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Local Governments Must Provide Incentives


Wednesday October 18, 2006

’s Trade and Investment News published by the Coordinating Ministry for the Economy reported that the government has asked provincial administrations to think out of the box to attract more investment to their provinces, rather than merely chanting the "tax break" mantra. 

Giving too many tax incentives to investors could damage both the local and national fiscal system, and violate the government policy of ensuring equal treatment for all investors, Coordinating Minister for the Economy Boediono said, according to
The Jakarta Post

"Let us not rely on just one type of facility.  The government itself is providing other incentives, such as simplifying procedures for obtaining business licenses and improving the infrastructure needed for investment projects," Minister Boediono said
Thursday (12/10/06) during a discussion on boosting 's investment climate.  

"What kind of other incentives the regions can provide, the local administrations themselves should know best based on their own assessments." 

Based on year 2000 regulations, the national government has provided corporate income tax incentives for investment projects in specific sectors and provinces.  The incentives include offsetting 30% of the investment value against tax, and reducing the period during which the assets of an investment project will be charged with income tax. 

The income tax on dividends from an investment project paid out to foreign shareholders has also been halved to only 10%.  The government is also in the process to amend regulations to better suit current investment needs. 

Coordinating Minister for the Economy, Boediono further explained that it would not be favorable for if some provinces provide tax incentives that are in too stark contrast with those offered by other provinces.  "If that were to happen, then we will end up with a tax system that is in reality a patchwork of different tax regimes," the Minister said, which would run contrary to the government's efforts to ensure similar policies throughout the country. 

Investment in the regions has long been hampered by red tape, as well as the trend for regions to excessively focus on increasing their revenues through local taxes and levies. 

The government, however, appears to be trying to sort out the confusion by weeding out problematic levies through the amendment of the 2000 Local Tax and User Charges Law. 

Finance Minister Sri Mulyani Indrawati said separately during a hearing on the amendments with the House of Representatives' Finance commission that the government wants the provinces to levy only 10 types of local taxes, which would still allow them to generate enough local revenue -- besides national government subventions -- for their development needs.  

She also said that as of January, there were 2,428 problematic local taxes and user charges that need to be revised.