Saturday, May 19, 2012

Even Indonesia Agrees: Blanket Mining Tax Is Not the Answer

Natural resources, especially minerals and palm oil, have been Indonesia’s major export earners over the past few years, as global prices and production have increased significantly.

The earnings from these exports have boosted the country’s foreign reserves. But exports of raw minerals have raised concerns over the possible depletion of our natural resources, as well as the absence of local processing industries.

To encourage the development of a domestic processing sector, the government has applied a 20 percent export tax on some 65 mineral products, but the move has caused an uproar among local miners. The rationale behind the new tax regime is sound, but without a corresponding package of fiscal incentives, its implementation is shortsighted.

The new tax regulations are beginning to have a negative effect on the mining industry. According to data from the Central Statistics Agency (BPS), Indonesia’s export of metal ores — excluding copper — declined 33 percent to $1.32 billion in the first quarter of this year compared to a year earlier.

The government hopes to raise revenue from the higher export taxes. The coordinating minister for the economy, Hatta Rajasa, said the tax would increase state revenue by about $2 billion, assuming that this year’s mineral exports can at least match last year’s exports, valued at $11.1 billion.

He said the money raised from taxes would go toward developing the infrastructure, human resources and local economies on communities located near mines. But instead of just levying a blanket tax on mining companies, it would be far more effective to establish a fund for specific purposes and have the companies contribute to it.

Raising taxes should be avoided if possible, especially because they may reduce investment in the mining sector over time. It is more effective to offer incentives to encourage companies to behave in a manner that fits the government’s objectives. Editorial, Jakarta Globe

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