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Risk-Based Criteria Business Licensing

By August 27, 2021 No Comments

The covid-19 pandemic does not stop the government’s intention to create efficiency and to simplify the public services related to business licenses. On 2 February 2021 the government enacted Government Regulation No. 5 of 2021 on the Implementing of Risk-Based Criteria Business Licensing (“GR No. 5/2021”), which is the implementing regulation of Job Creation Law. GR No. 5/2021 revokes Government Regulation No. 24 of 2018 on Electronic Integrated Business Licensing Services. Alongside GR No. 5/2021, the government has launched the new business licensing system in August 2021, called as Risk-Based OSS System.

The implementation of risk-based business licensing aims to improve the investment ecosystem and business activities in Indonesia by issuing permits that are effective and simple. In addition, it is also expected to create transparent, structured, and accountable supervision of business activities in accordance with the applicable laws and regulations.

There is a substantial mindset change with this regulation. Rather than the government issuing licensing in advance, but subject to certain commitment fulfilment, the concept is reverted to the old licensing process where requirements/conditions would need to be fulfilled before licenses are issued. However, the licenses and requirements/conditions would only be processed through the OSS system.

Risk-Based Criteria Business Licensing

Under the new regulation, business actors are expected to know the appropriate lines of business for their business activities and the corresponding classification code (Klasifikasi Baku Lapangan Usaha Indonesia or KBLI), thus the self-assessment concept remains the same. They are also expected to know any foreign investment or capital requirements for the lines of business, the licenses they need to conduct the lines of business, the requirements/conditions required to obtain the licenses, when to apply for the licenses, etc. The investors need to obtain appropriate advice from advisers and notaries if there is any uncertainty and a self-assessment of the appropriate business licenses, capital, investment plan, etc.

Under the GR No. 5/2021, business activities are categorized by 3 levels of risks, namely low-risk, medium-risk, and high-risk. The determination of the level of risk is based on a risk analysis carried out by the central government which refers to the indicators and aspects contained in GR No. 5/2021. It aims to determine the level and potential of occurrence of hazards in a business activity. It seems that the requirements to obtain the licenses do not change a lot, but the GR No. 5/2021 uses different terminology. As stated in Article 4, to start and carry out business activities, the business actors must fulfill the basic requirements for business license and the risk-based criteria business license. The basic requirements for business license include the suitability of space utilization activities, environmental approvals, building approvals, and feasible-function certificates.

The implementation of Risk-Based Criteria Business Licensing includes:

  1. the arrangements of risk-based business licensing arrangements;
  2. norms, standards, procedures, and risk-based business licensing criteria;
  3. risk-based business licensing through OSS system services;
  4. the procedures for controlling risk-based business licensing;
  5. the evaluation and reform of risk-based business licensing policy
  6. risk-based business licensing registration;
  7. problem solving and barriers of risk-based licensing;
  8. penalty

Business sectors that must fulfil risk-based criteria business licensing are:

  1. marine and fisheries;
  2. agriculture;
  3. environmental and forestry;
  4. energy and mineral resources;
  5. nuclear energy;
  6. trade;
  7. public work and public housing;
  8. transportation;
  9. health, medicine, and food;
  10. tourism;
  11. education and culture;
  12. religion;
  13. expedition, telecommunications, broadcasting, and electronic systems and transactions.
  14. defense and security;
  15. labor.

The level of business activity risk is divided based on the KBLI code, business activity sector, and supporting business licensing, as regulated in Attachment I and Attachment II of GR 5/2021.

  1. Attachment I
    Attachment I is divided into two parts, namely (i) part A which contains information on the KBLI number and the required licensing KBLI number based on the level of risk; (ii) part B which contains a list of supporting licenses required to conduct business activities.
  2. Attachment II
    Attachment II is divided into two parts, namely (i) part A which contains the requirements and/or obligations to obtain the required license, and (ii) part B which contains the requirements and/or obligations to obtain the required supporting license.

