Wed, 16 Jun 2010

From: The Jakarta Globe

By Irvan Tisnabudi & Muhamad Al Azhari
The government is considering granting a “tax holiday” to some foreign and local investors, amounting to a temporary suspension of tax on certain forms of direct investment in a bid to reach the ambitious goal of attracting Rp 2,000 trillion ($218 billion) in investment per year over the next five years, the Finance Ministry said on Tuesday.

“We’d like to propose a change to the current tax law so that we can enable the tax holiday scheme,” said Finance Minister Agus Martowardojo who is on record saying that he supports the proposal as a means of attracting investment and pushing development forward.

“The government has a limited budget that it can invest in infrastructure, which means we need to find creative and strategic ways to promote cooperation with the private sector,” Agus said.

Tax holidays are nothing new new to Indonesia. The government offered the incentive in 1967, suspending tax on foreign direct investment as the country started opening its economy to the West, but it met with limited success and was dropped from the tax code in 1984.

Ministers believe that today’s more stable economic climate, however, will lead to a better outcome this time around.

Requests from the private sector to include a tax holiday in the 2009 law fell short. According to the tax code, any activity that generates revenue is subject to taxation, but officials that support the tax break are pushing to change that by revising the law.

Agus, however, warned that careful implementation of such a tax incentive was crucial if the government wanted to avoid losing too large a chunk of revenue.

As a result, there are plans to establish a special working group consisting of officials from the Finance Ministry, the Industry Ministry and the Investment Coordinating Board (BKPM) to oversee and guide the process, he said.

If the tax holiday were implemented correctly, Agus added, the increase in investment would counterbalance any loss of revenue.

It’s unclear what industries might qualify for tax breaks under the proposed tax holiday, but Gita Wirjawan, chairman of BKPM did hint that large employment sectors and businesses that operate in Indonesia’s rural areas would probably be at the head of the line.

Gita also said he believes that the duration of any tax holiday should be no longer than five years.

For its part, the government is giving off signals that it might be ready to make the tax holiday a reality soon.

“If this is actualized, the Rp 2,000 trillion target will be much easier to achieve,” Gita added.

Another meeting to discuss progress on the tax holiday scheme is scheduled for next month.