House approves tax-break facility

Dadan Wijaksana, The Jakarta Post, Jakarta

The House of Representatives (DPR) approved on Tuesday a government proposal to waive the 10 percent value added tax (VAT) on the import of certain capital goods and raw materials by several industries.

The new tax-break facility would allow the revocation of VAT on the import of capital goods such as machinery and factory equipment, as well as raw materials for the agricultural, fishery, forestry and animal husbandry sectors. The ruling, which will be in the form of a presidential regulation, is expected to take effect in July this year at the latest.

Law No. 18/2000 on VAT stipulated that any decision to impose or lift VAT should be made in consultation with the House.

DPR approval was given recently during a meeting between Minister of Finance Boediono and House Commission IX on state budget and finance.

Boediono welcomed the decision, saying that it would help improve domestic businesses, thus enabling them to increase their output to meet demands from local and export markets. The related sectors would also become more attractive for investment.

All this will bring about plenty of revenue for the government, more than enough to offset the estimated Rp 1 trillion of potential loss in tax collection, as a result of the tax-break policy, he added.

Business groups have long lobbied the government for such a stimulus package, saying that domestic companies, especially the export-oriented ones, were facing difficulties in competing head- on in the international market with competitors from China and other countries, which are regarded as more efficient.

The government's decision to raise electricity and fuel prices for manufacturers and industries this year was also seen as an additional factor creating heavy burdens on domestic businesses.

The new tax-break facility is the second fiscal-stimulus measure introduced by the government this year. The first, worth around Rp 6 trillion, was issued in January, in which the luxury tax on 45 products -- mainly electronics -- was eliminated.

While this could make manufacturers lower their prices, making them more affordable for people, it was also aimed at helping discourage rampant smuggling practices.

The VAT facility was actually applied in 2001, but was revoked last year due to the industries' failure to improve their performance and the government's need for extra cash to help finance the cash-strapped state budget.

Director General for Taxation Hadi Purnomo said that tax collection as of April stood at Rp 65.1 trillion, of which Rp 20.3 trillion came from VAT.

The state budget has targeted the directorate to rake in some Rp 214 trillion in tax revenues this year.

Items to enjoy the new tax-break facility:

1. Capital goods in the form of machinery and factory equipment, installed or uninstalled but not including spare parts

2. Animal feed for animal husbandry businesses

3. Raw material for making animal feed

4. Seeds for agriculture, forestry, fisheries and plantations

5. Clean water from water companies

6. Electricity.