Norms, Standards, Procedures, and Criteria

The central government develops and stipulates norms, standards, procedures, and criteria (“NSPK”) of risk-based business licensing criteria for each sector. Such NSPK serves as the sole reference for the implementation of risk-based business licensing services by the central government and regional governments.

Business license is issued by the central government and regional governments according to the NSPK. Implementation of business licensing is carried out by:

  1. OSS Institution;
  2. OSS Institution on behalf of the minister/head of the institution;
  3. the head of the provincial One-Stop Integrated Service and Investment Service (Dinas Penanaman Modal dan Pelayanan Terpadu Satu pintu or DPMPTSP) on behalf of the governor;
  4. the head of the district/city DPMPTSP on behalf of the regent/mayor;
  5. Special Economic Zone (Kawasan Ekonomi Khusus or KEK) administrator; and
  6. head of the Free Trade Area and Free Port (Kawasan Perdagangan Bebas dan Pelabuhan Bebas or KPBPB) Concession Board.

Stages of Implementing Business Activities

Same as the old regulation, GR No. 05/2021 differentiates between preparing for business activities, and operating or conducting commercial activities, for determining when to apply for the relevant licenses. No specific definition is provided, but requirements are provided for each stage:

  1. Preparation Stage
    This stage includes land acquisition, building construction, equipment, and facilities procurement, hiring manpower, fulfilling business standards, and/or other activities before the operation and/or commercial activities stage, such as feasibility study and operational financing during the construction period. At this stage, business actors can prepare for the business activities.
    Specifically for business activities with a high level of risk, it is required to have an analysis of environmental impacts and building construction activities can be carried out after environmental approval is issued in accordance with the provisions of the legislation.
  2. Operation and/or Commercial Activities Stage
    This stage includes goods or services production, logistics and distribution, marketing, and/or other operation and/or commercial activities. At this stage, business actors can operate or conduct commercial business activities.

Risk-Based Criteria Business Licensing Based on the Risk Level

Business activities are categorized based on the risk level of the business activities, which will determine the licensing that they need.

  1. Low-Risk Business Activities
    To prepare the business activities, and operate or conduct commercial activities, business actor with low-risk business activities needs to obtain a business identity number (Nomor Induk Berusaha or NIB). NIB is a proof of registration of business actor business activities and as its identity in carrying out its business activities, as well as the legality for business actor with low-risk business activities to carry out business activities.
    NIB for business activities with a low-risk level carried out by micro small business (Usaha Micro Kecil or UMK) also serves as SNI (Standar Nasional Indonesia) and halal guarantee statement.
  2. Medium-Risk Business Activities
    Medium-risk business activities are divided into medium-low-risk business activities and medium-high-risk business activities.

Medium-Low-Risk Business Activities

To prepare the business activities, then operate or conduct commercial activities, business actor with medium-low-risk business activities needs to obtain:

  • NIB
    The proof of registration of business actor with medium-low-risk business activities to carry out business activities and as the identity for business actors in carrying out their business activities.
  • Standard Certification (medium-low-risk business activities)
    The legality to carry out business activities in the form of a statement by business actor to fulfil business standards in the context of conducting business activities that are given through the OSS system. The obligation for business actors to fulfil business activity standards is then carried out in the form of supervision by the central government and/or regional governments when business actors carry out business activities.

NIB and standard certification serve as the business license for business actors with medium-low-risk business activities to carry out preparation, operational, and/or commercial business activities.

Medium-High-Risk Business Activities

To prepare the business activities, then operate or conduct commercial activities business actor with medium-high-risk business activities needs to obtain:

  1. NIB
    The proof of registration of business actors with medium-high-risk business activities to carry out business activities and as the identity for business actors in carrying out their business activities. After obtaining the NIB, business actor makes a statement through the OSS system to meet the standards for implementing business activities in the context of carrying out business activities and capabilities, to be followed up by verification conducted by the central government or the regional government according to their respective authorities. Regarding the statement, the OSS Institution issues an unverified standard certificate as the basis for business actors to prepare for business activities.
  1. Standard Certification (medium-high-risk business activities)
    The verified standard certificate for the implementation of business activities will be issued by the central government or regional governments in accordance with their respective authorities based on the results of verification of the fulfilment of standards for the implementation of business activities by business actor. Business actors can operate or conduct commercial activities once they have a verified standard certification.

