Indonesia’s Omnibus Law: New Protection and Empowerment Measures for Small Businesses
Indonesia’s Government Regulation 7 of 2021 (GR 7/2021) — an implementing regulation of the Omnibus Law — looks to provide greater protection and empowerment to Indonesia’s cooperatives, micro, small, and medium-sized enterprises (MSMEs).
GR 7/2021 provides several facilities to encourage the growth of local MSMEs, such as mandating regional governments to provide at least 30 percent of the total land area for commercial areas for the promotion and development of MSMEs. In addition, the regulation has made it easier for MSMEs to obtain a business license, tax reductions, and reliefs, and are exempt from paying the provincial or the regency/city minimum wage.MSMEs are considered the backbone of Indonesia’s economy, contributing to over 60 percent of GDP and employing more than 100 million people (97 percent of the domestic workforce). Developing these small businesses into scalable ones will be essential for Indonesia’s economic growth and achieve its goal as the world’s seventh-largest economy by 2030. However, the majority of MSMEs are in the informal sector and thus face major obstacles to access financing, and the managerial and operational capacities to grow.
New MSME criteria
GR 7/2021 expands the criteria for an MSME. Previously, there were only two criteria: assets and revenue, and each had its own threshold for a company to be recognized as an MSME.
Under GR 7/ 2021, MSMEs are categorized by their business capital or annual sales. The criteria exclude land and buildings.
Micro enterprises are businesses that have capital of no more than 1 billion rupiah (US$69,900) and annual sales of no more than 2 billion rupiah (US$139,800).
Small enterprises are businesses that have capital of more than 1 billion rupiah (US$69,900) and annual sales of more than 2 billion rupiah (US$139,000) but less than 5 billion rupiah (US$349,551).
For medium enterprises, they are businesses with a capital of more than 5 billion rupiah (US$349,551) and annual sales of more than 15 billion rupiah (US$1.04 million) but less than 50 billion rupiah (US$3.5 million).
Ease of obtaining a business license
The Omnibus Law has implemented a centralized business licensing system. An MSME only needs to submit their national ID and a reference letter from their neighborhood association online to receive their business number.The government will provide technical guidance, consultation, and training for all MSMEs in this process, hoping it will also increase their knowledge of national standards, such as for Halal certification, as well as other regulatory certificates.
Ease of obtaining financing and incentives
MSMEs are able to use their business activity as a form of credit guarantee to obtain financing. Additionally, their tax administration process has been simplified.
Micro and small enterprises are eligible for incentives in the form of:
- Regional tax reduction or relief;
- Regional fee reduction or relief;
- Subsidized loans;
- Capital for MSMEs with innovative products that have market potential or are technology-based;
- Financing of intellectual property rights;
- Vocational training; and
- Support for research and development.
The government can act as a guarantor for up to 80 percent of loans or financing provided by banks and other non-bank financial institutions to MSMEs.
Micro and small businesses must first fulfill the following criteria:
- Must have just started business operations or are already operating;
- Have a gross income of no more than 7.5 billion rupiah (US$524,381) per year;
- The business activities are in:
- Boarding houses;
- Restaurants; and
- Stalls; and/or
- Procure government goods or services electronically.
Medium-sized enterprises and large businesses can also receive the above-mentioned incentives if they develop export-oriented products, hire a local workforce, utilize micro or small enterprises to expand the business, and train and provide upskilling programs for micro or small businesses.
MSMEs are also exempt from paying the regional/city minimum wage rates.
Priority location and development
GR 7/2021 mandates ministries, state-owned enterprises, and regional-owned and private businesses must allocate 30 percent of their commercial areas, shopping centers, and public infrastructure for the promotion and development of MSMEs. Public infrastructure includes airports, toll road rest and service areas, railway stations, and terminals.
The rental fee for the area used for the promotion of the MSME should not exceed 30 percent of the commercial rental fee.
Government and state-owned entities to help facilitate demand
The central and regional government(s) are obligated to allocate 40 percent of their goods and services procurement budget for MSMEs.
Business activities requiring partnerships with MSMEs and cooperatives
Another Omnibus Law implementing regulation, Presidential Regulation 10 of 2021 (PR 10/2021), stipulates that certain business activities must be allocated to cooperatives and MSMEs or require large businesses to partner with cooperatives and MSMEs.
PR 10/2021 states the following criteria for business fields that are reserved for MSMEs:
- Business lines that do not use advanced technology;
- Are labor-intensive businesses, characterized by a special cultural heritage; or
- The capital for the business activities does not exceed 10 billion rupiah (US$701,000).
There are two criteria for business fields that require large enterprises to partner with cooperatives or an MSME. These are:
- Business activities that are mostly undertaken by MSMEs or cooperative; and/or
- Business activities have the potential to scale up and enter the larger supply chain.
There are also new provisions to assist Indonesian cooperatives. GR 7/2021 reduces the requirement of primary cooperatives from 20 members to nine, and cooperatives can now be either single-purpose or multi-purpose cooperatives, aimed at attracting more members through this enterprise.
GR 7/2021 allows for the establishment of shariah-based cooperatives, but the entity must contain the word ‘shariah’ in the official name, and the shariah principles must be stated in the cooperatives’ articles of association.
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