Tax incentive D.O.A.

Although the income tax holiday offered to 22 categories of industries puts Indonesia on par with other Southeast Asian countries providing such an incentive, it may prove ultimately irrelevant and ineffective in wooing new investors when law and order is in great danger of complete breakdown. Political uncertainty this year has prompted big investors, domestic and foreign, to put business plans on hold, at least until they gauge how legitimate, credible and competent will be the next government.

If the objective of President B.J. Habibie's recent decree regarding the tax holiday facility was to make the tax incentive scheme more transparent, then the ruling did make a slight improvement. Under the Soeharto administration, income tax relief was decided discretionally by the president himself on a case by case basis. Not surprisingly, almost all the companies granted the incentive were ones close to the Soeharto family or its web of cronies.

But the ruling still fails to fully deliver transparency and expediency in the administration of incentives. There remain many loopholes for corruption and collusion because the incentive is not automatic once all the requirements are fulfilled, but is still vulnerable to discretionary and arbitrary decisions. It will be determined by the minister of investment development on the basis of recommendations from a special assessment team.

Habibie might be thinking more in the long term when he decided last month to offer the income tax exemption of three years to eight years to new investment ventures in 22 categories, what he classified as pioneering industries.

His rationale seems to be that when a newly elected government is in place later this year, law and order could immediately be restored and the country, with its abundant natural resources, large low-cost labor force and huge potential market, would again become a favorite place for investors.

Income tax exemption is not among the most important requirements by investors now, and will not be even after the establishment of a new administration later this year. Even in normal times, tax relief is never foremost among factors considered by investors in siting their projects in a country. Income tax is not a direct component of the cost structure. A business pays income tax only when it makes a profit.

Law and order and good governance have always been the primary variables factored by businesspeople into investment decisions. Unfortunately, it is these factors that are scarce in the country now when even the slightest provocation can flare up into communal conflagration or religious violence, with wanton property destruction and bloodshed.

No wonder that leaders of the Indonesian Chamber of Commerce and Industry did not touch upon the new tax incentive when they met with Habibie last week. They instead focused their concern on the escalating social unrest, which they warn is already endangering the business and industry environment.

Aburizal Bakrie, chairman of the chamber, contended the seemingly endless wave of violence made it almost impossible to conduct business.

Disorder and legal uncertainty do not only make it rather impossible to calculate risks. The higher incidence of security disturbances in various parts of the country sharply increases the costs of doing business, with additional security measures taken at factories, warehouses and in the transportation of goods. Bigger risks mandate higher insurance premiums.

The manufacturing industry, which should have been made more competitive in the international market by the sharp depreciation of the rupiah, has instead suffered from the brunt of the bout of social unrest. Many importers overseas, apprehensive of disturbances in scheduled deliveries from Indonesian exporters, have diverted their orders to other countries.

Unless public order and legal certainty, the very foundations of normal business activities, are fully restored, and the regulatory environment is made more efficient, the tax incentive will unfortunately fail miserably in reinvigorating new investment.