Indonesia Scraps Import Tax on Airplane Spare Parts

Indonesia's aviation industry has expanded rapidly over the past years and the Asia-Pacific region is one of the fastest-growing regions in the world in terms of air (passenger) traffic. This also meant that over the past couple of years, Indonesian airlines (such as Lion Air or Garuda Indonesia) have bought or borrowed hundreds of new aircraft. However, these airplanes need to be maintained and repaired. However, most of the aircraft spare parts need to be imported (in US dollars), implying a negative impact on the country's trade balance and current account balance. Moreover, due to the fragile rupiah, it puts pressure on the corporate earnings of local airlines.

In the 8th economic stimulus package the government now announced to scrap import taxes on 21 categories of airplane spare parts.

The Indonesia National Air Carrier Association (INACA) had already been requesting a 0 percent import tax policy for aircraft spare parts since 2011 as such a policy would strengthen the competitiveness of domestic airlines. Boosting Indonesian airlines' competitiveness is important ahead of implementation of the ASEAN Open Skies policy (also known as the ASEAN Single Aviation Market), part of the ASEAN Economic Community (AEC), at the start of 2016. The ASEAN Open Skies policy involves the multilateral agreement between all ten ASEAN countries to unite their skies into one single aviation market (hence liberalizing regulations to a large degree) in an effort to boost flight frequency in the region, enhance connectivity between the region’s aviation markets, and encourage higher service quality, while lowering ticket prices for air passengers amid increased competition. Although foreign airlines will only have access to five international Indonesian airports, domestic airlines will have to face tougher competition from abroad and therefore improved competitiveness of local airlines would be welcome.

Incentives for the Development of Oil Refineries

The Indonesian government also announced fiscal and non-fiscal incentives aimed at accelerating oil refinery development across Indonesia. This also involves the opening up of this sector to private participation, whereas in the past this sector was only available to state-owned energy firm Pertamina or through a partnership between a private investor and Pertamina. The Indonesian government will now allow private investors to establish oil refineries independently but with the requirement that the end-product has to be sold to Pertamina.

Indonesia's Chief Economics Minister Darmin Nasution said that the last oil refinery that was built in Indonesia was 25 years ago. There has been a long delay in the establishment of new refineries as it is assumed that certain stakeholders benefit from the old situation. However, with the fuel deficit in Indonesia expected to rise to between 1.2 and 1.9 million barrels per day (bpd) by 2025 (provided no additional oil refineries are established), the government needs to boost this industry. If not, the country will become increasingly dependent on imports, hence placing serious pressure on the current account balance and trade balance.

One-Map Policy Land Utilization

The one-map policy refers to the government's plan to harmonize all maps in the country under one reference map which will use a scale of 1:50,000. The central government will create this map in cooperation with local administrations and other government bodies. This policy is also aimed at speeding up land acquisition for infrastructure development. Over the past years much-needed infrastructure development has been obstructed as there has been unclarity about the status of land or the utilization plan of land.

The one-map policy will imply four advantages: (1) integration of the planning of land utilization with the government's Spatial Planning Document (Dokumen Rencana Tata Ruang), (2) easing and speeding up the completion of conflicts of land use, (3) one reference map will improve the information provision related to localization of economic activities, and (4) speed up the issuance of permits related to land usage.

Economic Stimulus Packages of the Indonesian Government:

Package Unveiled Main Points
1st 9 September • Boost industrial competitiveness through deregulation
• Curtail red tape
• Enhance law enforcement & business certainty
2nd 30 September • Interest rate tax cuts for exporters
• Speed up investment licensing for investment in industrial estates
• Relaxation import taxes on capital goods in industrial estates & aviation
3rd 7 October • Cut energy tariffs for labor-intensive industries
4th 15 October • Fixed formula to determine increases in labor wages
• Soft micro loans for >30 small & medium, export-oriented, labor-intensive businesses
5th 22 October • Tax incentive for asset revaluation
• Scrap double taxation on real estate investment trusts
• Deregulation in Islamic banking
6th 5 November • Tax incentives for investment in special economic zones
7th 4 December
• Waive income tax for workers in the nation's labor-intensive industries
• Free leasehold certificates for street vendors operating in 34 state-owned designated areas
8th 21 December • Scrap income tax for 21 categories of airplane spare parts
• Incentives for the development of oil refineries by the private sector
• One-map policy to harmonize the utilization of land