Earlier this year, Indonesian President Joko Widodo's government submitted a draft bill to the country's parliament. The omnibus law, as it is widely known, is a comprehensive bill that would regulate many provisions in various industry sectors into one law. Lawyers say that when passed, it will strengthen the economy by increasing competitiveness, creating jobs and making it to easier to do business in Indonesia.
In February this year, Indonesian president Joko Widodo handed over to Indonesia’s House of Representatives (DPR) a so-called “omnibus law” that is expected to replace dozens of overlapping measures in a bid to improve the investment climate and create jobs in Southeast Asia’s biggest economy. Widodo’s stated approach is to open investment opportunities further in Indonesia, which has so far been blighted by red tape and vested interests.
Defrizal Djamaris, a partner at Indonesian law firm Kudri & Djamaris, says that the omnibus law proposed by the government to the DPR contains important provisions aimed at easing foreign investment restrictions, labour law, simplify business licensing, and streamline corporate tax regulations. “It has intense implications for regional and multinational companies operating in Indonesia,” he notes.
However, for the time being, the law is still awaiting broader feedback, some-thing that has been hard to procure due to the COVID-19 situation in Indonesia. Andre Rahadian, a partner at Dentons HPRP, calls it a “quite complicated” law that will require a lot of inputs from various parties. “During this pandemic, the process of getting input from relevant parties or interest groups is difficult,” he says. “That’s why I feel that the discussions in the parliament about this law should be postponed until people can give required and relevant inputs, so that we have laws that will stand and not become subject of constitutional appeals.” Rahadian points out that a total of 79 laws were being impacted within 11 clusters. “Now it’s down to ten because the employment cluster was withdrawn by the president and will not be discussed. That’s why I think we should wait until things can get back to as close to normal as possible.”
Nevertheless, lawyers expect a lot of good things from the law. “As a lack of bureaucratic effectiveness is seen to be hampering economic growth and posing significant issues in enabling ease of doing business in Indonesia, the so-called omnibus law is drafted as a full package of deregulation aimed at boosting the economy,” says Djamaris. “It is also aimed at increasing competitiveness and creating jobs. According to the result of a study conducted in 2018 by the National Development Planning Agency showed that the most binding constrains were overlapping and relatively closed regulations, including in the labour and the quality of administrations that are still low, especially on the issue of policy coordination.” He adds, however, that as it proposes some drastic changes, for example concerning labour rights, the bill has been rejected by some parties so far.
Rahadian says that while the law looks good on paper, implementation will be the most important element. “Basically, the aim is to simplify process and regulations in doing business as well as establishing a business in Indonesia. For this reason, the law is being simplified, with unnecessary regulatory processes being cut and a one-stop regulatory window being established,” he says. “However, this law will require at least 11 presidential decrees at least right now. It will also require several implementing regulations at the ministry level. Presidential regulations are required because a lot of items in the law need to be interpreted. For example, the law says that to assess what kind of permits will be required for certain businesses, it will be using a “risk-based” approach. There are no definitions of this risk-based approach. I suppose it depends on the level of risk, but say, in the mining sector there are environmental issues - we don’t know how the risk will be assessed there. That’s why I think that to be effective, it has to be issued as a package, that also includes all the implementing regulations.”
CRITICAL ASPECTS
Djamaris says that there are 11 critical areas discussed under the bill that are expected to increase Indonesia’s attractiveness in the eyes of prospective investors. First, he mentions labour. “Some key points connected to labour reform in the omnibus bill is concerning outsourcing, working hours, layoffs, severance, remuneration, bigger chances for expatriates to work without a permit both for the positions of members of directors and commissioners,” says Djamaris. “Having said that, some provisions on labours are considered to be a potentially detrimental effect on labour rights and may create problems in its implementation.”