NIB and verified standard certification are the business license for business actors with medium-high-risk business activities to carry out operational activities and/or commercial business activities. But if the business actor (i) does not obtain the verified standard certificate according to the period specified in the NSPK; and (ii) does not prepare the business activities within a period of one year since the issuance of the NIB (based on the results of supervision), the OSS Institution cancels the unverified standard certificate.

  • High-Risk Business Activities
    To prepare the business activities, and then operate or conduct commercial activities business actor with medium-high-risk business activities needs to obtain:

    1. NIB
      The proof of registration of business actors with high-risk business activities to carry out business activities and as the identity for business actors in carrying out their business activities. After obtaining the NIB, business actor can use the NIB to prepare the business activities.
    2. License
      The approval by the central government or regional government for the implementation of business activities that must be fulfilled by business actor before carrying out its business activities.

NIB and license are the business license for business actors with high-risk business activities to carry out operational activities and/or commercial business activities. If that business activities with a high-risk level require the fulfilment of business standards and/or product standards, the central government or regional governments in accordance with their respective authorities shall issue a business standard certificate and a product standard certificate based on the results of verification of standard compliance. The verification is carried out by the central government or regional government and they may assign such work to the certified or accredited expert institutions or professions.

Business Licensing to Support Business Activities

Business license to support business activities is a legality granted to business actors to support business activities. If the operational and/or commercial stages of business activities require a business license to support business activities, the ministry/institution shall identify a business license to support business activities while considering the level of risk of business activities and/or products during the operational and/or commercial stages of business activities. Business license to support business activities is listed in Attachment I and Attachment II of GR No. 50/2021.

For example, the business activities that require business license to support business activities are construction services subsector. The license to support construction services subsector business activities includes:

  1. Construction Business Entity Certificate (Sertifikat Badan Usaha Konstruksi or SBU Konstruksi);
  2. Work Competency Certificate (Sertifikat Kompetensi Kerja Konstruksi or SKK Konstruksi);
  3. Registration of a representative office of Foreign Construction Services Business Entity (registrasi kantor perwakilan Badan Usaha Jasa Kontruksi Asing or BUJKA);
  4. Construction Services Business Entity (BUJK) certification body license
  5. Construction service professional certification institution license.

Adjustment by Business Actor

GR No. 5/2021 was enacted on 2 February 2021, but the implementation of Risk-Based Business Licensing through the OSS System will only be effective four months from its enactment, namely 2 June 2021. Factually, in August 2021, (another 2 months after its effectiveness) the government has launched the Risk-Based OSS System as the new business licensing system.

The substantial change with this regulation, the old licensing process where requirements/conditions would need to be fulfilled before licenses are issued. However, the licenses and requirements/conditions would only need to be processed through the OSS system. Other than that, it seems that the requirements to obtain the licenses do not change a lot, but the GR No. 5/2021 uses different terminology.

The self-assessment concept remains the same, business actors with directions from advisers and notaries should self-assess the appropriate lines of business for their business activities according to the KBLI code and the business license in accordance with the business risk level. There are different stages that must be carried out by business actors to be able to operate their business activities based on the level of risk of business activities. The higher the risk of business activity, the more stages and licenses are required.

Business actors who already have business licenses that are approved and effective before the enactment of GR 5/2021 are excluded from risk-based business licensing unless the provisions are more favorable for business actors. However, business actors who have obtained access rights prior to the enactment of GR 5/2021 must update access rights data on the OSS system.

Adhika Patria