Jakarta to go ahead with VAT in Batam

No special privileges for Batam, which has highest per-capita income in Indonesia, says minister, confident investors won’t pull out in protest.

THE Indonesian government, brushing aside the threat of foreign investors pulling out from Batam, said yesterday it would go ahead with plans to impose a value-added tax (VAT) in the once tax-free-haven.

But in making the announcement, Trade and Industry Minister Jusuf Kalla said that given the possibility of social unrest, Jakarta would apply the 10 per cent VAT gradually and selectively over a three-month period. It will come into force fully only in July.

“The government needs time to make this palatable,” he said. “But we won’t cancel it.”

Mr Jusuf, who was standing in for Finance Minister Bambang Sudibyo who is overseas, said Indonesia had to apply the same rules to the industrial island as it did in other regions.

“We have to be fair across the board,” he said. “We cannot give special privileges to Batam, which has the highest per capita income in Indonesia, and ignore the fact that taxes are applied in our other islands and industrial zones.”

It is clear that revenue from the taxes is a primary reason why Jakarta is standing firm. Mr Jusuf revealed that the central government stood to gain about 300 trillion rupiah (S$69 billion) by the end of the financial year with the new levy.

Mr A. Sjarifuddin Alsah, the Director-General of Taxes, told The Straits Times that the government was not worried by recent threats made by at least 60 predominantly American and Japanese firms to quit Batam if the decision on VAT was not reversed.

He said that the 700 companies now operating in the island were likely to stay on given its nearness to Singapore, good infrastructure and cheap labour.

“It is very hard for them to leave Batam,” he said. “If they leave for other countries expecting tax-free privileges, they will be disappointed. The same conditions in Batam will apply elsewhere.”

But the government appears concerned about the reaction from local residents after the VAT and levy on luxury goods were introduced on April 1.

Earlier this week, 2,000 people staged a demonstration on the island over the rise in prices of consumer goods, a result of the VAT kicking in.

Some speculate that protests will continue as a means of putting pressure on Jakarta to do away with the taxes.

But the government yesterday sought to diffuse the problem by saying that the VAT would be applied in stages over a three-month phase to help residents and businesses get used to the change.

Said Mr Jusuf: “We need more time to publicise and explain the taxes.”

He took pains to point out that export-oriented firms in Batam would not have to pay the taxes, in line with what the International Monetary Fund had stipulated.

The IMF, in its latest letter of intent with Indonesia in January, demanded that Jakarta impose the VAT for non-exporters in Batam and suggested that exemptions be made only for “bonded warehouses”.

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