I. Overview of Investment in Indonesia
Reasons to Invest in Indonesia
Indonesia is good investment destination. Abundant natural resources, a young and technically trained work force and a large and growing domestic market, combined with an improving investment climate and a higher global profile, are just a few of Indonesia’s salient strengths. With stability firmly planted after years of vibrant democratic rule, Indonesia’s vast economic potential is primed for taking off.
Indonesia is an emerging global powerhouse in Asia and the largest economy in Southeast Asia.
Following Indonesia's economic resilience during and after the global financial crisis, the government are going to continue reforming investment climate to make a safe and attractive investment destination.
Indonesia abounds with natural resources extractions from being a major producer of liquefied natural gas and expansion of mining industry. Petroleum and mineral make up majority exports.
1. Tax Allowance
30% of investment value
The Government of Indonesia has issued an updated Tax Allowance policy through Government Regulation No. 78 of 2019 on 12 November 2019.
183 business fields are eligible for tax allowance, expanded from 145 segments in the previous regulation.
Under certain requirements among others: investment value or export orientation, manpower absorption, local content, and project location (especially outside Java island).
Deduction of net corporate income which amount 30% from total investment, carried over 6 years period (equal to 5% deduction per year).
Tax Allowance Calculation Illustration: PT ABC
Total Investment: US$ 10,000,000
Deduction per year: 5% x US$ 10,000,000 = US$ 500,000
Deduction for 6 years: 6 x US$ 500,000 = US$ 3,000,000
2. Tax Holiday
The Minister of Finance (MoF) has issued an updated Tax Holiday policy through Regulation No. 150/PMK.010/2018 on 27 November 2018.
The Corporate Income Tax reduction can be given for 5 - 20 fiscal years, based on investment value and eligible for projects that considered strategic for the Indonesian economy.
The 18 eligible pioneer industries are:
Upstream basic metal
Oil and gas refinery
Petrochemicals from oil, gas, or coal
Organic basic chemicals from agriculture, plantation, or forestry products
Inorganic basic chemicals
Pharmaceutical raw materials
Irradiation, electromedical, or electrotherapy equipment
Main components of electronics or telematics equipment, such as semiconductor wafer, backlight for LCD, electrical driver, or display
Machinery and main components of machinery
Robotics components that support the creation of manufacturing machinery
Main components of power plant machinery
Motor vehicles and main components of motor vehicles
Main components of vessels
Main components of trains
Main components of aircraft and activities supporting the aerospace industry
Agricultural, plantation, or forestry-based processing that produce pulp
Digital economy which includes data processing, hosting, and related activities
III. 4 Prospective Sectors for Investment in Indonesia
There are four prospective sectors for investment in Indonesia. These sectors have a rapid and consistent growth pattern during the past few years. Improvements on regulations and bureaucracy which are reflected on a simpler and shorter policy implementation have created a more favorable business environment for investors to dig in more potential growth in the future, especially for the four prospective sectors as listed below.
Indonesia’s government has realized that developing the manufacturing industry in this country will bring huge opportunities for many sectors. Manufacture industry will surely be a huge investment for improving facilities needed by the people of Indonesia. More facilities can lead to more opportunities, such as job vacancies, economic growth, major distribution improvement, and at the same time will prove how good the investment work so far.
As we are now living in the era of digital technology, the chance to improve manufacturing here in Indonesia also getting bigger. Especially the chance to track the most products in demand and creating a system that can ensure the manufacturing industry is growing to provide goods that are high in quality and trust from its market. The government’s concern in this industry will soon enough take Indonesia to a better level, especially it’s the economic ecosystem.
Tourism has become Indonesia’s big asset, which is why this sector has a higher return for investment. The country’s culture, scenery, unique traditional customs, and over a thousand different local languages have been attracting the world to know more about wonderful Indonesia. The exotic sides of Indonesia is an enticing aspect to bring profitable advantage, helping the economy to grow rapidly in a short amount of time.
The tourism will grow simultaneously with many other industries; retail products for hoteliers, local fashion trends as the local culture begins to be introduced worldwide, also the arts and crafts for the visitors. The investment growth from this sector definitely will bring-up other sub-sectors that fall in the same business line. Now, it is clear that tourism can create a new scope of the economy by nurturing the business ecosystem.
E-commerce business has been playing an important role on how the market and customer behavior has changed lately in Indonesia. E-commerce and people’s day to day needs is inseparable. Customer relationship is crucial for understanding people’s needs, even before people know what they need. This is the basic requirement for a company engaged in this sector to thrive in the market.
