'Tax holiday ineffective in attracting FDI'

'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.