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Mizuho Insights: Indonesia
Economics & Strategy | Asia ex-Japan
October 22, 2020 | Lavanya Venkateswaran, Market Economist
Omnibus Bill – Looks Good on Paper, But Implementation is Key
In a nutshell: The Omnibus Bill is a complex piece of legislation which, among other subjects, amends laws on labour,
investment and taxation that have long held back Indonesia’s competitiveness. On paper, these changes are a step
in the right direction to boost long-term investments, reduce red tape and increase labour market flexibility. But
everything comes down to implementation, around which significant risks remain.
The Omnibus Bill: A motley crew of legislative changes that takes a step in the right direction
The Omnibus Bill, passed by Parliament1 on 5 October 2020, is a motley crew of various legislative changes on
disparate topics including labour, land procurement, small industries and taxation. This bill, the center piece of
President Joko Widodo’s reform agenda, is meant to improve the country’s investment climate, reduce bureaucratic
hurdles and increase employment opportunities. The bill contains eleven relevant chapters, in which over seventy
regulations are amended (Appendix 1). On paper, this bill is a step in the right direction as it attempts to revise
a number of regulations that have long hurt Indonesia’s competitiveness. We have chosen to focus on three
critical areas in which important legislation has been amended: taxation, the labour markets and investments.
a) Changes to taxation laws include exempting dividend tax on domestic and foreign enterprises if the proceeds
are re-invested in Indonesia as well as removing the withholding tax on interest payments to non-residents.
We summarise these changes in Figure 1, along with our view of these changes.
Figure 1: Key changes to tax laws
Law before the passing of the
New law based on the 2020 Omnibus bill
Omnibus bill
Allowed for individuals and domestic enteprises
Allowed for domestic enterprises who
Dividend tax as long as dividends are re-invested in
paid dividends from retained earnings or
exemptions Indonesia. Dividends originating abroad are also
owned 25% of paid-in capital
exempt if proceeds are re-invested in Indonesia.
Exempting dividend taxes if dividends are reinvested in Indonesia could, in theory, help
Mizuho view boost investments. The impending official regulation detailing how this change will be
implemented will be important to determine its exact impact.
Interest paid from an Indonesian There is a possibility that withholding tax rate
Withholding resident/company to a non-resident on interest paid to non-residents will be
tax individual/company will be subject to removed. This change maybe announced in a
20% withholding tax government regulation.
Much depends on the implementing regulation but this could increase the propensity to
Mizuho view
lend as returns become more attractive.
Source: Mizuho Bank; Omnibus Law 2020;Law number 36 of the 2008 amendment concerning (the 4th amendment) of Law
number 7 of the 1983 income tax law ; KPMG; Baker McKenzie.
1
We obtained a draft copy of the Omnibus Law from media sources. We note that the draft is in Bahasa Indonesia, which we have translated into English.
As such, we acknowledge that our understanding is based on a translation and is not the official language of the law.
Lavanya Venkateswaran | Market Economist, Economics & Strategy 1/6Mizuho Bank, Ltd. | Daily Market Report
b) Changes to the labour law potentially reduces compensation for job losses, allows for longer overtime and
alters some minimum wage legislation. We summarise these changes in Figure 2, along with our view of these
changes. That said, at the current juncture, it is hard to determine the exact impact of these changes as the
implementing regulations associated with many of these changes are still to released.
Figure 2: Key changes to the labour law
Law before the passing of the Omnibus bill New law based on the 2020 Omnibus bill
Minimum compensation for severance pay
determined according the years of service.
Maximum compensation for severance pay
Compensation for housing allowance, medical and
Compensation determined according the years of service. Clause
health care allowance is determined at 15% of the
for job loss on compensation for housing allowance, medical
severance pay and or reward for years of service pay
and healthcare has been removed.
for those who are eligible to receive such
compensation.
Shifting the minimum amount of job loss compensation to the maximum amount, i.e. shifting the floor to
the ceiling will, in writing, mak e is easier for firms to pay work ers lower job loss compensation. Moreover,
Mizuho view as Indonesia's severance pay is one of the least competitive in the world*, any reduction is welcome. That
said, ancedotal evidence suggests that under the current law, work ers are rarely compensated the floor
rates.
Overtime work is for no longer than 3 hours in a day Overtime is extended to 4 hours in a day and 18
Overtime
or 14 hours in a week. hours in a week.
This is lik ely link ed to trying to increase average productivity of the work force but much of the impact will
Mizuho view
come down to implementation - which is still uncertain as some exemptions will apply.
The provision for sector-based minimum wages has
been removed.
The minimum wages can be sector-based within a
Minimum wages given province or district/ city. No specified Micro and Small Enterprises are not subject to
exemptions for minimum wages. minimum wages. The impending implementing
regulation will further elaborate on this.
As the implementing regulations have not yet been released, it is difficult to conclude whether the
Mizuho view
process of setting minimum wages has been made more effective or efficient.
