Dion Bisara – After a long wait for the introduction of the country's tax holiday system, foreign and domestic investors can now take relief with the announcement of the decree on Friday by the nation's finance minister.
The decree is intended to improve the competitiveness of local industries and entice more investment. In effect since Aug. 15, the regulation stipulates that any company with an investment value of at least Rp 1 trillion engaged in dealing in base metals, machinery or telecommunication equipment, as well as in pioneer industries such as oil refining, petrochemicals and renewable energy would be eligible for a tax holiday.
The tax holiday, or the exemption of income tax dues for a certain period of time, would be granted to both local and foreign investors. "Those companies would be granted at least five years of income tax exemption and 10 years at most," the finance ministry said in the decree in Jakarta.
The government also wants to ensure that the companies are new in the country, by requiring them to have been registered in Indonesia for no more than 12 months since Aug. 15.
"The eligible companies must put at least 10 percent of their investment value as a deposit in local banks and must not withdraw it until the investment begins," the decree stipulates.
At the end of the tax exemption period, companies would be eligible for a 50 percent reduction of income tax dues for two years, the decree said. Corporate income tax in Indonesia is set at 25 percent.
The tax holiday would affect companies such as tire manufacturer Hankook Tire, which has expressed interest in investing $353 million; steel maker Posco with an investment of $6 billion; Kuwait Petroleum with investments of $6 billion to $7 billion; polyester producer Indorama with investments of up to Rp 7 trillion ($819 million); and US heavy machinery maker Caterpillar with an investment of Rp 5 trillion.
The finance minister has a right to extend the exemption or the discount period for companies viewed as having strategic value to the country's economy, the decree said.
Indonesia, Southeast Asia's largest economy, targets foreign investment to reach Rp 240 trillion this year from last year's Rp 208 trillion.
Corporations that want to obtain the tax exemption have to submit their proposals to the Industry Ministry and Investment Coordinating Board (BKPM) before Aug.15, 2014, the decree said.
Economists in Jakarta such as David Sumual of Bank Central Asia, welcomed the move's potential to lure foreign investment to Indonesia in the long term.
"The tax holiday would be positive in boosting investment in the country. Particularly for downstream industry that there has been lack of," he said on Friday.
Still, David said the tax holiday is only one effort of what the Indonesia government should do to attract investment. "Bureaucracy is still the biggest problem here, and that should be addressed," he said.
Indonesia has dropped two places in the World Economic Forum's global competitiveness report, bringing a halt to an impressive run that had seen it climb 11 places in the last two years.
"Despite efforts to tackle the issue, corruption and bribery remain pervasive and are singled out by business executives as the most problematic factors for doing business in the country," it said.