EVALUATION OF INVESTMENT INCENTIVE POLICY IN THE FORM OF TAX HOLIDAY IN ORDER TO INCREASE INDONESIAN ECONOMIC GROWTH Resha Dwiayu Pangesti Mulyono Master of Accounting-Airlangga University Surabaya, Indonesia reshadwiayu@gmail.com Elia Mustikasari Departement of Accountancy-FEB Airlangga University Surabaya, Indonesia elia-m@feb.ac.id Abstract— This study aims to evaluate investment policy in the form of tax reduction facilities as a result of the slowing down of the economic sector and the impact of global business competition resulting in a decline in foreign investor confidence in investing in Indonesia. This research was done in the form of qualitative research type using an exploratory study. The data collection technique used was preliminary surveys, direct interviews and direct observation with the policy actors. The results showed that tax investment policy in the form of tax holidays indicate that the tax incentive policy in Indonesia has little impact on the increase of economic growth. It is proven that there are regulations that do not yet reflect the efficiency of foreign investors for the industrial discrepancies set by the Government in stimulating investment and human resource limitations in relation to the Directorate General of Taxes. Keywords: Investment Incentives, Tax Holiday, Indonesian economic growth I. BACKGROUND Indonesian economic conditions nowadays have been facing massive challenges from the global economy, one of which is shown by the global economic growth noted by the World Economic Outlook (WEO) in 2016 from the initial achievement of 3.1% to 3.3% (yoy) indicating a decrease in global economic optimism in 2016, compared to the previous year. This outlook decrease is followed by a decrease in other trade commodities as well as slowing economic growth in developed countries, like Tiongkok, Japan, and Europe, and in developing countries in the ASEAN region. The global economy also impacts on the domestic economy, which is reflected in the fact that the current balance deficit is at its lowest level in the past five years, which is at 0.8% of the GDP in the fourth quartile which is due to the strengthening of the manufacturing exports (Worldbank, 2016). According to Rixen’s view (2008) about politics, valuable moves have been done to help forward the global business competition in a country which is known as tax competition. In the field of public economy, one of the fiscal issues in tax competition is about creating efficiency. An efficient tax competition may use models of economy which are aimed at exclusively evaluating the tax competition in one dimension (Genschel, 2011). In the history of the Ministry of Industrial Affairs (2012), tax holiday once existed in Indonesia’s taxes, regulated in Act No. 1 of 1967 jo Act No 11 of 1967 about Foreign Investment which stated all kinds of tax indulgences. Three years after, which was in 1970, provisions regarding tax holidays ended in failure. This was due to its failure to comply with the government’s target. The policy on tax holidays in Indonesia was waxed and waned until 2017, based on the data from the Ministry of Industrial Affairs (2017). It is noted that only five companies have received such facilities with a total investment of Rp 38.5 trillion. In fact, some pros and cons regarding the policy, especially that of the tax holiday, are in the form of profit-based tax insentivity, meaning that the benefits are available so long as the respective companies note down their profits. Thus, should a country wish to draw foreign direct investment out of the business sector which presumably tends to have low profits but can cover a lot of people’ needs, the tax holiday may not be appropriate (Darussalam et al., 2015). On the other hand, Botman et al. (2010) suggests that a tax holiday is the most attractive method of attracting investment with high profits. It may not always create redundancy which is dependent on the respective company’s profit and the average taxes rate effectiveness conforming to other countries which also is an attempt to attract investment. In addition to the above, miscoordination in the process of the distribution of income tax reduction is also an issue which is related to views among the Directorate General of Taxes, the Ministry of Industrial Affairs and the Capital Investment Coordinating Board, resulting in delays in the process of facility utilisation approval (Nizaldy, 2014). According to the aforementioned description, this study aims to conduct an evaluation of the tax holiday policy applied in Indonesia from 2011 – 2016. This has been investigated conceptually, theoretically, and practically in accordance with the field conditions. Employing the theory of policy evaluation in describing the administration improvements will increase the investment and enhance the development, thus the distribution of infrastructure development and Indonesian economic growth can be achieved by conducting the designed evaluation method. 220 Copyright © 2018, the Authors. Published by Atlantis Press. This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/). Advances in Social Science, Education and Humanities Research (ASSEHR), volume 98 1st International Conference Postgraduate School Universitas Airlangga: Implementation of Climate Change Agreement to Meet Sustainable Development Goals (ICPSUAS 2017)