indonesia policy monitor | september 2016
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Agriculture Food Crops | Plantation | Livestock | Fisheries | Forestry
On the Horizon
In early August the Ministry of Environment and Forestry (Lingkungan
Hidup dan Kehutanan / LHK) indicated that the final draft of Presidential
Instruction (Inpres) regarding the moratorium on licensing of oil palm
plantations had not yet reached President Jokowi’s desk. The draft
remains with the Coordinating Minister of Economic Affairs as discussions
continue among several ministries holding authority pertaining to land and
plantations. This Inpres aims to arrest the speed of deforestation and a
negative impact on the environment. It was previously slated to be signed
off by the President in late July or early August 2016. The government
stated on July 12 a moratorium on the licensing of oil palm plantations will
be implemented for a period of five years, and the Ministry of Environment
and Forestry will set up categories of land evaluation during the
moratorium period. The evaluation may encompass 950.000 ha of principle
permits awaiting the decree (SK) from the Environment Minister. The
moratorium will also concern land that is allegedly not consistent with
release purposes, transferable permits and plantations that have not yet
completed the licensing process. This may present some legal uncertainty
for oil palm producers which may impact palm oil futures if it drags on.
However a positive knock-on effect of the Inpres when it is eventually
passed, is likely to result in an immediate rise in the value of existing oil
palm plantations.
Consumer Goods
Food & Beverage | Cigarettes | Pharmaceutical | Cosmetics | Household
Articles | Household Appliances
On the Horizon
The Indonesian government has previously indicated there are two
possible options in order to reduce cigarette consumption as well as
increasing the country’s excise revenue. It comes down to a choice of
increasing excise tax on cigarettes or instructing cigarette producers to
raise the product selling price. The Ministry of Finance is still in discussion
September 2016
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with several relevant parties and so far there has been no dissent from Parliament on these
issues. The policy will be based on current excise law and will be included in a draft law
implemented in the 2017 state budget. This will likely be mandated before the start of 2017 state
budget law (UU APBN) discussion. Amended retail prices for tobacco products usually come
into effect on January 1 each year, and the regulation is slated to be announced in late
September.
The enactment of this regulation will likely hurt the tobacco products industry which is the
biggest contributor of Indonesia’s excise revenue. The government expects the industry to
generate up to IDR140 trillion (approx. US$10.6 billion) from excise receipts this year. The
government’s goal to improve the country’s health by hiking the so-called ‘sin tax’ won’t
necessarily wean the nation off tobacco products as there is a widespread black market for
illegal cigarettes. To put it into perspective, distribution of black market cigarettes rose 11.7%
when excise tax was increased in 2014, according to a study by Gadjah Mada University.
Indonesia is the world’s third largest consumer of tobacco, after China and Russia. The
government should consider taking a different approach and expand the range of goods subject
to excise tax. The country currently has a very limited number of goods subject to excise tax
currently and the tobacco industry contributed a massive 96% of the state's excise revenue in
2015.
Financial Banking | Financial Institutions | Securities | Insurance
On the Horizon:
The government is currently discussing a proposal to reduce the Corporate Income Tax (PPh
Badan) rate by considering factors such as tax base, and this was expected to be finalized by
the end of August 2016. The Ministry of Finance has been mulling a revision of PPh Badan for a
year, which is based on the income tax law (UU no.36/2008) and its derivative law (PP
no.46/2013). The government plans to revise the law regarding (1) value added tax (PPn), (2)
income tax (PPh), and (3) general provisions and procedures in taxation. No details are yet
confirmed regarding the mechanism of this tariff/rate adjustment. Indonesia’s current corporate
tax rate of 25% puts it at a distinct disadvantage compared to countries such as Singapore.
Proposals on the table include a provision to initially reduce the corporate tax burden to 20%
and then down to 17%, in line with Singapore, according to the Chief of the Directorate General
of Taxation. Lowering the corporate tax rate will give companies financial leeway to invest
further or encourage new entities to expand into the country, however a stable currency and the
continuing removal of barriers to doing business – such as the complex company registration
system is key. Interestingly, Coordinating Maritime Minister Luhut Panjaitan more recently
unveiled a tentative plan to set up offshore tax havens on two islands close to Singapore. It is a
conscious move to tap firms with the promise of low corporate tax rates right on Singapore’s
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doorstep. The resort islands of Bintan and Rempang have been earmarked as the tax havens
and are located just 60 km from Singapore.
Infrastructure Energy | Toll Roads | Ports | Airports | Telecommunications | Transportation | Utilities | Non-
Building Construction
On the Horizon
The Ministry of Telecommunication and Informatics has concluded its calculations and
announced an average 26% reduction of mobile interconnection rates/tariffs for 18 call
scenarios, in Ministerial Regulation (Perkominfo) no.8/2016, which will be enacted in September
2016. The new tariff is now set at IDR204 per minute, down from IDR250. Interconnection fees
are payable by one operator to another when a call is placed by a cell phone. The reduction is
intended to streamline user activity as cell phone users invariably possess multiple SIM cards in
order to benefit from lower same operator call fees The new tariff is significantly lower than that
applied in countries such as Japan and the Philippines, which range from IDR1,447-2,108 /min
and IDR1,184/min, respectively. Parliament has requested a delay in the price revision which
was publicly announced on August 2, for further discussions among stakeholders. There are
fears the price revision will negatively impact revenue derived from state-run operator
Telkomsel. Telkomsel has hinted it may have to increase fees for data usage and infrastructure
maintenance to make up the shortfall in revenue.
Extractive
Coal | Oil | Natural Gas | Metals | Minerals
On the Horizon
The Ministry of Energy and Mineral Resources has confirmed that on-going discussions
concerning coal prices for mine mouth steam power plant will lead to a revision of Ministerial
Regulation (Permen ESDM no.9/2016). Under the regulation, coal prices for mine mouth steam
power will also cover an additional margin of approximately 15-20% of production costs incurred
by mining companies. This margin may well be too big of a constraint in order to produce
electricity efficiently, amid a recent drop in coal prices.
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Manufacturing
Machinery | Heavy Equipment | Automotive | Components | Textiles | Garments | Footwear |
Cables | Electronics
On the Horizon:
On August 11, the new Minister of Industry revealed a proposal to increase the number of
potential recipients of gas price discounts set at approximately US$4 / MMBTU, by adding more
industries, specifically pharmaceuticals, pulp and paper, food and beverages, textiles and
footwear. A task force has been established to study these additional industry sectors and
determine the most competitive gas prices. In essence, this ministerial regulation (Permenperin)
will explore gas pricing and calculate the economic value of each respective industry both prior
and post gas price reduction. The regulation is also expected to include recommendations for
companies to receive appropriate gas pricing. This Ministerial regulation will then serve as a
legal basis prior to implementing Presidential Regulation (Perpres no.40/2016). The
Determination of Natural Gas Pricing forms part of economic policy package III, which was
launched in October 2015.
The current status of the gas pricing regulation is in the submission stage with the Ministry of
Energy and Mineral Resources, which is tasked with revising Ministerial Regulation (Permen
ESDM no.6/2016) concerning the allocation, use and pricing of natural gas. The government’s
previous gas price incentive was set at US$6 / MMBTU and specifically intended for seven
industry sectors, namely fertilizer, petrochemicals, oleo chemicals, steel, ceramics, glass, and
gloves. This regulation however, has been stalled and will likely be further delayed following the
new requests made by the Ministry of Industry.
The regulation should help firms boost their bottom line and put them on an even footing with
similar industries in other countries. Raw gas prices in ASEAN neighbors such as Malaysia are
considerably cheaper.
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