New tax rule for Batam opposed

BATAM, Riau (JP): A new government regulation imposing value- added taxes (VAT) and sales taxes on luxury goods on Batam and neighboring islands has drawn opposition from locals and entrepreneurs.

The head of tourism, post and telecommunications at the Batam chapter of the National Chamber of Commerce and Industry, Muzakiriyanto, said on Tuesday the new ruling, which took effect on April 1, would hamper foreign investment on the island.

"Foreign investors will judge Indonesia as inconsistent because it has imposed taxes on an area which it previously said was an industrial bonded zone, where business activities are exempt from tax obligations," he told The Jakarta Post.

"Soon many foreign investors will pull out of Batam because of (the new regulation)," he said.

He said the new tax regulation not only affected businesspeople, but also local residents because it caused the prices of consumer goods to increase.

Thousands of Batam residents staged a demonstration on Monday to protest the regulation.

In an attempt to attract investors to Batam, the government made Batam, some 19 kilometers south of Singapore, an industrial bonded zone in 1978. Later, several islands near Batam, including Karimun and Bintan, were included in the bonded zone.

According to the previous policy governing this bonded zone, businesses on Batam and the other islands in the zone were free from all import duties and "other government levies".

However, the government waived the tax incentives in 1998 at the prompting of the International Monetary Fund.

Under the new regulation, export-oriented companies will receive refunds for VAT and luxury good tax payments only after they show proof they exported their products.

According to the head of the Batam Island Authority, Ismeth Abdullah, the previous tax policy was successful in encouraging foreign investors to open businesses on the island.

He said foreign investment on the island had grown steadily and presently reached US$7 billion.

"About 77 percent of the investments are by private companies, while the remaining 23 percent are by governments," Ismeth was quoted by Antara news agency as saying.

He said the investments were in various projects, including public road construction and harbor and airport facilities.

"The government's decision to impose the value-added tax will certainly discourage investors," he said.

Ismeth said foreign investors were mainly concerned the new policy would become an administrative snag for daily business operations.

In addition, they are also concerned the imposition of the taxes will raise labor costs in the area, he said. (cst)