Indonesia’s political and legal factors affecting the business environment: Corruption level- Corruption is a significant impediment to Indonesia’s development. In 2016, Transparency International scored Indonesia 37 out of 100 on a scale from 0 (highly corrupt) to 100 (very clean).
Bureaucracy- Bureaucracy is considered by many international investors to be a barrier to investing in Indonesia. Disharmony between regulations made by regulators at the central government and at the regional level is considered to be a key source of Indonesia’s bureaucracy-related issues.Import limitations on quantity of the product- Indonesia applies quantitative limits on the importation of wines and distilled spirits. Companies seeking to import these products must apply to be designated as registered importers authorized to import alcoholic beverages, with an annual company-specific quota set by MOT. Other key challenges that are characteristic of the Indonesian legal system include that: It is not uncommon to find conflicting laws from different authorities and it is often unclear which regulations are applicable.
There is also often a time lag in passing implementing regulations; There is no reliable central source of obtaining comprehensive sets of relevant laws and regulations. It is not unusual, therefore, for Indonesian legal opinions to be caveated to reflect this; court proceedings are generally lengthy and cumbersome and are likely to take many months, or even years, to complete ; judges are given a high level of discretion in deciding matters. Combined with a lack of sophistication, particularly in some regional courts, this can lead to inconsistency in judicial interpretation.Limits on Foreign Control and Right to Private Ownership and Establishment: Restrictions on FDI are, for the most part, outlined in presidential decree 44/2016, commonly referred to as the Negative Investment List or the “DNI”. The 2016 revision to the list eased restrictions in a number of previously closed or restricted fields. The 2016 list raises the foreign investment cap in the following sectors, though not fully to 100 percent: online marketplaces under IDR 100 billion (USD $7.4 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices.
In certain sectors, restrictions are looser for foreign investors from other ASEAN countries. Though the energy sector saw a little change in the 2016 revision, foreign investment in construction of geothermal power plants up to 10 MW is permitted with an ownership cap of 67 percent while the operation and maintenance of such plants is capped at 49% foreign ownership. For investment in certain sectors, such as mining and higher education, the 2016 Negative Investment List is useful only as a starting point, as additional licenses and permits are required by individual ministries. A number of sectors remain closed to foreign investment or are otherwise restricted.
Foreigners may purchase equity in state-owned firms through initial public offerings. Capital investments in publicly listed companies through the stock exchange are not subject to Indonesia’s Negative Investment List unless an investor is buying a controlling interest. Indonesia continued a strong pace of reforms to improve its investment climate, says the World Bank Group’s latest Doing Business 2018: Reforming to Create Jobs report.
The reforms implemented in the past year in Jakarta and Surabaya, the two major cities in Indonesia are:Starting a business was made less costly with a reduction in business start-up fees to 10.9 percent of income per capita, from 19.4 percent.Getting electricity was made less costly by reducing connection and internal wiring certification fees. The cost to obtain an electricity connection is now 276 percent of income per capita, down from 357 percent.
In Jakarta, getting electricity was also made easier by streamlining the processing of applications for new connections.Access to credit was improved with the establishment of a new credit bureau. Trading across borders was facilitated by improving an electronic billing system for tax, customs and excise as well as non-tax revenue. As a result, the time for obtaining, preparing, processing, presenting and submitting documents when importing decreased from 133 hours to 119 hours.Registering property was made less costly by a reduction of transfer tax, reducing the total cost from 10.8 percent to 8.3 percent of the property value.Minority shareholder rights were strengthened by increasing minority shareholder rights, their role in major corporate decisions, and enhancing corporate transparency.
TAXTax advice in Indonesia is generally obtained from accredited tax consultants at Indonesian accounting firms. Most Indonesian taxes are similar to those that investors would expect to find in other jurisdictions. These include: income tax, which includes Corporate Income Tax, Capital Gains Tax, Individual Income Tax, Withholding Tax on employee’s remuneration and Withholding Tax on various payments to third parties; andValue Added Tax (VAT) and Luxury Goods Sales Tax (LGST), levied on goods and services used for manufacturing, business and consumption in Indonesia (subject to certain criteria). Taxation in Indonesia is determined on the basis of residency. A company is treated as being an Indonesian tax resident for taxation purposes if it has been incorporated or is domiciled in Indonesia. A foreign business engaging in business activities in Indonesia via a permanent establishment (PE) will typically assume the same tax obligations as a resident taxpayer.
The Indonesian tax regime incorporates both a self-assessment system and a withholding tax system. The fundamental pieces of tax legislation in Indonesia include: the General Provisions and Taxation Procedures Law No. 28 of 2007; > the Income Tax Law No 36 of 2008; and the Value Added VAT (termed ‘Goods and Services and Sales Tax on Luxury Goods’) Law No 42 of 2009. Labour LawsLaw No.13 of 2003 on Manpower (the Labour Law), together with its regulations, creates a uniform legal framework for employment.
The Labour Law applies both to local Indonesians and foreigners working in Indonesia, and it is not possible to contract out of the terms of the employment legislation, although, in practice, it is common to find contracts that do not comply with the Labour Law. If there is a dispute, the Labour Law will override the terms of the contract. Elections and BusinessConsumer goods companies listed on the Indonesia Stock Exchange are expected to experience two good years in 2018 and 2019 due to the presence of the “political years” (regional elections in 2018 followed by legislative and presidential elections in 2019). Traditionally, consumption rises amid these “parties of democracy” and therefore those consumer goods companies with strong brands are expected to see rising sales in this period.
President Joko “Jokowi” Widodo has instructed his Cabinet to reach 5.4 to 6.1 percent economic growth in 2018. Jokowi also promised that his government would also push down the prices of fuels and basic commodities in the province and develop infrastructure such as roads, as well as improve the quality of healthcare facilities and education. Indonesian politics is veering to the right. Even though there is no clear classification for Indonesia’s political parties (nominally, only religious or nationalist), there are indications that show rightward sway in the country’s politics.