(2 November 2020) The Indonesian House of Representatives (Dewan Perwakilan Rakyat or “DPR”) recently passed the Omnibus Bill on Job Creation (the “Omnibus Bill”). The stated aim of the Omnibus Bill is to bolster investment and create jobs by streamlining regulations and simplifying the licensing process to improve the ease of doing business in Indonesia.

The Omnibus Bill amends various provisions in laws across numerous sectors, including Law No. 4 of 2009 regarding Mineral and Coal Mining, as amended by Law No. 3 of 2020 (together, the “Mining Law”). The Omnibus Bill does not introduce significant changes to the Mining Law, adding just one provision and amending another provision. This is most likely because the Mining Law was just amended through Law No. 3 of 2020 in June this year.

The most significant change contemplated in the Omnibus Bill concerns special treatment incentives, which may be in the form of 0% royalty fee, for holders of a mining business license or special mining business license for production operation (“IUP-OP and IUPK-OP Holders”) that carry out coal value-added activities.

Incentives for Coal Value-Added Activities

The Omnibus Bill introduces a new provision to the Mining Law that provides IUP-OP and IUPK-OP Holders that carry out coal value-added activities special treatment incentives related to payment of tax and non-tax state revenues. This fiscal incentive is aimed at improving domestic coal processing and creating a competitive price for coal-processed products.

There is no explicit guidance under the Omnibus Bill on which tax and non-tax state revenues can be incentivized for IUP-OP and IUPK-OP Holders that carry out coal value-added activities, except for 0% royalty fee. It remains to be seen whether an implementing regulation will be issued to provide other incentives.

Under the Mining Law, IUP-OP and IUPK-OP Holders (including those that carry out coal value-added activities) are required to pay production royalty at varying rates. This production royalty constitutes non-tax state revenue paid by mining rights holders to the state on the revenue generated from the exploitation or production of mineral and/or coal (the “Royalty Fee”). As an overview, the Royalty Fee specifically for coal products is currently between 2% and 7% of the selling price, depending on the type of coal product.

The Omnibus Bill introduces an exemption to the aforesaid payment of the Royalty Fee by offering a fiscal incentive of 0% Royalty Fee for IUP-OP and IUPK-OP holders that carry out coal value-added activities, namely coal upgrading, coal briquetting, coking, coal liquefaction, coal gasification and coal slurry/coal water mixture. They also qualify if they build their own mine-mouth steam power plant.

Sanctions for Hinderance or Interference of Mining Activities

The Omnibus Bill amends the provision in the Mining Law on sanctions for hindering or interfering with mining activities. This is a minor amendment to the Mining Law, with the Omnibus Bill only adding to this provision on sanctions a reference to Article 86F of the Mining Law relating to the obligations of holders of a rock mining business license (surat izin penambangan batuan or “SIPB”).

Sanctions in the form of up to one year’s imprisonment or fines in the maximum amount of Rp. 100 million may be imposed on any party that hinders or interferes with the mining business activities of holders of a mining business license (IUP), special mining business license (IUPK), people’s mining license (IPR) or SIPB that have completed the land settlement process with landowners in accordance with the prevailing laws and regulations.

Other Noteworthy Changes Related to Mining Business Activities

Aside from the provisions in the Omnibus Bill that amend the Mining Law, the Bill also contains several notable provisions in other sectors that may affect the implementation of mining business activities. These provisions are as follows:

Exclusion of Coal Mining Products as Non-VAT Goods

The Omnibus Bill amends Law No. 8 of 1983 regarding Value-Added Tax and Sales Tax on Luxury Goods, as lastly amended by Law No. 42 of 2009, to eliminate the value-added tax (“VAT”) exemption for coal mining products. This means that coal mining products will now be subject to VAT.

Change of Forestry Permit Regime to Forestry Arrangement

The Omnibus Bill slightly amends the wording of provisions regarding the borrow-use permit for forest areas stipulated in Law No. 41 of 1999 regarding Forestry, as lastly amended by Law No. 19 of 2004. The Omnibus Bill essentially stipulates that the use of forest area for mining activities, among others, may be carried out by virtue of “borrow-use” from the central government. Interestingly, the Omnibus Bill eliminates the word “permit” from the borrow-use context, leaving it ambiguous as to whether the borrow-use referred to in this new provision does not necessarily signify the issuance of a permit or license, but is rather a mere arrangement between the business actor and the central government. It remains to be seen how this change will play out in practice.

Conclusion

Other than the imposition of VAT on coal mining products, the Omnibus Bill seems to follow the lead of the newly amended Mining Law in attempting to provide ease of business for business actors, including mining rights holders. Nevertheless, it will be important to closely scrutinize further implementing regulations and practices introduced by the government in enforcing the Omnibus Bill, bearing in mind the general nature of many of the provisions.