The government of Indonesia is busy preparing seven tax incentives to boost investment flows in 2014. Investments currently account for approximately 32 percent of the country's gross domestic product (GDP). Only domestic consumption owns a larger stake towards the economy with 55 percent. The regulatory framework related to the seven incentives is expected to be finalized by the end of this year. The incentives consist of five new ones and the relaxation of two older incentives, namely the tax holiday and tax allowance.
The five new incentives to support investments consist of:
1. Incentives for the exploration of oil and gas
This incentive will be provided for the exploration of oil and gas that involves large investments and meet one of the following requirements:
a. exploration in deep water
b. exploration in remote regions/difficult locations
c. exploration that uses high technology
d. exploration that uses enhanced oil recovery (EOR) technology
Head of the Finance Ministry's Fiscal Policy Agency, Bambang Brodjonegoro, said that the incentive that will be given for the exploration of oil and gas will most likely involve a tax allowance. As such, a contractor can obtain tax relief in the form of income tax deductions for a certain period of time.
Apart from this new incentive, other tax facilities that are already provided in the oil and gas sector remain in force. These are the exemption of import duties on goods for the use of the upstream oil and gas exploration and exploitation as well as the provision of production sharing contract (PSC) in the form of cost recovery.
Brodjonegoro hopes that these incentives will result in more investments in the country's oil and gas sector and can help to meet the country's oil production target of one million barrels per day. For over a decade Indonesia's oil output has been in decline due to a lack of new investments.
2. Incentives for intermediate industries
Incentives will be given in the form of a combination of duty exemption and tax allowance. The provision of incentives will primarily focus on industries which import many raw/auxiliary materials from abroad. The number of imported goods has prompted the swelling of the trade deficit as well as Indonesia's current account.
3. Incentives for education
The government will free up income tax rates and value added tax for the import of non-fiction books. The policy aims at lowering the costs of imported books. Currently, book imports are still subject to income tax (2.5 percent) and VAT (10 percent).
4. Incentives for special economic zones
Incentives will apply to various special economic zones, whether manufacturing or tourism-based industries. Incentives involve the exemption from import duties of capital goods for a period of two years. Today, Indonesia is developing four special economic zones, namely Sei Mangke (North Sumatra), Tanjung Dimples (Banten), Bitung (North Sulawesi), and Palu (Central Sulawesi).
5. Incentives for development of Research and Development (R&D)
Incentives that will be given include double tax deduction. The government has also exempted import duties for goods for the purpose of scientific research and development.
As mentioned above, the government also intends to change the tax holiday and tax allowance schemes. This will be highlighted in a forthcoming column.