The Indonesian upstream textile industry has urged the Fiscal Policy Office in Indonesia, Badan Kebijakan Fiskal, or BKF to exempt local raw materials supplied by local manufacturers from VAT.

Currently the Indonesian government only provides tax exemption for imported raw materials to those companies that obtained the so-called "Ease of Import Facility for Export Purposes" (in Indonesian: Fasilitas Kemudahan Impor Tujuan Ekspor, or KITE) on the strict condition that these companies only use these relatively cheap imported raw materials for output that is shipped abroad.

However, domestic textile manufacturers supplying raw materials to KITE facility owners are subject to a 10 percent value added tax (VAT), hence seeing weaker competitiveness.

For KITE facility owners this situation makes it attractive to opt for imported raw materials instead of buying from local suppliers. Scrapping the 10 percent VAT is expected to boost demand for local raw materials.

According to the Indonesian Synthetic Fiber Producers Association (APSyFI) data show that the volume of garment exports in 2016 reached 550,000 tons, while imports of cloth stood at 724,000 tons in the same year.

Meanwhile, it is estimated that domestic consumption of local raw materials in the textile industry could replace 100,000 tons of imports, hence saving up to USD $500 million in foreign exchange, boost activity at local factories and generate more employment.

Redma Gita Wirawasta, Secretary General of the Indonesian Synthetic Fiber Producers Association (APSyFI), said that the proposal has been discussed during several recent meetings with the BKF.

The APSyFI would be highly supportive of this move and it would in fact encourage the development of an import-substitution industry.