T

he government plans to relax a set of regulations on tax incentives in order to attract more companies to enter the country'€™s manufacturing sector.

Industry Minister MS Hidayat said on Thursday that the changes would cover the simplification of procedures as well as eased requirements to access tax holidays and tax allowances.

'€œThe minimal investment value for several key industries eligible for tax breaks, for instance, would be more flexible so that more companies will enjoy the tax facilities, he said.

'€œWe will consider other factors, such as labor absorption in the labor-intensive industry, as the requirement to be able to access the tax holiday,'€ he said, pointing out that a company might be granted tax breaks as long as its investments amount to less than Rp 1 trillion (US$97.08 million) as required.

Tax holidays, which provides a tax break for five to 10 years, is available for manufacturing projects in five pioneer sectors '€” base metal, oil refining and basic petrochemical, machinery, renewable energy and telecommunication equipment '€” with a minimum value of Rp 1 trillion.

Meanwhile, tax allowances, which reduce taxable income up to 30 percent of overall investments realized over six years, are available for 129 labor-intensive business sectors in remote areas with a minimum investment of Rp 50 billion.

Indonesia, Southeast Asia'€™s largest economy, has seen its gross domestic product (GDP) in the first quarter this year shrink to 6.02 percent, the slowest in two years.

The World Bank (WB) recently revised its economic growth estimate for Indonesia to 5.9 percent from 6.2 percent due to the bleak outlook for domestic consumption and export.

Against the backdrop, the Industry Ministry has kept its industrial growth of 6.5 percent throughout the year after expanding by more than 6 percent in the first semester, driven by sectors with heavy reliance on the domestic market to offset dousing overseas demand.

Finance Ministry'€™s head of fiscal agency interim head Bambang Brodjonegoro detailed the proposed changes, saying that the government would also expand the period of tax holiday based on the value of investment.

'€œCurrently, we give similar treatment to investors spending Rp 1 trillion and Rp 20 trillion. We want to offer a preferential treatment so that better incentives will go to bigger investment,'€ he said, adding that no change would apply in the sectors eligible to access the benefits.

Apart from that, the government would also widen the floor of business sectors eligible to enjoy tax allowances, while eliminating sectors which so far saw less investors applying for the facility, Bambang said.

According to Bambang, the government also aims to combine the tax holiday and the tax allowance with import tax for some types of goods, mainly under category of capital goods and intermediary goods.

'€œThe Industry Ministry will thoroughly map out intermediary goods that we strongly need to address a deficit in our trade balance,'€ he said.

The domestic manufacturing industry, which has picked up pace in the recent years, relies heavily on imports, causing significant surge in imports along with its faster growth.

Capital goods totaled $13.21 billion, or representing 16.77 percent of overall imports in January-May period that settled at $78.78 billion, while raw materials and intermediary goods amounted to $60.37 billion, or 76.63 percent.

The fast pace of imports have posed a continuing pressure to Indonesia'€™s trade balance, which from January to May this year posted a total deficit of $2.53 billion.

The deficit in trade balance in turn led to deficit in the current account that in turn caused volatility of the local currency. In the first quarter, the country'€™s current account recorded a $5.27 billion deficit, or 2.4 percent of the GDP.

The persisting deficit has dragged the local currency to exceed its psychological level of Rp 10,000 per US dollar in the past weeks.