Supply Chains: Indonesia
Indonesia has undergone rapid political and economic changes following the Asian financial crisis and has grown into the largest economy in Southeast Asia. The Indonesian economy is heavily reliant on commodities but has made gains in establishing domestic manufacturing centers. To further this transition, Indonesia continues to reform its inbound investment policies to make it a more attractive destination for investors. In 2020, it received US$18.6 billion of inbound foreign direct investment (FDI) versus US$16.6 five years earlier, an increase of 12 percent. Due to the COVID-19 pandemic and economic fallout, real GDP growth in 2020 decreased by 2.1 percent.
Indonesia’s growing economy and middle class have attracted foreign investment, while its relatively lower levels of human capital development as compared with other countries in Asia and comparatively high regulatory burdens on foreign firms have lessened its attractiveness for foreign investors. As Indonesia has grown wealthier, it has also increased the complexity of its trading sectors by welcoming foreign investment, upskilling its labor force, and simplifying its bureaucracy. Currently, Indonesia ranks 68 out of 146 countries in economic complexity.
Diversifying its economy beyond commodities is one reason Indonesia has prioritized attracting further foreign investment. In November 2020, President Joko Widodo officially enacted the Omnibus Law on Job Creation, which aims to boost economic competitiveness by reducing regulatory and bureaucratic barriers for investment, strengthening labor laws and lowering corporate taxes. This law seeks to make it easier to conduct business in Indonesia and provides more incentives through free-trade zones. In recent years, Indonesia’s top three foreign sources of investment have been Japan, Singapore, and the United Kingdom.
Recent Investment/Supply Chain Policies
On February 2, 2021, President Joko Widodo signed Presidential Regulation No. 10 of 2021 on Investment Business Lines (PR 10/2021), which came into effect on March 4, 2021. The regulation designates 245 industries as "priorities" and will offer incentives to foreign investors who invest more than 10 billion rupiah (US$710,000) in these industries, including tax breaks, streamlined licensing, guaranteed access to energy/materials, and others.
On November 2, 2020, President Joko Widodo signed and enacted the Law of the Republic of Indonesia No. 11 of 2020 on Job Creation, also known as the Omnibus Bill, which was passed by the Indonesian House of Representatives on October 5, 2020. The law revises more than 75 current laws and requires the national government to issue 30 more regulations, including those related to tax incentives.
On November 13, 2019, the government issued Government Regulation Number 78 of 2019, which lists tax incentives available to businesses investing in certain industries, such as pharmaceutical, energy, and information technology. Incentives include tax deductions, accelerated depreciation of fixed tangible assets, and fiscal loss compensation.
On June 25, 2019, the government issued Government Regulation Number 45 of 2019, which expands the pool of taxpayers who may receive tax benefits, and loosens the criteria for receiving these benefits. For instance, corporations investing in "labor-intensive" industries and research and development can now receive significant tax breaks under GR 45/2019.
- On November 2, 2020, President Joko Widodo signed and enacted the Omnibus Bill, which revises current laws, including those to do with land acquisition processes.
- On November 2, 2020, President Joko Widodo signed and enacted the Omnibus Bill, which revises current laws, including those regarding labor and immigration. More specifically, changes were made to laws related to "definite period employment, outsourcing, overtime, minimum wage, termination of employment and manpower social security."
- On April 28, 2021, President Joko Widodo signed Presidential Regulation Number 31 of 2021 (PR 31/2021). The regulation upgrades the status of Badan Koordinasi Penanaman Modal (BKPM), the government agency in charge of implementing foreign direct investment (FDI) policies, into a full-fledged government ministry.
- On November 2, 2020, President Joko Widodo signed and enacted the Omnibus Bill, which revises current laws that allow for the simplification of licensing, environmental assessment, and Micro, Small, and Medium Enterprise (MSME) registration processes.
SPECIAL ECONOMIC ZONES
[Possible New Policy/Program] On January 28, 2021, according to the Chinese press, President Joko Widodo revealed that Indonesia would waive charges for "five years of land lease" by foreign investors in Batang Industrial Park. Wihaji, Batang's district head, announced that investors "will only pay for electricity and water during the period."
On November 2, 2020, President Joko Widodo signed and enacted the Omnibus Bill, which amends previous provisions on Special Economic Zones (SEZs) –– including Law No. 39 of 2009 on Special Economic Zones (KEK Law), Law No. 36 of 2000 on Free Trade and Port Zones, and Law No. 37 of 2000 on Sabang Free Trade and Port Zone –– to provide more legal certainty for investors, more government support to SEZs, and enhanced cooperation across different sectors and government agencies.
Information and Communication Technology
[Possible New Policy/Program] In March 2021, Trade Minister Muhammad Lutfi told The Straits Times that the Indonesian government is planning on passing "a new regulation that lays out rules for e-commerce in a bid to promote fair and healthy competition in the domestic market." One rule, according to Lufti, will require e-commerce entities to declare if they carry out cross-border trade.
In November 2019, the Indonesian government issued Government Regulation Number 80 (GR 80/2019), which provides and clarifies legal guidelines around Indonesia's e-commerce industry.
- On May 24, 2019, the Ministry of Agriculture issued Government Regulation Number 40 (GR 40/2019), which simplifies procedures for acquiring agricultural business licenses.
On June 26, 2020, Taxation Regulation Director II Yunirwansyah announced that the Indonesian government issued Government Regulation Number 29 of 2020 on Income Tax Facilities to Address Corona Virus Disease (COVID-19) (GR-29/2020). According to the Indonesian Cabinet Secretariat, the regulation provides income tax cuts to taxpayers who produce, handle, and donate medical supplies, including surgical masks and respirators, medical disposable ventilators, and diagnostic test reagents for COVID-19.
On January 20, 2020, the government issued Government Regulation Number 3 of 2020, which permits foreign investors to own more than 80 percent of shares in locally-listed insurance companies without a “local partner.”