Infrastructure now the only strength of Batam island

Infrastructure now the only strength of Batam island

Fadli, The Jakarta Post, Batam

Batam island, the country's main bonded zone located near
Singapore, has lost one of its main competitive advantages
following the imposition of domestic consumption taxes on the
island.

The new tax policy, however, will not mean "the end of the
economic boom" for the island. Its strategic location and modern
infrastructure such as roads, airport and seaports as well as
better-than-average telecommunications and electric facilities
will continue to make the island one of more attractive
investment destinations in southeast Asia.

Chairman of the Batam Industrial Development Agency (BIDA)
Ismeth Abdullah said that the existing infrastructure would
remain one of the strengths of the island as an investment site.

"With such modern infrastructure facilities, Batam remains an
ideal site for investment," he told The Jakarta Post.

Under the new tax policy, which began this month, three main
products including cigarettes, automotive products and liquor are
subject to value added tax (VAT) and sales tax on luxury goods.
Electronic products will be subject to the taxes beginning in
March.

Investors doing business on the island are still exempted from
paying import and export duties, VAT and sales tax on luxury
goods taxes despite the new tax policy. Investors, like those in
the country's other industrial estates, will still receive the
tax incentives if the raw materials or products they bring into
the island are used for export purposes.

What upsets the Batam authority is that the new fiscal policy
has undermined years of hard work to develop the island as a more
attractive investment destination compared to other major
industrial investment sites in other Asian countries. It is also
saddening because the taxes were introduced when the Batam
authority was in the midst of its intensive campaign on the need
of introducing a special law that will give the island full free
trade zone status.

Prior to the imposition of the VAT and sales tax on luxury
goods, Batam had been a tax haven for investors but these tax
incentives were implemented only under a Presidential decree, not
as powerful as a law. The proposed law will provide a strong
legal foundation for investors to enjoy these tax incentives.

The House of Representatives in Jakarta is now still
deliberating the proposed Free Trade Zone law. Many analysts
doubt that the legislators will pass it as hoped, although
Coordinating Minister of Economy Dorodjatun Kuntjoro-Jakti has
said that the imposition of the domestic consumption taxes will
not affect the deliberation process of the proposed law.

BIDA's chairman Ismeth said that Batam as a tax haven had
become the main theme in promoting the island to foreign
investors.

"However, with the new tax policy, we have to withdraw the
existing promotional brochures and video presentations, most of
which, mention that Batam is a tax haven for investors," he said.

Last year, BIDA received new foreign investment worth US$149
million comprising 77 projects, or slightly lower than its target
of 80 projects.

"With the new tax policy, we can realistically only hope to
attract about 40 new investment projects this year, or around a
50 percent loss from last year," he said. Many investors who last
year expressed their intention to open factories on the island
pending the issuance of the free trade law might have changed
their minds, he lamented.

Batam which was established as an industrial bonded zone in
1971, has become one of the largest investment destinations in
the Asia-Pacific region. There are 650 foreign companies
operating on the island at present with a combined investment of
about $3.7 billion.

Their existence has provided jobs for more than 173,000
Indonesian workers with a further 70,000 jobs in the informal
sector. In 2002, these companies paid corporate income tax of
almost Rp 1 trillion.

The government's decision to impose VAT and sales tax on
luxury goods has also angered local businessmen especially those
involved in the industrial zone development business.

John Kennedy Aritomang, the chairman of the local chapter of
the Association of Indonesian Industrial Estates, said that the
new fiscal policy reflected the government's inconsistency in
promoting Batam as the country's main industrial bonded zone.

"Before the launch of the new tax policy, the exemption of VAT
and sales tax on luxury goods was the main strength of Batam.
Many investors came to the island because of the tax incentives,"
said John Kennedy, who is also the president of PT Panbil
Industrial Estate.

The new policy has scared foreign investors now doing business
on the island. Many of them have threatened to relocate their
factories to more attractive investment sites in other Asian
countries, he said.

Amazingly, the head of the local tax office, Adjat Djatmika,
claimed that the imposition of the VAT and sales tax on luxury
goods would not affect foreign investors' business on the island
at all.

"The new tax policy is only aimed at eliminating the flows of
smuggled products, particularly electronics, from Batam to other
parts of the country," he said.

According to him, the rampant "smuggling" activities from
Batam have severely hurt electronics companies in other parts of
Indonesia, that do not have the tax breaks of Batam companies.