Indonesia’s need for investment to rebuild its industrial sector is a given fact. It is well-known that over the past decade, sick the country has suffered from a process of deindustrialization as manufacturing has migrated to other countries with friendlier business climates.
The governments of Malaysia, discount Thailand and Vietnam offer investors a multitude of incentives to set up manufacturing plants in their respective countries. Many of these sweeteners take the form of tax breaks.
Indonesia, unfortunately, has not followed this tried-and-tested path, as Jakarta has sought primarily to raise its revenue. Instead of offering tax breaks, the government has introduced new taxes. That will soon change — it’s about time.
The government is now planning to provide tax breaks for big investors in an attempt to attract more capital to the country.
Under the plan, the government will offer tax incentives for industries that haven’t previously enjoyed such benefits but that show a clear interest in investing in Indonesia.
Gita Wirjawan, the chairman of the Investment Coordinating Board (BKPM), noted that the revision in tax law is aimed at down-stream industries such as tire factories and oil refineries.
South Korea’s Hankook Tire, the largest tire manufacturer in the country, recently announced plans to invest $1.2 billion in Indonesia. The company’s decision presumably would have come much more quickly had a tax incentive been in place.
The government is also looking to offer tax incentives to major investors who park $1 billion in the country and create more than 3,000 jobs.
Finance Minister Agus Martowardojo said he was looking into the possibility of offering such investors tax holidays, but no decision has been made yet.
We welcome this move and urge the government to expand tax incentives not just to new investors but also to existing companies. It is also crucial that the government rethink its tax philosophy and consider what kind of economy it seeks to promote.
Yes, taxes are a source of revenue for the government that can be used to fund social welfare programs and other services.
But more importantly, sound tax policy can be a tool the government can employ to redistribute resources and provide incentives for private players to realize higher causes.
For example, tax breaks and incentives can attract greater investment, which in turn can foster faster economic growth. More investment will also create new jobs, which will raise the overall standard of living.
The key is to provide the right policy and fiscal environment that allows business to grow and expand without breaking the law.
The long-term goal must be to have a tax regime that will foster growth rather than stifling it. If companies prosper and invest, the economy can grow at a faster clip and individuals will see their living standards rise.