Speaking to reporters in Jakarta on Tuesday, Finance Minister Sri Mulyani Indrawati said, revenue gained by venture capital firms from their investment in startups will be exempt from income tax. “The income received by venture capitals, which are company profit, will not be treated as an object of income tax so that investment in the SME sector and financing for startups can be increased,” Sri Mulyani said, as quoted by CNN Indonesia. However, she added that the tax exemption will only apply to venture capital firms that have registered with the country’s Financial Services Authority (OJK).
As of December 2017, OJK data shows that 67 venture capital firms with a total asset of Rp 11.52 trillion ($806.4 million) are registered with the regulatory body. Commenting on the reports, Edward Ismawan Chamdani, a board member at Indonesian Venture Capital and Startups Association (Amvesindo), told DEALSTREETASIA, the planned tax holiday is bound to have a positive impact on local venture capitals and ultimately the whole startup ecosystem.
“Local venture capitals are not attractive to foreign investors because of the factors of capital gain tax and tax treaty. So if this tax revision is done, there will be more inflow of foreign investment which uses local financial product instruments,” said Chamdani, who is a Managing Partner at local venture capital firm Ideosource. Furthermore, the minister also revealed that the government will also revise the regulated sales threshold for SMEs that qualify as venture capital partners. The current regulation, which is a 1995 Finance Minister Regulation, states that SMEs that can be partners of venture capital firms are those whose net sales do not exceed Rp 5 billion a year.
Sri Mulyani said, the government will soon refer to Law no. 20/2018 to determine the threshold. The law stipulates that small enterprises are those with an annual net sales figure of Rp 300 to Rp 2.5 billion, while medium-size enterprises are those with a net sales figure of Rp 2.5 billion to Rp 50 billion a year. “We will make revision to the 1995 KMK (Finance Minister Decree) in order to meet the needs of many startup companies which mobilize capital from venture VCs to grow fast,” she said. This, she added, will come also with a reduction in final income tax for SMEs from the current 1% to 0.5%. Under the leadership of President Joko Widodo, the Indonesian government has been determined to support the development of the startup ecosystem in the country. In 2016, the government launched a programme called 1,000 Digital Startup National Movement, which aims to stimulate the creation of 1,000 startups by 2020.
Communication and Information Minister Rudiantara has also been consistently urging for easier regulatory frameworks surrounding startups to enable them to grow at a faster rate. According to Daily Social’s Startup Report 2017, as many as 65% of the funding received by startups in Indonesia last year are in the form of seed and series A investments. The verticals that received most funding last year were fintech and e-commerce. Indonesia now has four startups who are in the unicorn club, or those valued above $1 billion, after Bukalapak reached the milestone in early 2018, following Traveloka, Tokopedia and Go-Jek.
Indonesia is looking at offering tax incentives to venture capital firms operating in the country as part of its efforts to boost investments in digital and e-commerce startups, according to reports by local media.