Background

In the past year, the Ministry of Trade has issued several regulations on Traditional Markets, Shopping Centres and Modern Stores.  These regulations are aimed at increasing the trade of locally produced goods whilst also providing legal protection and business certainty for the development of these retail markets.

Regulation 70

On 12 December 2013 the Ministry of Trade issued Regulation No. 70/M-DAG/PER/12/2013 regarding Guidelines for the Structuring and Development of Traditional Markets, Shopping Centres and Modern Stores (Regulation 70), which came into effect on 12 June 2014. Regulation 70 obliges Shopping Centres and Modern Stores to ensure that at least 80% of its goods are domestically produced (the Domestically Produced Goods Requirement).

Shopping Centres under Regulation 70 are defined as a single building, or group of buildings sold or rented by entrepreneurs or self-owned for trading activities. Regulation 70 provides for Modern Stores as stores with a self-service system that sell a variety of goods and retail in the form of minimarkets, supermarkets, department stores, hypermarkets or wholesale outlets (perkulakan).

Decree 65

On 12 June 2014, the Ministry of Trade issued Decree of the Director General of Domestic Trade No. 65/PDN/KEP/6/2014 regarding Implementation Guidelines on Local Content Requirement for Shopping Centres and Modern Stores (Decree 65). Under Decree 65, domestically produced goods' are defined as goods that are produced or made in Indonesia.

Whilst Regulation 70 provides that the requirement applies to Shopping Centres and Modern Stores, Decree 65 also provides that the following parties are also subject to the Domestically Produced Goods Requirement:

  1. business entrepreneurs who own modern stores (namely minimarkets, supermarkets, department stores and hypermarkets), and
  2. business entrepreneurs (tenants) who own and/or lease stores in shopping centres.

Decree 65 also includes exemptions for Shopping Centres and Modern Stores from the Domestically Produced Goods Requirement in certain circumstances.

Exemptions under Domestically Produced Goods

Decree 65 exempts Shopping Centres and Modern Stores from the obligation to comply with the Domestically Produced Goods Requirements in certain circumstances, namely where:

  1. the products cannot be produced in Indonesia,
  2. the products are premium products that are not in competition with similar local products, and
  3. the products originate from certain countries and are designated for their citizens who are living abroad.

To obtain an exemption Decree 65 requires the applicant to submit an application to the Minister of Trade, copied to the Director General of Domestic Trade containing the following data and information:

  1. a development plan for Indonesian products, and
  2. a segmentation and expansion market plan, along with data, on the composition of the products that will be produced in Indonesia.

Once submitted, an application for exemption is subject to further discussion by the Communication Forum of Structuring and Development of Traditional Markets, Shopping Centres and Modern Stores (Communication Forum). The outcome of the discussion by the Communication Forum is then used as a basis for a recommendation to the Minister of Trade for consideration in deciding whether or not to grant the exemption to the applicant.

Domestically Produced Goods Requirement under Regulation 56

Regulation 70 and Decree 65 do not provide clear guidance as to whether or not the Domestically Produced Goods Requirement will also apply to stand-alone-brand stores and/or concept stores, many of which sell high-end or premium products that may not or cannot be produced in Indonesia. On 17 September 2014 the Ministry of Trade introduced Regulation 56 to clarify and amend several provisions under Regulation 70, one of them is to address issues with respect to stand-alone-brand stores and/or concept stores.

Regulation 56 provides that the Ministry authorizes a Modern Store in the form of stand-alone-brand store and/or specialty stores to have less than 80% of its traded goods to be domestically produced, in the event that those goods (one of the following conditions must be met):

  1. requires production uniformity and is sourced from a global supply chain,
  2. has a famous brand (premium products) and that do not have production basis in Indonesia,
  3. originated from a certain country and are sourced to meet its citizens’ needs in Indonesia.

However, Regulation 56 obliges these stores to gradually increase the sale of its goods produced in Indonesia and to report the progress to the Ministry through the Director General.

Regulation 56 does not provide any formalized definition on what is deemed as stand-alone brand stores and/or specialty stores. However, based on our research, the Ministry of Trade deems a Modern Store in the form of a stand-alone brand store as a store that sells products under one brand only while a specialty store is deemed as a Modern Store that sells specific products.

The effect of Regulation 56 is that the exemption to the Domestically Produced Goods Requirement is limited to Modern Stores in the form of stand-alone-brand stores and/or specialty store that meet one of the above criteria. As a result, Shopping Centres and other forms of Modern Stores (i.e. minimarkets, supermarkets, department stores, hypermarkets or wholesale outlets) appear to no longer be exempted from the Domestically Produced Goods requirement even though the products they are selling meet the exemption requirements under Decree 65 and Regulation 56.

If stand-alone-brand stores and/or specialty stores seek an exemption from the Domestically Produced Goods Requirement, they are required by Regulation 56 to obtain Ministry authorization. Our research with the Ministry of Trade suggests that before obtaining Ministry authorization, the stand-alone-brand and/or specialty store will need to file a proposal to the Ministry through the Director General of Domestic Trade. The proposal will be forwarded to the Communication Forum for its recommendation. The Director General of Trade will consider and use the recommendation given by the Forum and forward it to the Ministry for the Ministry approval.

Practical implications for businesses

Foreign entities that run stand-alone-brand stores or specialty stores are not bound by  the Domestically Produced Goods Requirement where the goods they trade are within the categories set by Regulation 56 and they have obtained Ministry approval. However, it remains to be seen whether self-owned Modern Stores or Shopping Centres trading in premium products, even though the products they are selling meet the exemption requirements, will be exempted from the Domestically Produced Goods Requirement.

Modern Stores or Shopping Centres currently in business must meet the Domestically Produced Goods Requirements under Regulation 56 by 17 September 2016, two years after the date Regulation 56 became effective.