Introduces a new unemployment security. This
newly introduced program will be administered by
Social security No formal unemployment security program
the Manpower Social Security Organizing Agency
(BPJS).
The introduction of an unemployment benefit program will deepen Indonesia's social security safety net.
Mizuho view
But a lot of the benefit will boil down to how the program is implemented.
Source: Mizuho Bank; Omnibus Law 2020; 2003 Manpower Law; ILO; Baker McKenzie; Wold Economic Form.*This is according to the Global
Competitiveness Index 2019 (Indonesia's severance pay is ranked 136/141).
c) Changes to the investment law potentially allow private domestic and foreign investors to invest in all but
six sectors in the country. The exact nature of investment allowed will be detailed in a Presidential Regulation
(Figure 3).
Lavanya Venkateswaran | Market Economist, Economics & Strategy 2/6Mizuho Bank, Ltd. | Daily Market Report
Figure 3: Key changes to the investment law
Law before the passing of the Omnibus
New law based on the 2020 Omnibus bill
bill
The revisions bans investment in 6 sectors ( a.
Business sectors that are closed for
narcotics cultivation; b. all forms of
foreign investors shall be: a. production of
gambling/casino activities; c. catching
Sectors open to private weapons, ammunition, explosive devices,
endangered fish species; d. utilization or taking of
investment (including and armaments; and b. business sectors
coral; e. chemical weapons manufacturing; and f.
FDI) that are explicitly declared to be closed by
industrial chemicals and ozone depleting
law in what is known as 'the negative
substances). Further provisions for other sectors
investment list'.
will be detailed in a Presidential Regulation.
Various government officials have hinted that the previous 'negative investment list' will be
replaced with regulations that allow FDI and private investment in all except the six prohibited
Mizuho view
sectors. The exact impact of the change will be understood only following the Presidential
Regulation.
The Government must establish business
sectors that are reserved for MSMEs and The reservation of activities for MSMEs, or that
Micro, Small and cooperatives. Some business sectors are some large scale businesses have to partner with
Medium Enterprises open to large businesses on the condition MSMEs has been revoked. More details will
that they cooperate with MSMES and/or follow in an implementing regulation.
cooperatives.
Reducing government protection in the MSME space will, in the mediu to long-term, raise the
efficiency of this sector. However, there will lik ely be near-term pain as MSMEs adjust to
Mizuho view
their new reality of reduced government protection. The entire impact of the change depends
on the implementing regulation.
Source: Mizuho Bank; Omnibus Law 2020;Indonesian Law No. 25 of 2007 on Capital Investment (Investment Law) ; Indonesia Investments;
Baker McKenzie.
d) Other potential game-changers in the Omnibus Bill include the introduction of a risk-based approach to
business licensing in which low and medium-risk businesses will not have to obtain a large number of
government permits to function, setting up of a sovereign wealth fund that will allow the government to expand
its own investment capabilities and eliminating overlapping regulations across numerous sectors to reduce
bureaucratic hurdles.
Significant risks remain
While there is no denying that the Omnibus Bill has been a gargantuan effort for the Jokowi administration, significant
road blocks still remain for it to achieve its objectives.
The most obvious being implementation falling short or misfiring. Regulations for implementation (whether
government or Presidential) are up in the air. Government officials have stated that these regulations will be released
within 3 months of the law coming into effect; and that is where the devil resides. Even after the regulations are
released, it will be important for the government to minimise implementation risks.
Political backlash exacerbated by economic stress is no less of a risk. Given that the law involves many
politically sensitive areas, chief among which is labour, the implementation may be even more fraught with
hurdles than the passage of the bill. While amendments to the labour law have likely been done with the intention
of making the labour market more competitive and flexible while allowing for greater job mobility, it comes at a time
when the COVID-19 pandemic is already leading to significant job and income losses for households. The stress from
this and the break down of talks with key stakeholders including labour unions2, has bubbled over into street protests,
2
Indonesia Street Protests Reignite Over Controversial Labor Law, Bloomberg, 20 October 2020.
Lavanya Venkateswaran | Market Economist, Economics & Strategy 3/6Mizuho Bank, Ltd. | Daily Market Report
which have extended into a second week. It will be crucial for the government to reign in these protests to
provide investors with confidence around the labour law changes being implemented.
