Income tax waived
Income tax waived
When the five-year income tax holiday facility was abolished
as part of the 1984 tax law reforms the Indonesian government
persistently argued, in response to businessmen's complaints,
that tax exemptions were not a primary factor influencing
investment decisions. The tax holiday facility remained excluded
from the tax laws enacted in the second major tax law reform in
1995, even though the competition from other ASEAN countries
which offered such tax incentives had become increasingly keen.
But Government Regulation No.45/1996, issued last week,
unexpectedly reintroduced the tax holiday incentive. Even though
the regulation does not explicitly call the facility a tax
holiday but couches it under the phrase " the income tax is borne
by the government", the bottom-line effect is the same. The
phrase is used simply to circumvent the tax laws which do not
stipulate anything about income tax exemptions.
The new incentive is even more generous in that the income tax
exemption is valid for 10 years for specified businesses on Java
and Bali and for 12 years on other islands. The pre-1984 tax
holiday lasted only for five years after the start of commercial
operations. Obviously, the tax incentive is designed to be an
additional stimulus to new investment. The incentive can serve as
a tool to direct more investments to the areas the government
gives top priority to for development.
Admittedly, as the government argued in the mid-1980s, income
tax exemption is not among the primary factors considered by
businessmen when making investment decisions, especially after
the highest income tax bracket was lowered to 35 percent from 40
percent in the 1995 tax law reform. After all, tax is paid out of
profits and is a fiscal tool which every businessman has to live
with wherever he does business.
The most important factors that have the greatest influence on
the siting of investment ventures are political stability,
natural and human resources, consistency in economic policy,
adequate basic infrastructure, legal certainty (adequate
commercial laws and strong law enforcement), an efficient
bureaucracy and a potential market.
Indonesia's weakest points, we should magnanimously
acknowledge, are related to legal certainty, inefficient
government bureaucracy and inadequate basic infrastructure,
notably outside Java and Bali. The government is fully aware of
these weaknesses but it also realizes that removing these
disadvantages takes a lot of time and, in so far as the
bureaucracy is concerned, also involves a gradual, educational
process. The fiscal measure of the 10-12 year tax holiday could
thus serve as an additional, instant incentive to offset the
disadvantages of those weaknesses.
We don't share the fear that the tax holiday will adversely
affect government revenues. As long as the incentive does
stimulate new investment ventures, the new businesses will create
jobs which in turn will generate greater public purchasing power.
This should increase domestic market demand for services and
goods and provide the government with additional revenue through
value-added tax. One should also remember that the exemption only
applies to income tax. The government can still generate revenue
from income tax on the employees and from the value-added tax on
the transactions undertaken by the new businesses.
The special team in charge of implementing the tax holiday
facility has yet to select which business areas will be entitled
to the incentive. We hope the facility will be granted to the
kinds of businesses which will have the greatest positive impact
on the economy: The development of infrastructure such as power
generation, toll roads, seaports and airports;
telecommunications; the agro-industry sector and businesses
manufacturing basic and intermediate industrial materials which
currently have to be imported.