The Jakarta Post
The government finally decided recently to lift the cigarette and alcohol excise tax exemption for the free trade zones of Batam, Bintan and Karimun in the Riau Islands and the free port of Sabang at the northern tip of Sumatra, because it turned out that the fiscal facility was abused.
The decision to remove the fiscal incentive followed a strong recommendation from the Corruption Eradication Commission (KPK), which found through a study that the excise tax exemption had been abused to smuggle cigarettes and alcohol from the free trade zones to other regions.
The KPK study discovered that an estimated 1 billion cigarettes were smuggled last year out of Batam alone, causing losses of about US$35 million in state revenue. Strangely enough, not even the customs and excise tax directorate general knew the real reason behind providing the tax-free facility on cigarettes and alcohol in the free trade zones and the free port.
The 2007 Excise Tax Law does not contain specific provisions on granting such fiscal incentives to free trade zones and free ports, but Government Regulation No. 10/2012 does stipulate that free trade zones and free ports can be exempted from excise taxes on certain consumer goods. This means that the tax-free facility is not compulsory and should not have been granted at all.
The question, though, is why the tax facility had been given anyway, since such facilities are highly vulnerable to abuse for smuggling while they do not contribute significantly to attracting investments to free trade zones and free ports.
Moreover, the basic principle of imposing an excise tax on particular goods is to control the consumption of products considered harmful to the health or to the environment. Most countries, including Indonesia, have therefore slapped excises primarily on cigarettes and alcohol, although several developed countries have also imposed excises on fuel in view of its damaging impact on the environment.
We don’t believe that lifting the excise tax exemption would affect investment in the free trade zones, especially Batam. What is needed to promote investment in free trade zones like Batam is not excise tax relief for consumer goods but efficient business licensing, ease of land acquisition, adequate physical infrastructure and well-trained and skilled labor.
For almost 20 years until the early 2000s under the Batam Industrial Development Authority (BIDA), the island has transformed into an attractive manufacturing base for many industries.
But it has become less attractive to new investment since the emergence of what appeared to be a “dual authority” when the Batam municipal administration, empowered by the 1999 Regional Autonomy Law, claimed some of the authority that BIDA had formerly held.
The government has tried to resolve the matter through a presidential regulation issued last December, which stipulates that the Batam mayor is the ex officio chairman of BIDA. But investors are still waiting to see whether BIDA, under the Batam government, will be as professional as BIDA was under the old system.