Indonesia’s new tax incentives for investments alone won’t help halal industry, say experts
JAKARTA – Indonesia's government on December 13 issued regulation No. 78/2019 that offers tax incentives for businesses and their extension to 183 sectors from 145 sectors.
Sectors directly relevant for Islamic economy stakeholders include beef cattle breeding, dairy farming, baby food, textiles, cosmetics, pharmaceuticals, traditional medicines, and hotels. A lot more sectors are those that feed into others, including agriculture, commodities, food processing and ingredients.
The incentives, all subject to specific criteria and conditions, include a reduction in net income, by 30% over six years, of total investment value for fixed assets, income tax on dividends paid to foreigners set at 10% or a lower rate according to applicable double tax avoidance agreements, and compensation for loss of earnings for eligible businesses for five to ten years. The new rules amend government regulations No. 9/2016 and No. 18/2015.
The two Islamic economy consultants Salaam Gateway contacted had different views about the usefulness of the new tax incentives for the industry.
Sapta Nirwandar, chairperson of consultancy group the Indonesia Halal Lifestyle Center told Salaam Gateway the tax incentives are good initiatives and are welcomed by Islamic economy stakeholders who in general still lag behind the overall economy.
"We hope these tax relaxations will urge more investors to start looking at Muslim-friendly hotels and property businesses, halal cosmetics and pharmacy, for example,” the former deputy minister of tourism and creative economy told Salaam Gateway.
Since there is still a limited number of investments in the Islamic economy, the new incentives are expected to encourage more foreign investors to strengthen the supply chain for domestic products.
“Basically, several benchmarks, such as better tax, licensing, import duties for export-oriented products can push investors to strengthen the competitiveness of our halal products,” he added.
His optimism is not shared by Yudhie Haryono, Executive Director of Nusantara Centre, a Depok-based research institution that focuses on halal products.
Yudhie believes the new tax incentives do not entirely address the main problem for halal businesses, which is insufficient capital or loans especially for SMEs.
"Tax incentives are good theoretically but they are not practical as they only solve 30% of the challenges faced by the development of the halal industry,” Yudhie told Salaam Gateway.
He said the government should instead introduce policies for capital incentives integrated with tax incentives, as the main issue for the downstream value chain is lack of capital and loans.
“Indonesia has a limited number of financial institutions that provide loan access with ease for halal industry entrepreneurs," said Yudhie.
He said there should be an institution that provides access to financing specifically for SMEs in order to better address the needs of halal businesses.
This institution, according to Yudhie, should not be bogged down by tight requirements like the ones for commercial loans. It would also need to learn to trust SMEs in order to continue giving them financial and economic benefits, as SMEs account for around 97% of domestic employment.
Further, Yudhie believes that bodies such as the Investment Coordinating Board and financial institutions need to make their bureaucratic processes simpler, and then finally, the last step is to grant tax holidays or tax allowances for several years, with the government collecting income tax only when SMEs already have a stable annual income.
Tax incentives alone are not enough and are only one part of the upstream, stressed Yudhie.
These latest incentives form part of the Indonesian government’s review of the different parts of its investment rules. Prior to the introduction of these latest tax incentives, earlier this year it issued Regulation (PP) No. 45/2019 on the calculation of taxed income and expansion of income tax in the current year that offers tax deductions up to 300% on the cost of research and development.
These new investment regulations were released in the wake of a drop in foreign direct investments (FDI). Data from Indonesia’s national statistics agency show that in 2018, FDI decreased 8.8% to $29.31 billion. No breakdowns were given for Islamic economy sectors. As an indication, 1,377 food industry projects benefitted from $1.31 billion in FDI, 1,001 projects in pharmaceuticals attracted $1.94 billion, and 2,188 hotel and restaurant projects brought in $868.89 million.
Afdhal Aliasar, Director of Islamic Economy Development and Halal Industry at the National Islamic Finance Committee (KNKS), agrees that tax incentives are just one solution if the halal industries are to more impactfully contribute to any increase in FDI.
"Actually, in the field, the issue which halal industry players face isn’t about tax incentives alone, it just one part or a small issue,” said Afdhal.
He told Salaam Gateway that ideally, tax incentive programmes will work only if there are many halal industry clusters established.
“The issue on the downstream is to strengthen [halal businesses] so they can produce goods in better quality, better production volumes, maybe hundreds of thousands in quantity per month, and ensure sustainability,” said the director.
Once halal industry clusters msuhroom, the government should extend them tax incentives. These could include, for example, lower utilities bills, water bills, property tax tariffs, logistics costs, and increase non-taxable income so it will attract more labour.
“That’s the part where we can improve, by linking them to mid-sized or big companies, link them to forwarder companies, packaging companies, for example for halal F&B SMEs, we should make them able to supply to more advance retail networks like shopping centres, supermarkets, or bigger industries," he said.
Picking up on the point about access to financing, Afdhal suggested Islamic banks or Islamic non-bank financial institutions start to seek innovative ways to facilitate SMEs and to not always treat them as high-risk profile creditors.
"They can, for example, collaborate with more flexible institutions such as fintechs to approach SME players or collaborate with existing financial institutions that already have big names and that can [diversify] their customer [demographics],” said Afdhal
“Among their customers should be middle-income corporates that use SMEs as suppliers for raw materials, and another option is to form a trade club or trade association to link them with mid- or big corporates," he added.
Despite these, Yudhie, the executive director of Nusantara Centre, believes Islamic banks could still be coaxed into better serving SMEs.
“To provide adequate loans for halal industry players, maybe the government should go back to basics, that is strengthen BRI Syariah's role in financing SMEs in the municipal or regency levels," said Yudhie.
(Reporting by Yosi Winosa; Editing by Emmy Abdul Alim emmy.abdulalim@salaamgateway.com)
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