T

he government'€™s plan to impose a 20 percent luxury-goods sales tax on cell phones is designed to accelerate growth in the fledgling industry.

But, it also carries the risk of increased cell phone smuggling '€” a problem that particularly haunts foreign investors interested in establishing local manufacturing facilities, due to unfair competition.

'€œInstead of pushing for new taxes, the government should address smuggling and other issues pertaining to the business climate,'€ Indonesian Chamber of Commerce and Industry (Kadin) deputy chairman for monetary, fiscal and public policies, Hariyadi Sukamdani, said.

He added that Indonesia had the potential to serve as a regional manufacturing base.

Apart from the smuggling risk, investors, including South Korean giant Samsung Electronics Co. Ltd., are also reluctant to build manufacturing facilities here due to inequitable import tariffs between finished goods and components, according to the Indonesian Cell Phone Association'€™s (APSI) head of technology, Usun Pringgodigdo.

Imported cell phone components were charged with 5 to 15 percent duty and imported cell phones zero percent duty, making assembling cell phones locally more expensive than importing complete units, Usun said.

Indonesia has emerged as one of the world'€™s biggest and most promising cell phone markets, with an increasing number of people owning more than one mobile gadget.

The trade and industry ministries have agreed to apply the tax on a wide array of cell phones, including those priced under Rp 5 million (US$438.07), which were initially exempt from the plan.

The measure will consequently make the affected gadgets more expensive.

In a price-sensitive markets like Indonesia, a significant price gap will inevitably encourage illegal imports.

The government has been trying to curb illegal imports since early last year, through stricter import procedures, such as the requirement that the imported cell phones be delivered through nine appointed airports and seaports stretching from Jakarta to Makassar, South Sulawesi.

However, illegally-imported cell phones still account for up to 30 percent of national sales and the
figure will likely jump to half the size of annual distribution, according to APSI.

In spite of various challenges, bright prospects in the domestic market has meant a number of handset assemblers and manufacturers have or may invest in the country.

Taiwan-based Foxconn Technology Group said it planned to build a plant here this year with part of the output set to supply Canada-based BlackBerry Ltd.

Local firm PT Hartono Istana Teknologi, which manufactures consumer electronics under the Polytron brand, started operating its cell phone plant last month in Kudus, Central Java, with a monthly production capacity of 30,000 units. Polytron aims to produce 100,000 feature phones and 100,000 smartphones each month in the
long run.

Other producers, like PT Teradata Indonusa, which assembles tablets and smartphones under the Axioo brand, and PT Arga Mas Lestari, which assembles tablets under the Advan brand, are also building new facilities.

At present, the local supporting industry is already able to produce cell phone components, like LCDs, batteries, keypads, casing, chargers and cameras, but remains reliant on imports of certain items such as integrated circuits.