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Doubts Linger Over Impact of New Tax Holiday Scheme
Faisal Maliki Baskoro | September 11, 2011

A new tax holiday system will likely not have an immediate impact on renewing Indonesia A new tax holiday system will likely not have an immediate impact on renewing Indonesia's manufacturing base, analysts say. (JG Photo)
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Despite initially welcoming it as a step toward boosting investment, analysts and industry players were lukewarm about the impact the new tax holiday system would have on the economy.

“The impact will not be immediate. Trickle-down effects may be visible one to two years after the investment realization is made,” said Purbaya Yudhi Sadewa, an economist at state brokerage house Danareksa.

“But it’s not the only way to develop our manufacturing, fix traditional hurdles and create an integrated policy for the sector.”

The system, which took effect on Aug. 15, allows any company with an investment value of at least Rp 1 trillion ($117 million) that is engaged in certain sectors is eligible for a tax holiday.

The eligible sectors are base metals, machinery and telecommunications equipment, as well as pioneer industries such as oil refining, petrochemicals and renewable energy. The exemption from income tax is available to local and foreign investors.

“I welcome the move, though, as I’ve said, the old hurdles like transportation costs, electricity availability and the cost of doing business are the key issue for manufacturers to return to their glory days,” Purbaya said.

Manufacturing was the engine of Indonesia’s economy in 1980s. The sector, which employs millions of workers, grew at more than 20 percent annually before being slowed by the 1997-98 Asian financial crisis, which reduced the country’s economic growth to single digits.

Since then, persistent problems — including land acquisition hassles, poor infrastructure and legal uncertainty — have plagued efforts to revamp the sector.

Suryo Bambang Sulisto, the chairman of the Indonesia Chamber of Commerce and Industry (Kadin), said the tax incentives should be available to all sectors without a limit on the minimum investment required.

He argued the benefit of broadening the eligibility for industries outweighed the potential losses in taxation.

“[The losses] are small compared to the trickle-down effects such as employment, production increases and the amount of investment itself,” he said. ”Expansion will become more rife, and we can hope for local industries to be more competitive.”

He also echoed Purbaya’s call to improve the country’s infrastructure and energy supply.

However, Industry Minister M.S. Hidayat had a more bullish view about the economy after the tax holiday announcement.

He said over the weekend that average manufacturing growth from 2009-2014 was expected to reach an average of 6.78 percent annually, but increased investment could boost that average.

“I am hoping that with the incentives, we can reach 7 percent average annual growth and employ 17 million people by 2014 from nine million people currently,” he said.

He said the incentives could boost manufacturing sector growth to 7 percent this year, higher than the ministry’s target of 5.2 percent to 6.1 percent growth this year.

“The sectors and criteria were selected because they would bring in sizeable investment and maximize growth potential in regions that were lacking industrial growth,” he said. “Not all sectors can be granted this incentive because the government could lose all the tax income.”