India: Investing & Market Entry in Indonesia

 

India is one of Indonesia’s top trading partners along with China, Singapore, Japan, South Korea, Thailand, Vietnam, United States, Malaysia, Germany, Saudi Arabia, United Arab Emirates, and Hong Kong. Benefits of doing business in Indonesia include skilled and low-cost labour, a productive and highly motivated workforce; besides, English is the language generally used in Indonesia for the purpose of business.

Indian businesses in Indonesia: A quick overview

• Majority of Indian businesses in Indonesia revolve around the trade of textile, wood products and manufacturing.
• Health and infrastructure industries are drawing the interest of Indians lately. This sector has witnessed positive investments from Indians with significant growth each year.
• Main areas of focus for partnership are roadwork, urban railways, oil and gas, airports, and the health industry. Indian companies are allowed to become beneficiaries in these projects through Special Purpose Vehicle Arrangements.
• Indian investors are showing interest in waste management through IT and technology.

Setting up business in Indonesia

Steps for entry

• The first step is to register the company under foreign-owned limited liability (PTPMA) with a minimum capital of IDR 2.5 billion.
• Post registration the company receives an identification number to operate (NIB), the Business License and Location Permit.
• The next step is to apply for a business visa with a validity for 60 days, Investor KITAS with a validity of 1 year (index 313) and 2 years (index 314) and Permanent Stay Permit (KITAP), which is the most comprehensive, stress-free and cost-effective visa with a validly of 5 years. The Investor KITAS visa has been specifically designed for business investors in Indonesia that permit them to live and manage their business in Indonesia.

Requirements under PT PMA

For foreigners to legally run a business in Indonesia, they need to set it up under PT PMA (a Limited Liability company with foreign capital).

• Minimum paid-up capital is IDR 2.5 billion.
• The corporate structure should consist of Shareholders, Board of Commissioners and Board of Directors.
• The shareholder could be an individual, a company or foundation.
• Decision making authority lies with the shareholder.
• The PT PMA will require 1 director and 1 commissioner.
• The Deed of Incorporation should be included in the Articles of Association with the presence of a notary.
• The Deed of Incorporation should be submitted by the notary after which the legal entity will be approved by the Ministry of Law and Human Rights.
• Registration of the Tax Identification Number (TIN), which is known as Nomor Pokok Wajib Pajak (NPWP) in Indonesia. It is obtained from the local tax office. The NPWP is required for fulfilling tax obligations, banking activities and for securing other company’s license.
• A domicile letter is required to show the location of the business.
• The next step then is to register the legal entity in the one single submission system after which the company receives the NIB, the Business License and Location Permit.
• The NIB also serves as an import license, customs identification number and business registry number and it registers the PT PMA under the Health and Social Security Number.
• The final step is to apply for additional license depending on the business sector.

Time required to start a business: 13 days
Time needed to register property: 1-2 weeks
Time needed to fulfil tax requirements: End of the 4th month after the tax year ends
Time needed to resolve insolvency: 60 calendar days

Taxes & Subsidies

Corporate Tax Rate: 25%
Individual Tax Rate (depending on the income): 5% to 30 %
Value-Added Tax (VAT): 10%
Luxury Tax Minimum: 10%
General Import Duty: Between 0 % and 150%

Tax exemptions are available in the following cases:

• Listed companies offering a minimum 40% of their share capital to the public are eligible for a 5% tax cut.
• Companies with a gross turnover below IDR 50 billion will have to pay corporate tax at the rate of 12.5%.
• Companies with a gross turnover below IDR 4.8 billion will have to pay corporate tax at the rate of 1%.

Funds for setting up business in Indonesia

• The most convenient way for starting a business is through government grants. However, these grants are regulated by the European Union (EU) legislation and EU only funds public sector ventures.
• There are sites offering local grants to small businesses which include local councils and large companies. But the number of proposals and funding amount are limited.
• Another available source of finance is loans, but these funds are granted to only well-established businesses. New businesses do not qualify.

Business opportunities in Indonesia

• Indonesia has a growing internet penetration with the e-Commerce market growing at a rate of 37.4% as of 2020.
• There are 10 main core business clusters in Indonesia: Food and beverage industry; fishing industry; textile and textile products industry; footwear industry; palm oil industry; timber industry (including rattan and bamboo); rubber and rubber-based products industry; pulp and paper industry; electrical machinery and electrical equipment industry; and petrochemical industry.
• In recent years’ health, retail, education, financial, and telecom services have boomed in Indonesia. Note: Around 50% of the Indonesian consumers are under the age of 30.
• The aviation industry is growing at a rate of 20% yearly – thus, aircraft replacement parts and services, air traffic control, airport logistics services and ground support equipment constitute a valuable and significant market.
• The Government of Indonesia aims at making Indonesia a manufacturing hub that rivals South Korea and Germany by 2030. The current contribution to the sector is 20% of the GDP and employment of 15% of the total workforce; the goal is to increase the contribution from 20% to 25% by 2030. The main areas of production in Indonesia are in automotive, electronics, textiles and garments, food and beverages, chemicals, and footwear. The micro, small or medium enterprises dominate 99% of these sub-sectors. At present, the island of Java consists of the majority of manufacturing hubs in the country, which account for nearly 58% of the total GDP. The government’s aim is to expand this sector to other regions of the country.
• Indonesia has an ambitious infrastructure plan in place, worth more than USD 700 billion. Focus areas include waste-to-energy facilities, mass transit projects, construction of new highways of 2600 km, new airports, construction of electricity plants with a capacity of 35000 MW, and the construction of a new capital city. 40% of the costs of these projects will be borne by the government, 25% by the state-owned companies and rest by the private sector.
• It is estimated that by 2025 Indonesia’s digital economy will be worth around USD 130 billion and will be ASEAN’s largest digital economy. The leading role in this sector will be played by the e-Commerce segment, which has over 170 million users engaging in some form of online shopping.
• Due to Indonesia’ s large market size, the healthcare sector presents a lucrative opportunity for foreign investors. Since the implementation of the Universal Healthcare Program (BPJS) in 2014, the government’s annual spending has sky-rocketed covering nearly 200 million people, making it the world’s largest healthcare program. It is mandatory for expatriates and citizen to join; and companies are required to register their employees to the program by paying a percentage of the premium.
• The increase in spending on healthcare is bound to impact sub-sectors like the medical device industry which had a value of USD 4.5 billion in 2019. The majority of imports for this sub-sector was valued at USD 2.8 billion, with most imports being sophisticated medical instruments such as ICU equipment and PET-CT scans.
• There is a great dependency on the import of raw materials in the health industry; hence, the government enacted reforms by allowing foreign investors to have 100% ownership of factories which produce essential raw materials.
• Foreign investors are allowed up to 67% ownership of private hospitals as a part of ongoing reforms within the industry. If the investor is from an ASEAN country, the percentage increases from 67% to 70%.
• The expansion of modern retail benefitted the cosmetic industry which witnessed sales worth USD 1.2 billion prior to the COIVD 19 pandemic.
• Note: There have been reforms enacted in the Fast-Moving Consumer Goods (FMCG) industry; the Halal Law was issued by the government in 2019 making it mandatory for consumer products and related services to be Halal-certified. The government plans on making Indonesia the world’s largest Halal market.

 

For further information, please contact:

Gautam Khurana, Managing Partner

India Law Offices, New Delhi

e: g.khurana@indialawoffices.com

t: + 91 11 24622216

 

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