Indonesia to make tax breaks applicable for labour intensive industries

Indonesian government is planning to apply existing tax allowances to labour-intensive industries that includes garment industry in an effort to reach its 2-million-a-year job-creation target. However, at the moment the allowance applies to just 129 business sectors, ranging from plantations to real estate.

Investment Coordinating Board (BKPM) deputy chairman Azhar Lubis after a meeting with industry officials said that they really need the investment in the labour [-intensive] industries, including garment, footwear and furniture. If they don’t give [a tax allowance] to them, they [investors] may relocate to other countries.

In 2012 a tax policy was enacted that slashed taxable income to 30 per cent of overall investment realised over six years; sped-up depreciation and amortisation; charged an income tax of up to 10 per cent for offshore taxpayers; and carried forward losses from five years to 10 years.

The industry ministry’s director-general for base manufacturing industries, Harjanto, said that the tax allowance should be made more accessible to downstream industries ineligible under the current system. At present, for example, the tax accommodation applies to textile businesses, but excludes the garment industry. They may require greater flexibility as their new orientation is to absorb labour.

The labour-intensive industry covers firms that employ at least 200 workers and whose labor costs account for 15 percent of total production costs; they include manufacturers of textiles and garment, food and beverages, tobacco, leather and leather products, footwear, toys and furniture.

Harjanto added that in addition to the tax allowance, his office has proposed a restitution of taxes for firms in export-oriented industries to encourage them to use locally sourced raw materials.

Such an incentive would be needed to entice investment in the industrial sector, where there is stiff regional competition.
Investment in labour-intensive industries trended upward between 2010 to 2014, rising by between 20 and 40 percent annually, with 1,528 projects realized in 2014 making up 15 per cent of total domestic and foreign direct investment.

However, industrial growth did not trigger increased labour absorption, which raised concerns among policymakers; in fact the number of workers in the labour-intensive industry tumbled, falling from 337,305 workers in 2011 to 203,732 workers last year.