Passed on November 2, 2020, the Indonesian omnibus law is a milestone regulatory reform in the history of the country's conservative investment laws. The omnibus law seeks to bolster Indonesia's economy by amending many of its onerous government regulations. Saddled in bureaucracy and red-tapism, the earlier Indonesian regulatory requirements made the investment climate in the country one of the most difficult. Which was further compounded by restrictions on excessive foreign ownership, and the intricacies of the tax infrastructure. 

To put it simply, in the past, any foreign investor planning to invest in the country needed to first know the Indonesian Negative Investment List. It was a list of business lines that allowed the investors to know if it was okay to invest in certain sectors, plus the regulations involved. This was more to do with shared ownership. 

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What is the omnibus law all about?

The Indonesian omnibus law was approved by the Indonesian parliament in 2020 and signed into law by the president in November. The main purpose of the law is to strengthen the Indonesian economy by creating jobs, improving competitiveness, and making the business environment conducive to foreign investment. 

Since the main purpose of the law is to trigger both domestic and foreign investment in a bid to transform the country's economy, it has opened the doors to several multinationals. These multinationals are companies that aim to enter, build, and grow their business in Indonesia.

The omnibus law should not be viewed as a panacea.  Like many economies developing quickly, Indonesia continues to have plenty of challenges for foreign organisations looking to operate there.  Here, working with a partner like Seamless is important.  That said, the direction of travel is welcomed and we remain hopeful that these changes and subsequent refinements have the impact of delivering a step change in the ease of doing business and, as a result, FDI into the country.

This, in fact, is also a great opportunity for these foreign companies to partner with some global organisations. An organisation that can guide them on their strategic entry and expansion into South East Asia's largest economy. The experts from these global organisations can help the multinationals with the following:

  •       to build their globalisation strategies
  •       to run payrolls
  •       to set up entities
  •       to supervise accounting and compliance 
  •       to recruit local teams and handle the backend jobs

All this will ensure that the multinationals can focus on their goals. 

Why is the law important?

This law seeks to address the problem of over regulation in Indonesia by easing restrictions in some critical areas, including, capital investment, labor law, corporate tax, business licensing, and land acquisition. The new law is slated to create more opportunities in the field of ecommerce, healthcare, warehousing, and distribution, believes Singapore Business Federation's CEO. 

Also, being Indonesia's largest foreign investor, the Singapore business partners, are wholeheartedly welcoming the new law.

Indonesia’s Omnibus Law: What you need to know

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Business licensing made easy

The new law makes it easy to obtain a business license in Indonesia now. Earlier it was a complex multi-layered system, involving state, local, and central bodies. But now the main responsibility of business licensing lies with the National Investment Coordinating Board.

Under the omnibus law, a foreign investor can obtain a license through a single online submission system, removing the need to go through several government agencies. The omnibus law further categorises the businesses into low, medium, and high-risk groups to help them understand what category of license they need to obtain. 

For expanding in Indonesia, and accelerating business growth, any foreign company needs strong hand-holding by a globally-acclaimed strategic partner. Somebody, who can monitor the organisation's compliance with laws and regulations. This is because compliance is a difficult subject, and it varies across industries. However, any non-compliance not only invites hefty compensations, but often leads to the scrapping of orders. 

Therefore, as businesses enter into partnerships with other companies, it is important to oversee if they are complying with regulations. So having a global strategic partner ensures there is due diligence to make sure the partners are well within the limits of the law consistently. Another important step in stimulating business growth, lies in evaluating the company's risks. This consists of designing full-fledged risk assessment protocols that help in assessing the perils of a path taken and the responses to those perils. Through an unbiased view, the strategic partner can suggest the best course of action for the company. 

Curbs on foreign investment lifted

Indonesia was known for its negative investment list that included a number of business sectors that were not fully open to foreign investment. But under the new law, the negative investment list has been replaced with a positive investment list. According to the new regulation, all business sectors are open to 100 percent foreign investment, except for the following:

  • Cultivation of Class 1 narcotics
  • All types of gambling activities
  • Fishing of species which are at risk 
  • Using natural corals for making souvenirs, jewelry, building materials, etc.
  • Production of chemical weapons 
  • Production of industrial chemicals and industrial-zone-exhausting substances 

Boost to priority sectors

Additionally, the positive investment list includes 245 priority sectors, with focus on the following businesses:

  • research and development intensive
  • labor oriented
  • heavy metal industry
  • petroleum industry
  • renewable energy sector
  • maritime transportation 

Foreign investors investing in these sectors are eligible to the following benefits:

  • fiscal incentives like tax allowance, tax holidays, and tax import duty exemptions
  • non-fiscal incentives like easily acquired business licenses, work permits, raw materials, labor and infrastructure

International structuring and set up requires important planning. To operate a business successfully on international soil, a company needs to have a thorough understanding of the technicalities of the most basic business functions. Seeking advice from a well-known expansion strategist like Seamless makes sure an organisations plans are well considered, thereby providing a solid foundation for future growth.

Change in some minimum capital requirements

The minimum capital requirement of foreign investment in Indonesia remains IDR 10 billion as was in the earlier case. But some exceptions like concessions to start-ups in special economic zones is an added attraction for foreign investors. Moreover, the minimum capital requirement of IDR 100 billion in some sectors has been completely done away with. Which is again a welcome relief for foreign investors looking to invest in those sectors.

Relaxation of labor laws

Earlier, the Indonesian labor laws were so much in favor of the workers that they deterred the foreign investors from even contemplating expanding in Indonesia. However, under the new labor laws, the Indonesian regulatory requirements have become much more flexible and investor-friendly. Although it does not mean the new labor laws are not prone to criticism. The newly implemented labor reforms have their share of both bouquets and brickbats. So while they continue to receive appreciation from some quarters because of their flexibility, there are detractors, busy carrying out their protestations in support of the lack of protection to the workers' rights.

Regulation of corporate tax 

A large part of corporate taxation comes under the omnibus law. This law helps in organising the somewhat unorganised Indonesian tax regulatory framework by reducing repetitive regulations and providing several corporate incentives, including the below.

Corporate income tax rateA large part of corporate taxation comes under the omnibus law. This law helps in organising the somewhat unorganised Indonesian tax regulatory framework by reducing repetitive regulations and providing several corporate incentives, including the below.

Conclusion

Under the omnibus law, expanding in Indonesia is easier than ever before. Enactment of this law is a highly encouraging move by the Indonesian government, committed to opening Indonesia's business sectors to foreign direct investment. The implementation of this law distinctly shows the government's initiative to reduce overlapping protocols in every business sector to attract foreign investors. Although not immune to criticism, this law has the potential to transform Indonesia's economy and catapult the country into the five best economies of the world.