To the world, Indonesia is renowned for being the largest archipelago in the world, with more than 300 ethnic groups, that is blessed with abundant and diverse natural resources along with tourist destinations that boast breathtaking natural beauty such as Bali, Lombok and Raja Ampat. However, there is more to Indonesia than just being one of the most popular travel destinations. Strategically situated close to the giant economies like China and India as well as neighbouring countries like Singapore and Malaysia, it is ideal to locate your investments and register your business in Indonesia.
Furthermore, Indonesia has enjoyed steady economic growth in the past decade. In 2019, the country’s GDP reached $1,119.19 billion, making it the largest economy in Southeast Asia and one of the top 20 economies in the world.
Despite being hit hard by the Covid-19 pandemic, Indonesia’s economy is expected to rebound in 2021 as the government has implemented several fiscal and monetary policies to lessen the impact of the crisis suffered by both businesses and the people. According to Focus Economics, Indonesia’s GDP will increase by five per cent in 2021.
With the end of the year coming soon, it is time to prepare for a new business venture.
1.Investment Protection and Trade agreements
The government of Indonesia always puts effort to boost the country’s economic growth and make it easier for foreign investors to pour investments. One way to do it is through the signing of Bilateral Investment Treaty (BIT) and trade agreements.
Indonesia has ratified the BIT with UAE and will exchange the instrument of ratification later this month. This treaty will protect investors from both countries.The exchange will be done in same occasions of Indonesia-UAE the first round of negotiation of Comprehensive Economic Partnership Agreement (CEPA).
Until the present day, Indonesia has had several trade agreements, including the economic partnership agreement with Japan (came into effect in 2008) and the preferential trade agreement with Pakistan (signed in 2012).
The most recent agreements that just came into effect in 2020 are the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) and the historic signing of the Regional Comprehensive Economic Partnership (RCEP). Fifteen countries (10 ASEAN countries along with New Zealand, Australia, China, Japan and South Korea) were involved in the agreement, making it one of the biggest trading agreements, covering almost a third of the global economy.
2. Ease of doing business
According to a report by the World Bank, Indonesia ranked 73 out of 190 economies in total, with the overall score of 69.2 in terms of ease of doing business in 2020, thanks to the initiatives implemented by the government. First of all, when it comes to company registration in Indonesia, the process has been significantly improved. If previously the company registration process took at least two months to be completed, it is no longer the case in 2020. Now, a foreign investor can expect to complete the entire company registration process in as quick as one and 1.5 months. What is more, new businesses that are established in Jakarta are no longer required to submit Company Domicile (SKDP). This regulation has come into effect since May 2019. Furthermore, since the implementation of the Online Single Submission (OSS) system, more businesses can now start their operations right away as long as a Business Identification Number (NIB) has been obtained through the system, without having to obtain additional licenses. Earlier this month, government published OSS risk-based approach which simplify the licensing process, for low risk-based investment it only takes 7-10 minutes to get licenses.
3. Lucrative Investment incentives for foreign investors
Good news for all investors, the government of Indonesia has reduced the corporate income tax (CIT) rate from previously 25 per cent to now 22 per cent, and this applies to the 2020-2021 fiscal year. Moving forward, the CIT rate will be reduced even more to 20 per cent in 2022.
Other than the CIT reduction, various tax incentives have been granted to encourage even more foreign investments such as Tax Holiday up to 20 years for pioneer industry. Export services that are produced in Indonesian territory, such as repair and maintenance, information and technology services, HR consulting, legal consultation, research and development (R&D) services, and toll manufacturing, are eligible for zero-rated value added tax (VAT).
Furthermore, businesses that engage in R&D activities can enjoy 300 per cent reduction in gross income and businesses in the trailblazing industries are eligible for 60 per cent reduction in their net income. There are also fiscal and non-fiscal incentives for businesses that operate in one of the 15 special economic zones available in Indonesia.
4.Sizeable population, growing middle class and competitive labour costs
As of mid 2020, Indonesia’s population is estimated at more than 273 million people. The number is equivalent to 3.51 per cent of the world’s total population and is expected to grow even bigger in the next few years. In addition to a huge population, the middle class in Indonesia is growing rapidly. Huge population means strong purchasing power, and strong purchasing power implies that any kinds of businesses can thrive and generate substantial profits, provided that the right markets are targeted.
From the huge population, more than 40 per cent are the working age population, according to the World Bank, making Indonesia a big pool of labourers. What is more, the country offers competitive labour costs compared to other countries like China whose monthly minimum wage is increasing and Singapore where everything is expensive.
5. Improved and a world class infrastructure
Indonesia is considered as one of investment destination countries. In the World Competitiveness Report 2021, Indonesian rank is in the 17th position. One of serious effort made by the government to increase the competitiveness is to build the massive infrastructure.
When first elected four years ago, President Joko Widodo announced a US$350 billion infrastructure plan that promised to remove existing bottlenecks and improve access to infrastructure outside of the main island of Java. In his second presidency, his government announced an even more ambitious plan for 2020 to 2024. More than US$400 billion will be spent across hundreds of projects. Twenty-five new airports are in the pipeline, as are power plants, waste-to-energy facilities and lots of mass transit projects. The plans also include developing the groundwork for a new capital city.
It's not all big-ticket items. In fact, much of the infrastructure plan focuses on enhancing the value of the assets created in that first round of investments. Around 60 percent of the planned investment is earmarked for transportation projects. Much of the investment will go towards creating new mass transit options and improving the efficiency of existing services. This made Indonesia have better connectivity compared to the most of Southeast Asia countries.
— Source: www.rikvin.com, www.kpmg.com, IIPC Abu Dhabi
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