Indonesia takes another step towards implementing Industry 4.0

The follow-up regulation to Indonesia’s long-awaited super deductible tax program is expected to arrive this August. This regulation will be another step forward in the implementation of Industry 4.0 across the country’s manufacturing sector.

Earlier this week, on July 31, Indonesian Minister of Industry Airlangga Hartarto enthusiastically announced the advent of a new tax program that will allow companies to deduct up to 300% of its taxes by taking part in upskilling Indonesian workforce via vocational programs and/or conduct research and development in Indonesia.

The program, of which the supporting Government Regulation (PP) was finalized earlier this June and is being further refined by several Ministries in terms of its technical implementation, is due to be issued this August.

Under PP No. 45/2019 on the calculation of taxes income and expansion of income tax in the current year, domestic taxpayers who organize working programs, internships, and/or educational activities to develop human resources based on certain competency could obtain a gross income as high as 200% of the funds they had spent for the activities. Additionally, domestic taxpayers who conduct research and development (R&D) in Indonesia could obtain a gross income as high 300% of the cost of their R&D activities.

The regulation is part of the “Making Indonesia 4.0” roadmap launched by the government late last year. Aside from the super deductible tax program, the government has also launched e-smart IKM (which stands for small and medium enterprises), which aims to assist local IKM penetrate online marketplaces.

The government has also established so-called lighthouses companies, which act as reference points for other companies looking to implement Industry 4.0 practices in their own production processes. In this regard, the established companies are French-based PT Schneider Electric Manufacturing Batam and publicly-owned mining contractor PT Petrosea Tbk. The progress of all of Indonesia’s sectors in implementing Industry 4.0 will be tracked using the government’s own Indi 4.0 system, which evaluates and identifies which sectors are ready.

All these efforts will be on display at Hannover Messe 2020, of which Indonesia is the official partner country.

Shared ambition
Indonesia’s roadmap and subsequent policies towards implementing Industry 4.0 is widely accepted by the local business community. A joint research between the Indonesian Ministry of Industry and McKinsey, a consulting firm, predicted that the proper implementation of Industry 4.0 practices could add US$120-150 billion in value to the country’s GDP and accelerate the country’s economy by 1-2%. By the end of 2018, Indonesia has a GDP growth of 5.17%. Such expansion could significantly reduce the counry’s unemployment problem, with 10 million additional jobs being added.

PP No. 45/2019, as part of the Making Indonesia 4.0 roadmap, is crucial in ensuring in bringing Indonesian workers into the fold. It is no secret that Indonesia possesses mainly cheap, unskilled workers – though this is a condition that has continued to improve overtime. A successful implementation would ensure a win-win situation for companies who would like to enter Southeast Asia’s largest economy and the country that aims to take a larger part in the global supply chain.

Thus far, the government has identified the five sectors of food and beverage, automotive, chemical, electronics and textile as being the most ready to adopt Industry 4.0. Companies such as world’s largest coffee candy manufacturer Mayora, garment producer Sritex, and carmaker Toyota Indonesia are among those that have integrated Artificial Intelligence and digitalization into their production processes.

The re-election of President Joko Widodo for his second term ensures that companies can count on his signature deregulation agenda. The President has repeatedly demanded his administration to expand foreign investment with talks of allowing more leeway for companies in employing foreigners, of further revising Indonesia’s notorious Negative Investment List – a list of sectors that are barred from obtaining foreign investment, as well as of revising labor laws that requires generous payouts for fired workers.

All of these show Indonesia’s committment in becoming one of the world’s largest, most influential economies. It is already the only Southeast Asian member of the G-20. Its economic trajectory, according to consulting firm Price Waterhouse Cooper, is setting the country up with the world’s fourth largest GDP by purchasing power parity by 2050. There may never be a better time to be a part of the Indonesian economy than there is now.