The e-commerce question: Paving the way for global firms to sell online

E-commerce in Indonesia is booming, but it is not clear whether foreign investors can legally participate in the expanding field. In 2013 the government announced that online retailers would be treated like all others: any company without a shop larger than 2000 sq metres must be Indonesian-owned. By implication, that would mean all internet retailers would have to be locally controlled. The rule was written so broadly that it seemed to include anyone conducting online transactions of any kind in Indonesia.

Contingent

Much has since been clarified. While the regulation was indeed issued by the Ministry of Trade, it was never actually put into effect. That would have required the agreement of other government bodies and implementation regulations, and none of these follow-up processes have occurred. E-commerce had not in fact been restricted, but the idea was being pursued. In late 2013, the Ministry of Trade said that it would be issuing new regulations regarding e-commerce, covering the regulation of both providers and products, consumer protection, and a possible tax, according to the ministry.

In the absence of more information, speculation continues as to how, when and even if the sector will be regulated. Observers note that e-commerce falls under many ministries and departments, from trade, to information and communications technology to small and medium-sized enterprises, so the discussions will be complicated and will involve different parties with different interests. They add that given the history of regulation in Indonesia – especially the 2009 Mining Law – regulations could be passed without fully accounting for unintended consequences.

Regulation 82

What is on the books already has generated some concern. E-commerce is currently governed by the Electronic Information and Transactions Act 2008 and supplemental regulations. The provisions relating to online trade are quite general. But Government Regulation No 82, the Implementation of Electronic Transactions and Systems, was issued in 2012 and broadly sets out the obligations of e-commerce firms. The most worrying provision is the requirement that all internet traders doing business in the country do so via a .id domain name. This was, in part, an attempt to curb internet fraud. If the government had a registry of players in the sector, it would know who to go after should there be complaints.

But the provision was a problem for e-commerce companies. Hosting within the country is not popular with internet retailers due to concerns about the reliability of power and the susceptibility of Indonesia to natural disasters. Observers said that the .id requirement would inhibit development of the sector, as registering a local name requires an incorporation and a local address. More broadly, it would defeat one of the strengths of internet commerce – unfettered competition on the global playing field.

Great Potential

Indonesia’s e-commerce sector is seen as one of great opportunity. Because of the country’s population and the fact that transportation is difficult, e-commerce is set to explode as internet penetration increases, which it is fast doing as the price of smartphones drop, bandwidth increases and connectivity improves. The rise of payments systems is also helping. E-commerce has proved an attractive market for global companies. Rakuten, eBay and firms from Germany and South Korea have recently set up in Indonesia. But whether they will be able to continue operating in Indonesia is now open to question.

Observers say that even if e-commerce finds itself under the retail law, these firms may be able to operate locally. However, even if they are able to exploit loopholes or set up workarounds to local ownership requirements, e-commerce could still be a challenge.

The legal framework for online activities is sparse.

Data protection and privacy laws, consumer protection law and dispute resolution remain areas that are undeveloped or with only the most basic of statutes in place. Getting into the country might be one challenge. Operating there could be another altogether.