Megawati agrees with tax holiday plan: BKPM

Adianto P. Simamora, The Jakarta Post, Jakarta

President Megawati Soekarnoputri has agreed with plans to promote a tax holiday to attract more foreign investment into the country, according to Chairman of the Investment Coordinating Board (BKPM) Theo Toemion.

"Ibu Megawati has, in principle, agreed with our proposal to provide a tax holiday to foreign investors," Theo told reporters after meeting with Megawati on Monday.

However, he said that the Cabinet would still have to debate the plan before proposing it to the House of Representatives for approval.

He said that if agreed by the Cabinet, which will discuss the issue next month, the tax holiday proposal would be included in the new investment bill currently being drafted by his office.

But Minister of Finance Boediono, who is under pressure to generate more tax revenue to finance the state budget, is likely to oppose the tax holiday. The International Monetary Fund, which is sponsoring the country's economic reform program, would also be unhappy with such a proposal.

Theo has said that the government must provide tax incentives to compete with other neighboring countries in the region to attract investors.

He argued that even countries with better infrastructure and security were offering tax incentives to attract investment.

Foreign direct investment (FDI) approvals dropped last year to US$9 billion, from $15.42 billion. In the first two months of this year, FDI fell by 79 percent to $489 million, from $2.33 billion in the same period in 2001.

The government abolished tax holidays in 1983 following the enactment of a new tax law, although investors in certain sectors and areas of the country were eligible for a tax allowance facility.

But opponents of a tax holiday scheme argued that such tax incentives would not only result in the loss of revenue to the government but also erode the standard of tax systems.

Tax holidays were also prone to pressure from vested interests as they favored particular sectors or regions. Incentives could be abused through improper accounting schemes that shifted income into the holiday period. The incentives also encouraged the false closure and establishment of firms in order to extend the length of the holiday period.

There also are doubts about whether the government could prevent the abuse of tax incentives.

Calls for the introduction of a tax holiday have come from various quarters, including from Japanese business organizations. Japan is the largest investor in the country.

The Jakarta Japan Club Foundation said in a letter sent to BPKM, (a copy of which was obtained by this newspaper), that applying a tax holiday would boost Japanese investments here, which could generate jobs for more than 80,000 workers per year.