Indonesia’s parliament passes sweeping reform bill

Indonesia’s parliament passes sweeping reform bill

Indonesia has passed a bill that will overhaul several dozen tax and labour market laws as south-east Asia’s largest economy strives to boost foreign investment and counter the economic impact of coronavirus. 

Indonesia’s parliament rushed through the so-called omnibus law on Monday, the day before the start of a national strike against the reforms called by trade unions, which say they violate workers’ rights.

The parliamentary vote had originally been scheduled for Thursday.

Joko Widodo, Indonesia’s president, has made the new law a priority as he seeks to attract foreign investment and revive the economy.

Fallout from the pandemic has pushed Indonesia into a technical recession, defined as two consecutive quarters of contraction. Economic growth in the second quarter fell 5.32 per cent year on year, the biggest drop since the Asian financial crisis. 

The new law — whose final draft has not yet been made public — aims to create jobs by reforming rules linked to investment, intellectual property rights and the labour market, which had offered workers some of the world’s most generous severance payments.

President Joko Widodo has made the new law a priority © Beawiharta/Reuters

Under the new law, Indonesia’s corporate income tax rate would gradually drop from 22 per cent to 20 per cent by 2022 and income tax for domestic dividends would be eliminated.

Wellian Wiranto, economist at OCBC, said the omnibus law could help change regulation that has prevented Indonesia from capitalising on the supply chain reshuffle amid Sino-US trade tensions. This is despite it being the largest market in south-east Asia, rich in natural resources and with a young population.

“Indonesia should have been one of the top FDI destinations,” said Mr Wiranto. “But that hasn’t been the case” partially because of rigid labour laws keeping competitiveness low. 

But ahead of the vote, 35 global investors with $4.1tn in assets under management on Monday sent the Indonesian government a letter expressing concern about the new law.

The omnibus law is (an) attack to the welfare of labour in Indonesia . . . We will continue the struggle

Deregulation of environmental protection could have “severe environmental, human rights and labour-related repercussions that introduce significant uncertainty and could impact the attractiveness of Indonesian markets,” they said. Robeco, Aviva Investors, Legal & General Investment Management, and Sumitomo Mitsui Trust Asset Management were among the signees. 

Said Iqbal, president of the Confederation of Indonesian Trade Unions, said workers “refused” the law, which would slash severance pay and have an impact on the minimum wage. 

“The omnibus law is (an) attack to the welfare of labour in Indonesia . . . We will continue the struggle,” said Mr Said, adding labour unions would seek a judicial review and take their concerns to the constitutional court. 

The law was passed a day before two million workers across the country are set to kick off a three-day strike. Staff in sectors including textiles, auto, energy and pharmaceuticals will hold the strike within their workplaces to avoid risks of Covid-19 contagion, said Mr Said. 

Indonesia is struggling to contain the virus, with almost 4,000 new cases a day. At more than 300,000, Indonesia’s total number of infections is the second highest in south-east Asia, after the Philippines.