Tax incentive D.O.A.

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.