Foreign investment requires a supportive and conducive legal environment and legal institutions. In this light, legal certainty is as vital as political stability and economic opportunities.
In the interest of improving the investment climate in Indonesia, President Susilo Bambang Yudhoyono signed Presidential Decree Number 3 2006 regarding the Policy Package for Investment Climate Reform on February 27 2006. This package includes 85 steps that the government must take within just one year to better foster investment.
There are four elements within the package: general, excise and duty, taxation, and employment.
The general policies include, among others: (i) strengthening the investment service institution, including finalizing the Investment Bill and forming a transparent and simple Negative List; and (ii) accelerating approval for investment in, and establishment of, companies, which will require an overview of several approval regulations in an effort to simplify them.
As for taxation, the Decree sets out several policies, with accompanying programmes, including: (i) tax incentives for investment, with a programme to perfect the law regarding general provision and methods of tax, income tax, value-added tax and service, and tax of sale of luxurious goods; (ii) implementation of a consistent self-assessment system, with a programme to adjust the income tax tariff, evaluate prepayment/instalment payments, and tax service improvement; and (iii) to promote transparency and disclosure, with the programme of tax audit, investigation, and disclosure, and improving public understanding of taxation.
The government has set up a monitoring team, led by Jannes Hutagalung, to supervise not only the implementation but also the quality of the reform. It will report every month regarding its progress.
The issue of investment approval in Indonesia is complex. It is time, mind, and cost consuming. Based on research conducted by the World Bank, the investment approval process in Indonesia is one of the lengthiest and most expensive in the world. To obtain approval, an investor must spend more than $1000 and must follow 12 procedures over a required 151 days. Processes in other east Asia countries usually only take up to 66 days. Singapore only requires 21 days. Investor's preference for such other countries is largely driven by this difference in timeframes.
The new policy package is related to the so-called three pillars strategy to push investment and export. The first pillar contains institutional reform to tackle uncertainty in policy and governance as one of the obstacles hampering investment in Indonesia, and one of the main objects of the new investment package is approval system regulation. A better approval system, along with a better taxation and duty system, will improve the investment climate. For example, to simplify the investment process, the time requirement to establish a company, which has taken on average 150 days in the past, will be shortened to 30 days.
This reform will be implemented in an Investment Bill, which has been submitted to the House of Representatives (DPR).
The government must take action to make the package effective in stimulating investment and the economy, such as passing the Investment Bill, taxation reform, simplifying the approval system, and improving the employment system. Actions to eradicate corruption should also accompany these efforts.