The IMF's proposal to impose VAT taxes and import duties in Batam is strongly opposed becuase it removes the entire reason why Batam is attractive.

This Letter to the Editor of the Jakarta Post explains why ..

Letter to the Editor. Re: Wrangle over Batam Tax

Dear Sirs

Your editorial on the subject of applying value added taxes and import duties in Batam (Jkt Post 20/4/2000) is timely but misguided.

The issue is creating a serious rift between Jakarta authorities and the residents of Batam, even including many Batam based tax and customs officials.

Your assertion that the 1978 law, which established Batam as a free trade zone, is a "mistake", is wrong. Batam's competitive edge over neighbouring free trade zones (FTZ), such as Penang and Langkawi, occurs precisely because Batam is a totally to free to trade, both within the island and overseas.

This system minimizes emcumberances involved with shipping materials into and within Batam. Other places that compete with Batam are "Bonded Zones" (BZ), which use a system of bonded warehouses to tranship goods between supplier, factory and customer. Bonded warehouses cost more to operate, suffer heavy materials handling costs and serious delays involved with customs approvals. Batam's present system is easy and attractive to foreign investors, proven by the hundreds of foreign companies that have set up operations here in the past 15 years. The Free Trade Zone (FTZ) system readily lends itself to modern "just in time" manufacturing processes.

Jakarta's authorities fail to recognise that the types of factories operating in Batam are highly mobile and highly sensitive to factors which delay goods shipments or increase costs. Under Batam's unique FTZ system, greedy customs and tax officials had little opportunity to hinder the flow of goods for their own personal gain.

Your editorial writer has evidently never suffered the businessmen's fearsome grind of shipping goods in and out of Indonesia. Even under the FTZ regime, it was not uncommon for Batam's customs officers to suffer a "computer failure", whenever a $10,000 per-day-ship needed a timely document clearance. Imposition of multiple bonded zones on the island will only serve to delay shipments and further enrich Batam's already rich customs officials.

You are correct in saying that the scariest part of the new policy is the measure to require all businesses to pay VAT up front. A great majority of the island's manufacturing industry, like the tax itself, is in the business of adding value. Batam's factories take partly finished goods from other factories, add value to those goods, then send the goods to yet another factory.

The goods themselves are often not the property of the factory; they are the property of a third party. The factory is merely a contractor to perform certain work on the customer's goods. As the factory never bought the goods and therefore never sold those goods, VAT should not apply to the goods themselves, only to the value added by the factory.

You are also correct in labeling tax officers as venal. Just ask any company in Indonesia that you like to choose, whether they have ever received a refund on a valid VAT claim. In Indonesia, companies write off millions of dollars yearly in valid, but unrecoverable, VAT claims. For those many Batam factories, which may be adding only 10% value to the goods that they are processing, up front VAT payment immediately puts them out of business.

The Finance Minister argues that it not fair that the residents of Batam ($3,000/ year per capita GNP) should not pay tax when the rest of Indonesia ($700/year GNP) does. The good minister should come to Batam and personally explain his ideas to the many unskilled workers who earn Rp8,000/day. Batam is already the most expensive place in Indonesia, where plate of nasi in the most humble roadside warung costs Rp4,000. These new taxes will hit the little people hardest.

Many have overlooked just how quickly Batam rose from an unknown backwater to become Indonesia's export powerhouse. Warnings by local citizens, that Batam's fall could be just as fast as it's rise, is not an empty threat. Foreign investors, particularly the ones in the electronic sector, are highly mobile. Many of the factories in the highly successful BatamIndo Industrial Estate are in their second or third country. In this competitive world, a few percent difference in operating margins is enough to prompt them to move.

Ironically, the IMF is now sending signals that imposition of import duties and taxes in Batam is no longer one of their priorities. So the wrangle now appears to be between the Minister of Finance and the people of Batam.

The people of Batam feel that are faced with economic disaster. A single factory layoff could result in 10,000 jobless people. Almost a hundred companies are contemplating moving. A blockade of the local tax office since the beginning of April has rendered it unable to collect taxes of any kind. This will probably continue until Jakarta changes it's mind, as the people of Batam have nothing to gain and everything to lose by this misguided policy.

WWW Batam News Site