T

he long-awaited revision of the government'€™s tax holiday policy is expected to attract more investors to enter Indonesia'€™s strategic industries despite the controversies that surrounded the granting such a tax facility in the past.

The new tax holiday policy, slated to be issued this month, would be a good fiscal incentive to attract new investors in pioneer and strategic industries to come to Indonesia, said Haris Munandar, the Industry Ministry'€™s director general for research and development.

He noted that there were already seven companies queuing for the tax holiday facility, as they had been waiting for certainty on the policy'€™s revision. The companies were in the industries of machineries, petrochemicals, papers, textiles and others, he said.

'€œSome of the companies plan an investment that will last for a very, very long time,'€ Haris said in an interview at his Jakarta office. '€œAnd they will need fiscal incentives because their business is high-risk, high-technology with low return in the short-term.'€

The Indonesian government introduced a tax holiday in 2011 to attract investments in strategic sectors with a huge value of minimum capital outlay of Rp 1 trillion (US$74 million) that has high job creation levels. The facility will exempt investors from paying taxes between five and ten years.

However, economists have said that the tax holiday so far has generated more controversies rather than economic successes. Four years after its inception, the facilities were only given to three companies: PT Energi Sejahtera Mas, PT Petrokimia Butadiene Indonesia and PT Unilever Oleochemical Indonesia.

In this period, negotiation broke off between the Indonesian government with Kuwait Petroleum and Saudi Aramco over the tax holiday proposals for their oil refinery projects.

Last year, the Samsung Group also canceled plans to invest in Indonesia after the Finance Ministry rejected its 30-year tax holiday proposal, with the South Korean electronics manufacturing giant opting to build a factory in Vietnam instead.

'€œThere was resistance from officials in the Finance Ministry'€™s taxation office [regarding the tax holiday policy], with some questioning whether the policy had sufficient legal backing,'€ said Haris. '€œSuch resistance appears to have been resolved now.'€

In the government'€™s new tax holiday proposal, there will be four new industries eligible to apply for the facility: agriculture processing, marine infrastructure, manufacturing industry in special economic zones (KEK) and other strategic infrastructure.

Specifically for the machineries and communications sector, an investment worth at least Rp 500 billion (US$37 million) would be eligible to apply for the tax holiday facility, Finance Minister Bambang Brodjonegoro said recently.

Bambang said that the new tax holiday would exempt investors from tax obligations from between 5 and 15 years, but the Finance Ministry would have a '€œdiscretionary'€ authority to extend it to 20 years if the investment is considered strategic for the domestic economy.

The Industry Ministry would recommend the list of companies interested and eligible for the tax holiday, with the Finance Ministry having the final say on whether the facility could be granted.

'€œInvestors, especially those in mineral-processing and import-substitution industries, have been asking us about this tax holiday policy,'€ said Franky Sibarani, the head of the Investment Coordinating Board (BKPM), which is responsible for processing business permits in the country.

Amid the current economic slowdown, the BKPM targeted to attract Rp 519.5 trillion in investments from both domestic and foreign investors this year, growing 12 percent from last year'€™s realization of Rp 463.1 trillion.

To achieve this objective, President Joko '€œJokowi'€ Widodo has pledged to cut bureaucratic red tape in Indonesia, a country that was ranked 114 among 189 countries in the World Bank'€™s Ease of Doing Business index, and to make the country a more attractive place to invest.

'€œIf we look at how attractive the investment opportunities in other parts of the world are and then consider a policy like this [tax holiday] and it makes Indonesia a more attractive investment opportunity,'€ said Hemant Bakshi, the president director of PT Unilever Indonesia, a sister company of PT Unilever Oleochemical Indonesia that was granted a tax holiday by the government.

However, while the tax holiday facility is expected to draw new investments in targeted areas in Indonesia, it is important for the government to utilize the tax holiday facility '€œas prudently as possible'€, Bakshi suggested.