Another good reason to consider joining this sector is about the social habits of many Indonesians who cherish the use of technology in their daily activities. Indonesia has become one of the highest social media users in the world, meaning that access to the online market has widely opened. The same reason why e-commerce startups in Indonesia keep growing rapidly.
The manufacturing industry, tourism, and e-commerce, all of these three prospective sectors are bringing major impacts on how the infrastructure in this country will evolve. Surprisingly, it is already visible, as seen from the massive efforts of the Indonesian government to build new transportation routes on the underdeveloped regions throughout Indonesia in recent years. An answer that helps more economic sectors to flourish.
More routes and public transportation have been opened, resulting in better access to a lot more area across Indonesia. A better infrastructure will create an opportunity for the eastern regions to improve their living, which naturally will drive the economy to go up. Properties, tourist attractions, and various job opportunities for the locals are the source of income to improve the economy and catch up with the regions near the nations’ capital on Java island.
These investment sectors surely bring a great opportunity for those who plan to start a business in Indonesia. Good news for investors to bring in their innovations, technologies and improvements and turn it into a profitable business.
Indonesian government expected foreign investors and domestic private corporations to invest in infrastructure construction. Therefore, the government exerted effort to create advantageous investment conditions and legal framework for private corporations and reinforce macroeconomic control and adjustment which includes adjusting tax rate and investment policies.
Road transport develops well in Java, Sumatra, Sulawesi, Bali, etc. By the end of 2014, the total mileage of highway is not more than 1000km. Indonesia regards highway construction as one of key projects. According to Indonesia's National Medium-Term Development Plan 2015-2019, Indonesian government would build 2650km road and 1000km highway, maintain 46770km current road and build BRT (bus rapid transit) in 20 cities during 2014-2019.
Indonesia has the ownership of Indonesian railways, which is run by Indonesian state-owned asset administration company. Java and Sumatra develop well in railway transport. In the period of 2014-2019, Indonesian government planned to build a 3258km railway network, including the southern railways and south-north railway line and the two-way track. Also, Indonesia prepared to research on the railway transport in Kalimantan and Sulawesi and considered to build urban rail transit.
Indonesian air transportation is becoming busier since economy develops well and tourism thrives. All provinces, cities and remote areas have been open air traffic. There are 179 airports in Indonesia, 23 of which reach international standard and open international flights, domestic flights, Hajj pilgrimage flights and pioneer flights. The development project of air transportation includes maintenance, improvement and expansion of current airports, and construction of new airports to replace the old some, for instance, construction projects of Medan airport and Lombok airport. In order to satisfy the increasing demand of air transportation, Department of Transportation Indonesia planned to build 15 brand-new airports and logistics airports in 6 places before the end of 2019.
Indonesia is developed in waterway transport, whose system includes inter-island transport, traditional transport, ocean transport and special shipping.
Located in Jakarta, Port of Tanjung Priok is the busiest Indonesian port. Port of Tanjung Perak in Surabaya ranks the second. The government planned to develop water transport routes and construct ports. In order to keep up with national economy and solve the problem of stranded cargos, Indonesian government expected to expand the capacity of ports to handle cargos. The government will gradually loosen the control of port and allow private agencies to build and administrate ports through BOT.
Indonesian telecom enjoys huge development potential and great growth momentum with the invasion of multinational operators and capital. Indonesia has begun to operate the 3G network and the five telecommunications companies will increase infrastructure investment for 3G network. In addition, to make sure the successful construction of the 3G network, the wireless network of fixed-line telephone will undergo frequency translation and all the equipment of fixed wireless network operators need adjustment, expansion and update. Indonesian government is introducing availability of telephone in countrywide.
Though Internet covers most areas of Indonesia, the bandwidth is small and the speed of network is slow. The government plans to build 12000km-long optical fiber network in the east of Indonesia, which will connect with other countries via three terminals. The three terminals are Manado Terminal connecting Philippines, Papua Terminal connecting Australia, and Kalimantan Terminal connecting Singapore.
The penetration of power in Indonesia is less than 75%. To meet the increasing demand of power, Indonesia launched the new electric power development plan, which planned to build a power plant with 35 million KW and develop 40000km-long electricity network.
Source: 1. Chinese Ministry of Commerce Department of Outward Investment and Economic Cooperation
2. Indonesia Investment Coordinating Board