%GDP Figure 5: Indonesia's general government
3mma, Figure 4: Growth in tax revenue collections 35 revenues are the lowest in its peer group
% YoY have been poor for past two years
Indonesia India
60
30 Malaysia Philippines
50 Tax revenue
40 Thailand Vietnam
25
30
20
20
10
0
15
-10
-20
10
-30
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Mar-15 Nov-15 Jul-16 Mar-17 Nov-17 Jul-18 Mar-19 Nov-19 Jul-20
Source: CEIC; Mizuho bank
Source: IMF; Mizuho Bank
From an economic standpoint, the various tax incentives and exemptions provided under the Omnibus Law could
cause short-term cashflow issues for the government, which has been struggling to grow tax revenues even before
the pandemic (Figure 4). For example, broadening dividend tax exemptions or even potentially eliminating the
withholding tax could lead to a cash crunch for the government. Further out, if tax incentives fail to produce the
desired results of raising foreign and domestic private investments, fiscal stress could build as Indonesia’s
tax to GDP ratio is already the lowest amongst its peers (Figure 5). More importantly, this will put the fiscal
consolidation agenda in a precarious position.
No changes to our near-term growth forecasts
The upshot is that while this Omnibus Bill holds the promise of medium-to long- term capacity expansion corresponding
to a higher growth potential, there will be no instant gratification of a growth boost. Implementation challenges amid
current economic headwinds hobble near-term positives, if not marginally undermine current growth prospects.
Accordingly, we have not revised our 2020 and 2021 GDP growth forecasts of -3.3% and 2.1%, respectively even
after the Omnibus Bill was passed in Parliament. We will review our medium-term forecasts depending on how we
view the regulations that are released.
Lavanya Venkateswaran | Market Economist, Economics & Strategy 4/6Mizuho Bank, Ltd. | Daily Market Report
Appendix 1: Summary of the contents of the Omnibus Bill
Chapter
Chapter title Broad topics covered in each chapter
number
a. risk-based licensing is implemented for applications of
business licenses; b.
location permits is based on the government’s Detailed
Business licensing Plan for Spatial Planning; c. Environmental Audit
(AMDAL) is based on risk-based business licensing; d.
Building Construction Audit is also based on risk-based
business licensing
a. amendments towards four Agriculture Laws in a follow
up to a WTO decision on dispute settlement.
b. fishing licensing integration.
c. simplification of Mineral and Coal Mining regulations
Chapter 3
and further incentives for the down streaming of coal
products.
d. expansion of halal certification organizations and
Investment ecosystem omission of halal certification fees for UMKM.
e. establishment of the Agency of Housing Acceleration
to manage housing funds.
f. allowance of the establishment of foreign universities in
Special Economic Zones.
g. simplification of the Negative Investment List from 20 to
6, with a presidential regulation on a Prioritized
Investment List to follow.
a. regulations around employing foreign workers; b.setting
Chapter 4 Labour of minimum wages; c. changes to severance pay; d.
setting up an unemployment benefit program
a. one-off licensing for UMKM via registration; b. more
Protection and empowerment of fiscal and financing incentives for UMKM; c. prioritizing
Chapter 5 cooperative, micro, small and medium UMKM products and services in the procurement of goods
enterprises and services for government activities; d. requirement of
establishing a cooperative reduced from 20 to 9 members.
a. employing foreign labour; b. simplifying the process to
Chapter 6 Ease of business acquire patents; c. income tax changes (dividend
exemption law and withholding tax); d. VAT changes
a. assigning state-owned enterprises with research and
Chapter 7 Research and innovation
innovation responsibilities
a. a land-bank is to be established, the tasks of which
Chapter 8 Land procurement include land redistribution of at least 30% of the land
being managed.
a. expansion of allowed business activities by foreign
entities, including in the fields of education and
Economic areas (free trade zones and
Chapter 9 healthcare, in special economic zones; b. application for
special economic zones)
economic zones by private entities to require a minimum
of 50% ownership of the land.
a. setting up for a sovereign investment fund with initial
Central government investment & strategic capital of IDR15trn; b. the Central Government will provide
Chapter 10
national projects land and all the licensing required in the execution of
nationally strategic projects.
a. license application to be considered as approved if the
process has gone over the deadline as stipulated in the
Service Level Agreement.
b. establishment of NSPK (Norms, Standards, Procedure
and Criteria) in the execution of business licensing to be
Chapter 11 Government administration issued later in the form of Government Regulation.
c. allowing regional governments to issue regional bonds
or sharia bonds to fund infrastructure development and/or
investments (per the approval of the Ministry of Finance);
d. synchronization of Central and Regional policies to be
implemented via Government Regulation with the
applicable administrative sanctions.
Chapter 12 Supervision and development Supervision and implementation of business licenses
Source: Bloomberg; EKONID; Bak er McKenzie; Mizuho Bank .
Lavanya Venkateswaran | Market Economist, Economics & Strategy 5/6Mizuho Bank, Ltd. | Daily Market Report Important Information This publication has been prepared by Mizuho Bank, Ltd. (“Mizuho”) and represents the views of the author. It has not been prepared by an independent research department and it has not been prepared in accordance with legal requirements in any country or jurisdiction designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Disclaimer Unless otherwise stated, all views or opinions herein are solely those of the author(s) as of the date of this publication and are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, and are subject to change without notice. This publication has been prepared by Mizuho solely from publicly available information. 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