The number of micro small medium enterprises (MSMEs) in Indonesia is small when compared with other Asean countries.
In Indonesia, micro enterprises are defined as those with net assets of less than 50 million rupiah (155,000 baht), land and buildings excluded, or less than 300 million rupiah (930,000 baht) in annual sales. Small firms are those with 50-150 million rupiah in assets or annual sales from 300 million to 2.5 billion rupiah. Medium-sized firms have net assets from 500 million to 10 billion rupiah or annual sales from 2.5 billion to 50 billion.
The Indonesian government is optimistic that by 2025 there will be an additional 5 million MSM entrepreneurs who could help meet domestic needs, especially on the consumer front.
The central bank (Bank Indonesia) hopes to help promote more entrepreneurship by requiring banks to make 20% of their small-business credits available to the MSME sector. There has been some debate about expanding credit to the consumption sector when banks are more inclined to choose the production sector, but small businesses welcome a chance to obtain low-cost funding.
Access to funds has been the main obstacle for MSMEs in Indonesia. Most are not yet “bankable” and tend to borrow money from loan sharks or relatives.
Yanuar Rizki, the owner of the famous clothing lines Ouval Research (RSCH) and Gummo, said he raised funds from his friends when he was starting out in the fashion business. His companies have since graduated to SME status but he believes strongly that Indonesia needs more entrepreneurs.
“There are many obstacles, especially the current challenges from fashion products coming from other countries, not just the United States and Europe, but also Asean countries such as Singapore and the Philippines,” he said. “However, I am still optimistic about the development of this clothing business, as long as we continue to innovate.
He said RSCH was established in 1997 to offer alternatives to a young generation that tended to love foreign products or brands. “At that time, local products were still underestimated. As we continued to build a strong brand image and to innovate, consumers are finally willing and proud to wear RSCH products,” he said.
Distribution is the key to business success and now Rizki’s company makes billions of rupiah from sales each month, with 100 distributors throughout Indonesia and branch stores in Bandung, Jakarta, Yogyakarta, Surabaya, Makassar, Padang, and soon to open in Bali.
RSCH’s products have also become widely known in Singapore and Malaysia as many tourists from those countries have visited the RSCG stores and bought some products. He’s now looking at the possibility of opening stores in those countries.
However, Mr Rizki and others believe a new draft tax proposal will be burdensome for small businesses.
Under the draft, entrepreneurs will be subject to income tax at a rate of one percent of their sales, said Fuad Rahmany, the director-general of Taxation.
He believes it’s important for businesses, no matter how small, to be in the tax system and to get used to paying taxes. Tax avoidance or outright evasion by businesses of all sizes is a major problem in most Asian economies including Indonesia.
The one-percent rule would apply to entrepreneurs who have permanent business locations with sales of up to 4.8 billion rupiah, he said.
Many SME entrepreneurs, Mr Fuad pointed out, currently do not do any kind of financial bookkeeping even though they have billions in revenues.
Tax revenue from SMEs was only 3% of the total tax revenue collected in Indonesia last year.
Mr Rizki, says his business can comply with the rule, although he considers it is quite burdensome, as purchases of raw materials and production costs have been subject to tax already.
In any case, he said, SMEs still do not have strong support as they still face high interest rates when applying for microcredit from banks.
*Published at Asia Focus--Bangkok Post 26/02.2013