Then there is the issue of taxation. “A big part of the omnibus law covers the taxation aspects. Major changes are made to Law on Income Tax, Law on Value-Added Tax, Law on the General Provisions and Procedure for Taxations, Law on Excise, Law on Regional Taxes and Levies, Law on Customs and Law on Regional Government at aims to give incentive for prospective investors,” says Djamaris. “For example, the government will decrease gradually the corporate income tax rate from 25 percent to 20 percent in the period 2021 to 2023; it will provide for income-tax-free dividend payments with the condition the full amount is re-invested in Indonesia; and it will facilitate a tax incentive for companies listed on the Exchange in the form of an additional reduction in the corporate income tax rate by 3 percent of the normal rate.” However, he notes that while the government suggests that decreasing the corporate income tax rate could boost economic growth by 1 percent in 2030, the large incentive is given to investors however may cause a negative impact on the state revenues. “The government must take into account that its attempts to create a friendly investment climate for investors do not hurt the state revenues which feared would only add to the sovereign debt in financing the state’s infrastructure development.”
“Under the omnibus law, there are at least some fresh provisions that most affect foreign investors namely simplifying business licensing, harmonising regulations, streamlining tax laws, tax incentives, easing foreign investment restrictions, and labour law.”
— Defrizal Djamaris, Kudri & Djamaris
When it comes to the potential impact of the law on investors, Djamaris says that legal certainty is a key issue demanded by both local and foreign investors. “To clear investors doubts about overlapping regulations and ease of doing business in the country, the government has proposed omnibus law. President Joko Widodo hopes that is the solution for such issues,” he notes. “Under the omnibus law, there are at least some fresh provisions that most affect foreign investors namely simplifying business licensing, harmonising regulations, streamlining tax laws, tax incentives, easing foreign investment restrictions and labour law.”
Rahadian agrees on the certainty aspect. “It will attract foreign investors because for foreign investors and also, in general, all the investors they want the certainty. They want something that they can hold onto, especially for investments that will take long term for returns like infrastructure, natural resources, oil and gas and so on. This law creates simplifications of the requirements and with clear and complete implementing regulations, it will have a positive impact definitely.”
ADVICE TO CLIENTS
Given that the bill is still with parliament, clients need to wait and watch.
“The omnibus law contains some fundamental changes to Indonesia’s legal reform towards creating a friendlier investment climate,” says Djamaris of Kudri & Djamaris. “This is nothing but a golden moment for foreign investors to enter Indonesia’s market. However, as the bill has not yet become legislation and is still being discussed by DPR, the investment scheme at current time is still applying the old prevailing investment law.”
“Right now, as we are not sure whether the bill will be passed by parliament this year, however we are keeping clients updated on the important aspects and possible opportunities. So, our advice is to wait while we prepare for the new opportunities as well as new requirements.”
— Andre Rahadian, Dentons HPRP
Rahadian of Dentons HPRP agrees. “Right now, as we are not sure whether the bill will be passed by parliament this year, however we are keeping clients updated on the important aspects and possible opportunities. So, our advice is to wait while we prepare for the new opportunities as well as new requirements. Only when the implementing regulations are released do we expect things to become clearer,” he says.
Nevertheless, Djamaris feels that while the government should play a crucial role in providing a more friendly investment climate, it is also important to make the law-making process trans-parent. “Another critical point is corruption,” he says.
“In order to attract more investors, the government must also put an extra effort into eradicating corruption as investors consider that corruption under-mines the fair and efficient implementation of laws and regulations and has been a major concern for businesses in Indonesia,” Djamaris adds.
Rahadian feels that while the law basically reduces or deletes a lot of requirements related to licenses, one thing that is not clear is how the provincial governments and regencies are expected to follow the regulations decided under this law.
“We have autonomy laws that transfer some of the rights from the central government to the provincial governments,” he says. “So basically, the main issues that are not addressed in the investment landscape right now is in what ways, and how effectively the central government can regulate provincial regulations that can still become an obstacle to investors, especially foreign investor.”
To contact the editorial team, please email ALBEditor@thomsonreuters.com.
