An aerial view of the Sanur Special Economic Zone (SEZ), Bali. As 60% of the SEZs are located in Java and Sumatra, this raises questions about whether the formation of SEZs is in accordance with its objectives. — The Jakarta Post
AT the beginning of October, the government established two new Special Economic Zones (SEZs) to enrich the investment location options in Indonesia, namely the Banten International Education, Technology and Health SEZ and the Batam International Health Tourism SEZ.
The National SEZ Council is also proposing the addition of six new SEZs, which would bring the total number to 30 as of early 2025.
Based on the results of the SEZ performance evaluation of the first six months of 2024, all SEZs have recorded investments amounting to 205.2 trillion rupiah, with accumulative employment of 132,227 people.
However, there are still lingering questions as to who benefits from the investments, and from which provinces the workers employed in the SEZs have come. Statistically, the SEZ locations in Indonesia are not evenly distributed.
With the current SEZs, as well as those that will be established in the near future, the distribution of SEZ locations is as follows: 10 on the island of Java, eight in Sumatra, four in Kalimantan, two in Bali, three in Sulawesi, one in the Nusa Tenggara islands, one in the Maluku islands and one in Papua.
Establishing Special Economic Zones is a strategic government policy for developing centres of economic growth and equitable national economic distribution, as well as supporting industrialisation and increasing employment in Indonesia.
A law concerning Special Economic Zones, stipulates that the objective of establishing SEZs is to create a just and prosperous society, accelerating economic development in certain areas that are strategic for national economic development and to maintain a balance of regional progress toward national economic unity.
The phrase “maintain a balance of regional progress toward national economic unity” can be interpreted to mean that SEZs are intended to be an instrument that can reduce the imbalance of economic development among regions.
Boosting economic growth
The presence of SEZs, if located in underdeveloped areas, is expected to encourage economic growth in these areas, thereby creating a more balanced and equitable “national economic unity”.
Statistics Indonesia data regarding the 2023 gross regional domestic product at current prices by province, show that the gross domestic product (GDP) of Java Island was 11.71 quadrillion rupiah, while the overall national GDP was 20.53 quadrillion rupiah.
This means that 57% of Indonesia’s GDP is concentrated on the island of Java. The island of Sumatra accounts for 22% of the national GDP, with a regional GDP value of 4.52 quadrillion rupiah.
As 60% of the SEZs are located in Java and Sumatra, this raises questions about whether the formation of SEZs is in accordance with its objectives, and whether the government is serious about addressing social and economic disparities among the various regions in Indonesia.
The government’s establishment of SEZs is not merely a matter of granting permits.
A Finance Ministry regulation concerning income tax treatment, customs and excise, states that business actors who invest in SEZs are given facilities in the form of income tax incentives, value-added tax (VAT), import duties and excise.
Depending on the value of investment, companies located in SEZs can receive tax holiday facilities from 10 to 20 years.
Other corporate income tax incentives can be in the form of tax allowances, where business actors can reduce their net income component by an additional 60% of the investment value made, and can even compensate for company losses for up to 10 years.
In addition, business actors are also exempted from the collection of VAT, import duties and excise for activities within the SEZ. By providing such facilities, there is certainly a large potential for national tax loss.
This potential tax loss is referred to as tax expenditure. SEZ tax expenditure is interpreted as government investment to develop the economy and infrastructure within the SEZ.
Relative to the objectives of SEZs, this government investment should be commensurate with the benefits that the nation receives in equitable economic development in underdeveloped areas.
Balancing objectives
In addition, we must reconsider the balance between investment objectives and tax revenue objectives.
President Prabowo Subianto has set an ambitious taxation vision for his government by targeting an increase in the tax ratio to GDP to 23% from around 10% currently.
This means that with a national GDP of 20.53 quadrillion rupiah, the directorate general of taxes must collect at least 4.72 quadrillion rupiah, which is more than double the 2024 tax revenue target of 2.30 quadrillion rupiah.
With such goals in mind, a strong tax base is needed and tax expenditures (tax incentives) should be minimised.
Limiting unnecessary tax expenditures can be done by, among other things, restricting the licensing of new SEZs in areas that are already developed with industrial estates or economic growth centres.
Industrial estates or agglomerations that are already developed are basically independent and can attract business investment easily even without special tax benefit stimuli.
Designating these already profitable areas for new SEZs could erode potential tax revenues. — The Jakarta Post/ANN
Muhammad Syarif Mansur is a tax policy analyst at the directorate general of taxes, Finance Ministry. The views expressed here are the writer’s own.
