Indonesia’s Business Climate under the World’s Spotlight

Ease of Doing Business (EODB) 2018, a global business convenience research initiated by World Bank, has placed Indonesia at the 72th from 190 (one hundred ninety) countries tested. Indonesia has climbed19 ranks compared to the previous year’s survey result, which was the 91st.

However, Indonesia’s position is still behind peer coutries in Southeast Asia region, such as Singapore (2), Malaysia (24), Thailand (26), Brunei Darussalam (56), and Vietnam (68). Indonesia is ranked only ahead of the Philippines (113), Cambodia (135), Myanmar (171), and Timor Leste (178).

In this year’s Doing Business survey, World Bank measures the policy impact on 11 business environments. The 10 areas that become the assessment indicators are the survey results and another one is the evaluation of labour regulation. Unfortunately, this survey entitled Reforming to Create Jobs was only conducted in two big cities, namely Jakarta and Surabaya.

Based on the survey results, the eight indicators show improvement on business climate in Indonesia. They are: cost of starting a business (increasing 7 ranks), process of construction permits (increasing 8 ranks), cost of getting electricity (increasing 11 ranks), cost of registering property (increasing 12 ranks), access on credit (increasing 7 ranks), protection of minority shareholder (increasing 27 ranks), contract enforcement (increasing 21 ranks), and resolution of insolvency case (increasing 28 ranks).

Meanwhile, another two indicators are having a fall-off, which are tax payment (decreasing 10 ranks) and trading across borders (decreasing 4 ranks).

Subject	2014 Rank	2015 Rank	2016 Rank	2017 Rank	2018 Rank
Starting a Business	158	163	167	151	144
Dealing with Construction Permits	150	110	113	116	108
Getting Electricity	101	45	61	49	38
Registering Property	112	131	123	118	106
Getting Credit	67	71	70	62	55
Protecting Minority Investors	43	87	69	70	43
Paying Taxes	158	160	115	104	114
Trading Across Borders	61	104	113	108	112
Enforcing Contracts	171	170	171	166	145
Resolving Insolvency	71	73	74	76	38

 

Policy Reform

The great improvement of Indonesia’s Doing Business rank is linked to a series of policy reform that has been performed by government within the last one-year period. First, the cost of starting a business becomes cheaper because of the revocation of provision on Limited Liability authorized capital minimum limits, which is previously determined by IDR50 million at minimum adjusted by the agreement of the company’s founders.

Second, cost of getting electricity is also becoming more affordable after the government lowered the costs of line certification and internal cable. The cost of getting electricity is currently 276% from per capita income, decreasing from 357%. In Jakarta, through the shorter process of new line request, electricity may also be obtained easily.

Third, the current property registration is cheaper following the cutting of final income tax rate on sales of non-subsidized land and building, from 5% to 2.5%. Upon the survey result, this policy reduces cost component, which is previously 10.8% to 8.3% from assets’ value.

Fourth, the access on credit in Indonesia is considered easier since the forming of new credit agent.

Fifth, protection on investor is considered better. It is related to the rights of minority shareholders that are strengthened by the improvement on their roles in the company’s decision as well as the improvement on the company’s transparency.

Sixth, related to policy of cross border trading, the import activity is considered quicker through the introduction of electronic and integrated systems of taxes, customs and excise, and non-tax state revenue collection. Because of this single collection system, the period of getting, preparing, processing, and sending documents during import is lessened from 133 hours to 119 hours. However, this policy is not enough to improve Indonesia’s position, which fell 4 ranks in this indicator.

Seventh, the indicator of paying taxes is improved. This indicator reflects the total taxes and contribution paid, payment method, frequency of payment, and number of interested institutions. Several government’s policies considered significant, among others, are by promoting online tax submission and reporting system as well as decreasing the tax rate on profits (capital gain). This indicator also takes into account the government’s policy on increasing health insurance limit (National Health Care Security).

Declining Taxes Indicator

Despite considered getting better, Indonesia’s Paying Taxes position is lower 10 ranks this year. Based on last year’s survey, the rank of Indonesia’s Paying Taxes was the 104th, meanwhile this year’s position has plunked  to 114 from 190 (one hundred ninety) countries.

Referring to 2016 tax system, the survey result records 43 types of tax payment in Indonesia. The amount is quite bigger compared to the average of 21.8 payment types in East Asia and Pacific regions, and the average of 10.9 types in high-income economy countries of Organisation for Economic Cooperation and Development (OECD) members. For this variable, Hong Kong is a country having the best tax system with only 3 (three) types of tax to be paid by entrepreneurs.

Meanwhile, the period required to prepare, submit, and pay (or defer) income tax, value added tax (VAT) or sales tax, and labour tax (including taxes on income and social security premium) reaches 207.1 hours per annum on average. Although it has been better than the previous year’s survey result, which was 221 hours per annum on average, it still takes longer time compared to the average time needed in Asia Pacific region (189.2 hours/annum) and OECD countries (160.7 hours/annum). Luxembourg is recorded as the country with the shortest period in tax administration, which is only 55 hours per annum on average.

From perspective of total tax rate, which measures the amount of tax and mandatory contribution to be paid by entrepreneurs in the second year of operation and which is considered as part of commercial profit, the aggregate percentage in Indonesia amounts to 30% of profit. This percentage is lower than the average in East Asia and Pacific regions (33.6%) and in OECD member countries (40.1%).

Homework

Although this year there have been seven policy reforms conducted, Indonesia is unable to maintain its position on the top 10 most improvised countries as the previous year. In that report, this year’s top 10 most improvised developing countries are Brunei Darussalam, Thailand, Malawi, Kosovo, India, Uzbekistan, Zambia, Nigeria, Djibouti, and El Salvador.

Brunei and Thailand succeed in representing Association of Southeast Asian Nations (ASEAN) countries in the list of top 10 most improvised developing countries after each of them conducted reforms on the eight indicators.

At least, World Bank records Indonesia that has reformed the ease of doing business as much as eight times in 15 years or since 2003. As a result, the duration to start a new business in Jakarta has diminished from previously 188 days (Doing Business 2004) to 22 days. However, the procedures to register a new business remain high, which are 11  procedures, compared to five procedures in high-income economy countries of OECD members.

Indonesia is also considered having performed a significant improvement on resolving insolvency and, it is surely the best achievement.

However, Indonesia still needs improvement on Contract Enforcement field in order to create a better business climate. Therefore, in case of any legal matters on investors related to their investment in Indonesia, they will receive a legal protection and certainty.

In terms of contract enforcement, Indonesia’s score is still below 50 or becomes the lowest in Southeast Asia with the Phillippines. Although the cost to settle commercial dispute through district court in Jakarta decreases almost half of 135.3% (year 2003) to 74%, it is still quite higher than the average of 21.5% in high-income countries of OECD members.

Currently, the contract enforcement in Indonesia ranks the 145th from the total of 190 with 45 points, which is the lowest point from other indicators obtained by Indonesia.

As a comparison, Thailand and Brunei Darussalam, as countries with the best EODB rank increase among East Asia and Pacific countries, have implemented online contract enforcement system. So that investors obtain convenience and certainty in handling contract that is in legal dispute.

Government assumes that the low contract enforcement indicator in Indonesia was caused by difference of law system adhered. Indonesia has been practicing Civil Law court system, while EODB survey refers to Common Law system that becomes the world’s standard.

No matter what, the government’s effort deserves appreciation in improving the investment climate in Indonesia. However, we cannot be lulled by EODB rank because the improvement on public service policy should still be maintained whenever possible, with or without the “rank.”