Doing business in Batam Free Trade Zone

batam-portBatam is the first Special Economic Zone (SEZ) opened in Indonesia and includes islands of Batam, Tonton, Setokok, Nipah, Rempang Galang and Galang Baru and lies on one of the world’s busiest shipping lanes between Sumatra and Singapore.

Investment Law (article 31/1) specifies the role of special economic zones as following:

Special economic zones may be specified and developed for accelerating economic development in certain regions whose nature is strategic for national economic development, as well as maintaining balance of regional progress.

Last government regulation about Batam Free Port And Free Trade Zone was released in 2007 (Number 46). This stipulates the area as Free Port and Free Trade Zone for 70 years as of the enforcement of the regulation. Prioritized industries according to the regulation (Article 2/1) are trade, maritime, industry, transportation, banking and tourism.

In 2009 Free Trade Zone was finally legislated in the Riau islands of Batam, Bintan and Karimun, which ended most of the legal uncertainty concerning customs and tax exemptions.

In this article we are looking at the benefits and concerns of running business in Batam and legal framework governing it.

Key benefits

Infrastructure

According to study conducted by  Political and Economic Risk Consultancy, physical infrastructure in Batam is significantly better than in the rest of Indonesia.

Physical infrastructure rating Batam

Main reasons why Batam infrastructure is better according to the study participants:

  • It is much easier to move materials and equipment into Batam through its port and airport from foreign supply sources than it is to other parts of Indonesia, including Jakarta.
  • It is also easier to export finished product out of Batam’s port and airport than it is to other parts of Indonesia, again including Jakarta.
  • The basic infrastructure like electric power and water is comparable to what is available in Jakarta and superior to most other parts of the country, where investors frequently need to put in this type of infrastructure themselves.
  • Batam benefits from its proximity to Singapore, which gives investors the ability to use infrastructure in Singapore when facilities are lacking in Batam. An example here is medical facilities.

One stop investment application

Foreign investment application is processed with a one-stop policy and it takes usually 20 working days to get approval. All permits and licenses required to start development are also processed “under one roof” by the Batam Industrial Development Authority (BIDA).

Proximity to Singapore

Map of Singapore and BatamBatam is only 20km away from Singapore and can be passed by ferry. This makes Batam an attractive location for Singaporean manufacturing firms, who enjoy the benefits of cheaper land and competitive labor costs.

About half of Batam’s export and 70% of foreign investments are from Singapore. This is what K. T. Ang, managing director of ASL Marine has told about doing business in Batam:

Land is cheap, infrastructure is cheap, labor abundant. We save 20 per cent in overall business cost.

Labor costs and availability

Compared to nearby Singapore and even Malaysia, workers’ wages in Batam continue to be much lower. Until last year the minimum wage was only Rp 1.4 million (US$145) and was increased to Rp 2.040 (US$210) million for 2013.

Labor is widely available, as thousands of new workers come to Batam each year mainly from Sumatra and Java islands hoping to find jobs that are sometimes scarce in their home provinces.

Low wages are also a cause of constant labor protests. Firms relying solely on low wages are facing constant tensions with the workers and labor demonstrations take place occasionally.

Tax regulations

As a free port and free trade zone, Batam offers several tax incentives to businesses that use the area for manufacturing products for export purpose.

Value Added Tax (VAT) and Local Service Tax (LST)

According to PWC Pocket Tax Book 2012, most of the transaction to enter goods or services into Batam are free from VAT and LST. In order to qualify for that, there are following administrative requirements:

  1. Business License from the Badan Pengusahaan Kawasan (BPK)
  2. Masterlist (type of goods and and quantity) from the BPK; the goods need to relate to the business activities.
  3. Goods consumed within FTZ follow separate regulation.
  4. Customs procedures, including audit and penalties, are still applicable in Batam
  5. Registering as a Taxable Enterprise is not required

Import tax and duty

Goods delivered into Batam and delivered amongst companies inside the free trade zone are exempted from import duty. However, if the goods enter other parts of Indonesia, they will be for all the import duties and taxes. Goods that can be imported under the FTZ regulations are listed in the master list.

Concerns of companies doing business in Batam

A 2012 article in Jakarta Globe highlighted the experience of Singaporean foreign investors doing business in Batam.

Indonesia ought to be its natural market but Batam is strictly an export zone and there’s a firewall between them. It’s a flawed protectionist strategy.

Mr Tan, a manager at a Singaporean-owned shipyard in Tanjung Uncang

It is mostly companies from the precision engineering, electrical components and electronics manufacturing, and marine and offshore supporting industries that have set up shop on Batam

Lee Yee Fung (trade agency IE Singapore’s regional director based in Jakarta)

Conclusions

I see several concerns regarding Batam free trade zone. Firstly, until now the key reason foreign investors look into Batam is the cheap labor costs. Proximity to Singapore and higher than average living costs compared to rest of Indonesia put an immense pressure to keep raising the minimum wages. Constant labor protests and recent goverment decisions clearly indicate that.

As the minimum wages will increase, so will decrease the attractiveness of Batam compared to Malaysia, Thailand, Vietnam, China etc. who offer better skilled labor and lower logistics costs. Indonesian government is ought to come up with additional benefits to keep foreign investors coming to Batam, such as better clarity regarding master list and avoidance of double taxation.

Companies manufacturing in Batam also benefit only partly from the main growth engine of Indonesian economy – the domestic consumption. After moving goods from Batam to other parts of Indonesia, companies lose the tax and duty benefits and face high logistics costs due to poor infrastructure in rest of Indonesia.

Considering all of the above, it is no wonder Singapore is the main player to benefit from Batam, as it enables them to keep their manufacturing sector competitive.

Indosight

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