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COVID-19: E-commerce Lofts Indonesia’s Economy As Shoppers Migrate Online

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From Oxford Business Group

E-commerce firms in Indonesia are reporting higher volumes of online sales as consumers practise social distancing amid the Covid-19 outbreak, with the government looking to the flourishing sector as one means of addressing tax shortfalls resulting from the wider economic slowdown.

Compared to neighbouring Malaysia and Singapore, the Indonesian government had been reluctant to implement strict quarantine procedures due to fears over the economic and social impact.

However, a partial two-week lockdown was imposed on the capital Jakarta from April 10, involving the closure of offices, a ban on gatherings of more than five people, reduced operational hours for public transport and an end to in-restaurant dining.

The lockdown was announced in an effort to contain the spread of the coronavirus, with Indonesia reporting 5136 cases and 469 deaths as of April 15. The densely populated capital is considered the epicentre of Indonesia’s outbreak, accounting for almost 50 per cent of all cases.

Prior to the announcement of the partial lockdown, many major companies in Jakarta were already implementing work-from-home policies following requests from the national and local governments. In addition, some malls, retailers and restaurants had taken unilateral decisions to reduce business hours, switch to online operations or suspend commercial activities completely.

Rising digital demand

Even without enforced closures of brick-and-mortar retail stores selling non-essential items, shoppers have been increasingly turning to online channels to make purchases as the Covid-19 case count has risen.

E-commerce marketplace Bukalapak, which is one of Indonesia’s five unicorn start-ups valued at over US$1bn, has been expanding its grocery selection in recent weeks to cater for the needs of stay-at-home consumers.

“We can’t answer for other e-commerce platforms, but we have seen a spike in transactions on our platform, with growth in new users due to shifts in the MSME [micro-, small and medium-sized enterprise] business model and consumption behaviour,” co-founder and president of Bukalapak, Fajrin Rasyid told OBG.

Elsewhere, online mall Blibli reported that sales of groceries, cleaning and sanitising products, surgical masks and vitamins have all experienced increases over recent weeks. In addition, the e-commerce firm has recorded heightened demand for cooking appliances, video games and exercise equipment as Indonesians adjust to spending more time at home.

Conversely, Blibli logged noticeable demand declines in segments such as smartphones, automotive, shoes, formal dress and travel, as the uncertain economic climate and public health outlook began to weigh on discretionary consumption.

E-commerce was already gaining significant traction in Indonesia prior to the Covid-19 outbreak, with the sector one of main driving forces behind the county’s emergence as South-east Asia’s largest digital economy, valued at US$40bn in 2019 and expected to be worth US$130bn by 2025.

Now that more retailers and consumers are being forced to explore e-commerce options, growth could be accelerated even further.

“While e-commerce was just an option before Covid-19, it is now essential for retailers and producers to sell their products through e-commerce platforms in order to survive. The long-term impact will be positive for online shopping as it will start to become habitual for consumers,” CEO of Blibli, Kusumo Martanto told OBG.

Meanwhile, the shifting market dynamics caused by the pandemic are also creating opportunities in the online food delivery market. Market leaders Go-Food and Grab Food – which are integrated within the multipurpose ride-hailing apps Go-Jek and Grab, respectively – have been promoting contactless delivery mechanisms and strict cleanliness procedures to continue serving consumers.

Industry leaders told OBG that the Indonesian market for food delivery could potentially double in size in 2020 as a result of the Covid-19 disruption.

Tax framework adapts

As part of efforts to offset the economic impact of the pandemic, the government has been accelerating planned tax reforms, including the introduction of taxes on transactions involving offshore e-commerce platforms.

The government is anticipating a 10 per cent decline in tax revenues this year due to relief and incentive measures introduced to help businesses manage the coronavirus-related downturn. Public finances are also expected to be impacted by reduced oil and gas revenues resulting from falling global demand and prices.

“Indonesia’s tax base will move towards digital taxation as online transactions have been growing significantly, especially during the Covid-19 pandemic,”  the minister of finance, Sri Mulyani Indrawati told a teleconferenced press briefing at the start of this month.

Following the March 31 issuance of Government Regulation in Lieu of Law 01/20, value-added tax – which is currently set at 10 per cent – can be charged on goods and services sold through electronic platforms that do not have a physical presence in the country. This includes services related to online retail, streaming media, e-learning, apps, and cloud services.

Indonesians are avid users of international social media platforms such as Facebook and Twitter, as well as streaming sites such as Netflix and Spotify, while video over internet protocol (VoIP) service Zoom has been growing in popularity since some companies began to implement work-from-home procedures in March.

Previously, such platforms could generate significant business in Indonesia without incurring local taxes, but this should change under new regulations if their gross circulated product, sales or active users in Indonesia meet the stipulated criteria.

Implementing regulations will be published at a later date to provide further details on how domestic tax laws – including those related to income tax – will be applied to offshore e-commerce firms deemed to have a signficant economic presence in Indonesia.

“If the new rules can be applied effectively then they will be good for local e-commerce firms as they will help to level the playing field,” Martanto told OBG.  https://oxfordbusinessgroup.com

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