Tax holiday needed to attract investment: BKPM

Adianto P. Simamora, The Jakarta Post, Jakarta

Indonesia must provide tax incentives if it hopes to compete with other countries in the region in attracting badly needed foreign investment, according to Investment Coordinating Board (BKPM) chairman Theo Toemion.

Theo said on Monday that even countries in the region with better infrastructure and security were offering tax incentives to attract investment.

"At this time, Indonesia no longer has the competitive advantages that can be offered to attract foreign investors ... so we must provide tax incentives," he told The Jakarta Post.

The Japan External Trade Organization earlier suggested that the government follow the example of China and other member countries of the Association of Southeast Asian Nations (ASEAN) in providing incentives to woo foreign investors, particularly from Japan.

Japan is Indonesia's largest investor and creditor.

According to data from the ASEAN Secretariat, a number of the association's member states, including Malaysia, the Philippines, Singapore, Thailand, Vietnam and Brunei, have offered tax holidays to lure foreign investors. China and South Korea also are providing tax facilities.

China, along with its territory Hong Kong, last year attracted 80 percent of the foreign direct investment (FDI) in the Asian region outside of Japan. The country offered tax holidays to foreign investors during the first two years of their operation.

In Indonesia, FDI approvals in 2001 dropped sharply by 41.5 percent to US$9.02 billion, compared with $15.42 billion the previous year.

Besides exports and domestic consumption, foreign investment is seen as essential in overcoming the current crisis and achieving economic recovery.

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

According to analysts, foreign investors remain reluctant to enter the country due to the continuing security problems and an unstable social and political situation.

Both local and foreign investors also repeatedly have voiced concern over uncertainty in the country's legal system.

"With such a (grim) picture, we need to provide tax incentives," Theo asserted.

He said his office had drafted a new investment bill that would soon be submitted to the House of Representatives. The proposed law would allow the use of tax incentives, including tax holidays, to attract foreign investment.

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.

But according to sources, the Ministry of Finance, which is under pressure to generate more tax revenue to finance the state budget, opposes tax incentives. As an alternative, the ministry has introduced several new measures such as making capital goods and raw materials exempt from import duties.

"(But) these regulations are not enough to attract investors," Theo said.

But he admitted that tax holidays were not the most important factor in attracting foreign investors, saying a favorable investment climate played a more significant role.

Under the investment law proposed by the Investment Coordinating Board, the government would offer such fiscal incentives and facilities as tax holidays, making capital goods and raw materials exempt from import duties for two years production, exempting imported capital goods from the value added tax and offering an exemption from dividend taxes.