The Industry Ministry is proposing the removal of value-added tax (VAT) totaling Rp 6.8 trillion (US$561.98 million) to help keep labor-incentive sectors afloat, an official says.

The ministry's director general for metal, machinery, textile and miscellaneous industries, Ansari Bukhari, said Monday the proposed industries to receive the 10 percent VAT cut included steel, textiles and footwear.

"These industries are being designated because they employ a great many workers and have made a significant amount of investment," he said, adding other directorate generals would also have their own proposals.

Central Statistics Agency (BPS) data shows that 1.01 million people were employed in textile companies, 30,069 workers in steel firms and 186,003 workers in footwear in 2005.

Ansari said the that the elimination of VAT for the steel sector would save around Rp 4 trillion, whilst for textiles the saving would be Rp 2.2 trillion and for footwear Rp 600 billion. The scrapping of VAT will be applied to the raw materials used by these industries.

The proposals, which will be submitted soon to the Finance Ministry for approval, will cover locally made products only.

These tax reductions represent more than half the tax savings of Rp 12.5 trillion planned by the government under the 2009 state budget for the reduction and elimination of VAT and import duties to help the manufacturing sector withstand the impact of the global economic slowdown.

Of this amount, some Rp 10 trillion will be spent on cuts in VAT and the remaining Rp 2.5 trillion on reduction in duties.

Some 10 industrial sectors will benefit from tax cuts, including food and beverages, electronics and electronic components, automotive and auto parts, telecommunications and information technology, ship components, chemicals, heavy equipment and components for small-scale steam-generated power plants

In the steel industry, the eligible products for tax cuts will include hot rolled coil, cold rolled coil (CRC), hot rolled plate, galvanized iron sheet, wire rod and wire rod-related products and concrete steel.

"A zinc-coated steel manufacturer, for example, that imports CRC for its raw material will not be eligible for the elimination of VAT," he said.

"This move is aimed at guaranteeing that local CRC manufacturers will be able to sell their products in the domestic market," he added.

However, the Indonesian Iron and Steel Industry Association (IISIA) co-chairman on long products, Ismail Mandry, said manufacturers using scrap steel should also be eligible for the tax cuts because of high demand for that type of steel by manufacturers in the downstream industry, including concrete steel producers.

He said scrap steel imports amounted to 2 million tons per annum, twice as much as the one million tons produced locally.

Ansari said scrap steel and other upstream products, including pig iron, pellet and billet, would not benefit from the cuts because "the upstream steel industry is still under-developed".

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