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 1119.19 billion USD, 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 FocusEconomics, Indonesia’s GDP will increase by 5.0% in 2021.
With the end of the year coming soon, it is time to prepare for a new business venture. This article discusses the top 5 reasons you should expand your business in Indonesia in 2021.
Table of Contents
Why Expand to Indonesia in 2021
1. 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 signing trade agreements.
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. There are 45 business fields that have been added, such as, call center, event organiser, ticketing in travel agencies and education and/or training.
Finally, foreign investors who fill the positions of shareholders and directors or commissioners and meet the requirements of invested shares can work right away with a permit called the Investor KITAS. Its other benefits include easy application and waiver of work permit government fee (DPKK).
3. 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% to now 22%, and this applies to the 2020-2021 fiscal year. Moving forward, the CIT rate will be reduced even more to 20% in 2022.
Other than the CIT reduction, various tax incentives have been granted to encourage even more foreign investments. 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% reduction in gross income and businesses in the trailblazing industries are eligible for 60% reduction in their net income. There are also fiscal and non-fiscal incentives for businesses that operate in one of the 13 special economic zones available in Indonesia.
4. Huge 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% 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% 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.
Must Watch Video: Everything to Know about Business Expansion Strategies in Indonesia »
5. Permitted land ownership by foreign investors
Foreign investors are no longer restricted from owning a piece of land in Indonesia. To be able to buy land in the country, foreign investors can choose whether to establish a foreign owned company (PT PMA) or a locally owned company (PT).
With a PT PMA, you can secure the right to build (Hak Guna Bangunan – HGB). The land certificate will state the name of the foreign owned company. Fully protected ownership is granted through a legal agreement. With the HGB, you are also permitted to construct property and generate income through selling or renting the property.
As the freehold title or right of ownership (Hak Milik – HM) can only be granted to Indonesian citizens, foreign investors can secure the HM through the establishment of a PT under a local nominee arrangement.
Doing Business in Indonesia Starts with Company Registration
To start a business in Indonesia, you need to have a deep understanding of local regulations and requirements and familiarity with the local market to have a quicker penetration. This can be a challenge for foreign investors. Our team of business incorporation specialists in Indonesia can assist you in registering a company, securing the necessary licenses and incorporating your business altogether, saving you all the hassle when you try to do all by yourself.
- Apart from its good investment climate, Indonesia also has a wide range of natural resources, a young and trained labor force and a growing economy.
- Since 2014, the GDP of Indonesia has been increasing by about 5% every year. Indonesia has the biggest population and economy in Southeast Asia. According to the UN population statistics predictions, these are favorable for economic growth.
- This is due to the fact that a lot of its middle class citizens have been consuming and rapidly growing. The middle class population is also young and can help the Indonesian economy grow even further in the years to come.
- Yes, according to Oxford Economics, due to the coronavirus pandemic, Indonesia’s GDP shrank by 2.2% but is set to grow by 6% in 2021.This is due to a projected increase in consumer spending and infrastructure. Similarly,compared to other neighboring countries, Indonesia’s retail sales and industry production are relatively stable.
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