'Tax holiday ineffective in attracting FDI'

Adianto P. Simamora, The Jakarta Post, Jakarta

Plans to introduce a "tax holiday" would not be effective in alluring foreign investors into the country due to continuing security problems, labor disputes and legal uncertainties, Centre for Strategic and International Studies (CSIS) economist Pande Radja Silalahi asserted.

Pande said on Tuesday that foreign investors preferred a secure investment climate over tax incentives.

"According to several surveys, tax holidays are not their top priority in entering this country, they need more certainty in doing business here," he told The Jakarta Post.

He added that the government's fiscal condition was not in good enough shape to introduce a tax holiday.

He was responding to an earlier report that the Investment Coordinating Board (BKPM) was proposing the introduction of tax holiday to help boost badly needed foreign direct investment (FDI) into the country.

BKPM Chairman Theo Toemion claimed that he had already won the support of President Megawati Soekarnoputri, although the plan had yet to be discussed by the Cabinet.

Theo also said that other countries in southeast Asia had provided a tax holiday to attract foreign investors.

Calls for the introduction of a tax holiday have also come from various quarters, including from Japanese business organizations.

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 plan.

Meanwhile, economist Bustanul Arifin economist of the Institute for Development of Economic and Finance (Indef) said that the government should only offer the tax holiday facility to foreign investors with a long-term investment plan which would create a considerable number of job opportunities in the country.

He, however, warned that the tax holiday facility could also be ineffective if the country's newly autonomous provincial governments unilaterally slapped taxes on foreign investors.

"Foreign investors are very worried about the implementation of the provincial autonomy," Bustanul said.

He also urged the government to take immediate steps to improve the investment climate here.

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.

BKPM is currently drafting a new investment bill which will include the tax holiday plan. The bill will be submitted to the House of Representatives for approval in the near future.

Meanwhile, Irmadi Lubis, a legislator from House commission V, overseeing industry and trade affairs welcomed the plan to provide tax holidays.

"It shows that there is a political will from the government to attract foreign investors by introducing tax holidays," Irmadi said.

He, however, said that such a policy would require a change in the existing tax law.

Meanwhile, First Secretary for trade at the Japanese Embassy in Jakarta Tetsu Fukuoka said that the tax holiday policy was very important for Indonesia to attract foreign investors.

"Tax holidays are a very important step to attract foreign investors but it is not a guarantee (that investors will come)," he told The Post, pointing out that other factors such as the rule of law, labor environment and existing supporting industries were also at play.

Foreign investors have largely shunned Indonesia since the country plunged into an economic and political crisis in 1998.

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.