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.