Rini calls for a delay on tax plan for Batam

Tantri Yuliandini, The Jakarta Post, Jakarta

Minister of Industry and Trade Rini Soewandi has asked the finance ministry to postpone the imposition of value added tax and luxury tax on the island of Batam in the Riau province for another six months to prevent investors from abandoning the island.

"We have asked for a postponement in the implementation of the taxes for at least six months until mid-2002," Rini was quoted by Antara as saying.

The government intends to impose value added and luxury taxes on the island early next year as pressure mounts to collect more domestic tax revenue for the 2002 state budget.

But the government also plans to turn Batam into a free trade zone, which would enable companies on the island to import goods without paying customs duties and taxes, pending their eventual processing, transshipment or re-exportation.

Rini, however, said that the change from an industrial bonded zone to a free trade zone would take some time to accomplish, and although the new bill on Batam's free trade status was already in the hands of the Minister of Justice and Human Rights Yusril Ihza Mahendra, it still needed the approval of the House of Representatives before it could be passed into law.

Earlier, director general of taxation Hadi Poernomo said that, if by January 2002 a new decree on Batam's exemption from the taxes had not been approved, then they would be collected on the island from Jan. 1.

He further said that the 2002 tax ratio of 13.03 percent agreed to by the House of Representatives has already taken into account value added tax (VAT) contributions from Batam.

He said that VAT contributions from Batam would amount to approximately Rp 322 billion (about US$30.7 million). The total tax revenue estimate for the 2002 state budget is Rp 184.7 trillion.

Batam was initially declared an industrial bonded zone in 1978 to attract foreign investment and bolster export competitiveness. The same status was later given to the nearby islands of Rempang and Galang, forming a total bonded area of 715 square kilometers.

However, the islands have technically acted as a free trade zone for the last 10 to 15 years, and tax incentives originally intended for industry have also been enjoyed by all Batam residents, including Indonesian companies providing products and services not destined for export.

This situation has caused resentment among companies based outside the island, leading the government, at the prompting of the International Monetary Fund (IMF), to reimpose value added tax (VAT) in 1998 to ensure equitable tax treatment.

The ruling, which was originally to take effect in April last year, met with strong resistance both from Batam residents and foreign industrialists based here.

Foreign companies operating on Batam had threatened to leave the island in protest at the new tax policy, and considered relocating their businesses.

It was then decided to postpone the imposition until the following year.