With more than 300 ethnic groups, Indonesia is the largest archipelago in the world. The country boasts abundant and diverse natural resources, not to mention the wonderful tourist destinations whose beauty captivate everyone, such as Bali, Lombok, Raja Ampat, and the new shining star Sumba Island. But, Indonesia is more than just a popular travel destination. Ideally located adjacent to giant economies such as China and India and neighboring countries like Singapore and Malaysia, Indonesia is the perfect location for foreign direct investments and business setup.
Indonesia has enjoyed steady economic growth in the past 10 years. The country’s GDP reached 1119.19 billion USD in 2019, making it the largest economy in Southeast Asia and one of the top 20 economies in the world.
The economy of Indonesia, just like other economies around the world, might be hit hard by the COVID-19 pandemic. But, it is forecasted that Indonesia will rebound in 2021. The government has implemented several fiscal and monetary policies to support the businesses and people profoundly affected by the crisis. According to FocusEconomics, Indonesia’s GDP will increase by 5.0% in 2021.
Other top 5 reasons that you should expand your business to Indonesia in 2021 are discussed in this article.
1. Trade agreements
The Indonesian government is actively implementing efforts to boost the country’s economic growth and make the country more friendly towards foreign investments. One of the efforts is trade agreements.
Up to now, Indonesia has had several trade agreements. The agreements include the economic partnership agreement with Japan, which came into effect in 2008, and the preferential trade agreement with Pakistan that was signed in 2012.
Several agreements are more recent as they just came into effect in 2020. They are the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) and the historic signing of the Regional Comprehensive Economic Partnership (RCEP). All ASEAN countries along with New Zealand, Australia, China, Japan, and South Korea were involved in the agreement. The agreement is one of the biggest trading agreements as it covers almost a third of the global economy.
2. Ease of doing business
According to a report by the World Bank, in 2020 Indonesia ranked 73 out of 190 economies in total, with an overall score of 69.2 in terms of ease of doing business. This is mainly due to the initiatives implemented by the government.
First of all, when it comes to business setup in Indonesia, the process has significantly improved. Previously the company registration process took at least two months to be completed. Since 2020, it is no longer the case. A foreign investor can complete the entire company incorporation process in as quick as one and 1.5 months. Good news for new businesses that are established in Jakarta, they do not need to submit the Company Domicile (SKDP).
Furthermore, the implementation of the Online Single Submission (OSS) system enables businesses to start their operations right away, provided that a Business Identification Number (NIB) has been obtained through the system, without having to obtain additional licenses.
Finally, foreign investors who are to fill the positions of shareholders and directors or commissioners and meet the requirements of invested shares can work immediately after applying for a permit called the Investor KITAS. Its benefits include easy application and waiver of work permit government fee (DPKK).
3. Investment incentives for foreign 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 further reduced down to 20%, starting in 2022.
In addition, various tax incentives have been granted to encourage even more foreign investments. Export services that are produced in Indonesian territory, such as information and technology services, legal consultation, research and development (R&D) services, and toll manufacturing, are eligible for zero-rated value-added tax (VAT).
Businesses that engage in R&D activities can enjoy a 300% reduction in gross income. Businesses in the pioneering industries are eligible for a 60% reduction in their net income. Fiscal and non-fiscal incentives are also available for businesses that operate in one of the 13 special economic zones available in Indonesia.
4. Huge population, growing middle class, and competitive labor costs
As of mid-2020, Indonesia’s population was more than 273 million people. The number is equivalent to 3.51% of the world’s total population. It is expected to grow even bigger in the next few years. The middle class in Indonesia is growing rapidly. A huge population means strong purchasing power. Strong purchasing power implies that any kind of business can thrive and generate substantial profits, as long as that they are targeting the right market.
What is more, more than 40% are the working-age population, making Indonesia a big pool of laborers. The country also offers competitive labor costs compared to other countries like China whose monthly minimum wage is increasing and Singapore where everything is expensive.
5. Permitted land ownership by foreign investors
Foreign investors can now own a piece of land in Indonesia. To buy land in the country, foreign investors can choose 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. With the HGB, you can also construct property and generate income through selling or renting the property.
As the freehold title or right of ownership (Hak Milik – HM) is only available for Indonesian citizens, foreign investors can secure the HM through the establishment of a PT under a Special Purpose Vehicle arrangement.
To start a business in Indonesia hassle-free, it is a must to have a deep understanding of local regulations and requirements. To penetrate the local market quickly and easily, familiarity with the local market is required. Both things can be a challenge for foreign investors.
Our team of business incorporation specialists can assist you in registering a company, securing the necessary licenses, and incorporating your business in Indonesia altogether, saving you all the hassle when you try to do it all by yourself.
If you are a Singaporean entrepreneur, our regional footprint enables entrepreneurs to set up a business in Indonesia, remotely from Singapore. As we are part of In.Corp Group Singapore, a collaborative effort between both teams will also ensure the process leverages on existing regulations that are beneficial for our clients.
Get in touch with our team to discuss your business setup plan in Indonesia by filling in the form below.