14 Nov 2023
New Indonesian Regulation Attempts to Control Growth of ‘Social Commerce’

The e-commerce landscape in Indonesia has seen tremendous growth and transformation in recent years, including the emergence of what is termed “social commerce,” that is, business models that combine features of both social media and e-commerce.

The growth of social commerce significantly affected traditional market traders and other existing business models in Indonesia, leading to loud calls for protection. These calls have now been answered in the form of Ministry of Trade (“MoT”) Regulation No. 31 of 2023 on Licensing, Advertising, Development and Supervision of Business Undertakings in the E-Commerce Sector (“MR 31” or the “New Regulation”),[1] which revokes and supersedes Minister of Trade Regulation No. 50 of 2020 (“MR 50”).[2]

While MR 31 has elicited significant public attention and controversy for the restrictions it has placed on social commerce, it is actually more wide-ranging than that as it also makes important changes to regulatory and compliance requirements.

The key changes introduced by MR 31 are as follows:

A. E-Commerce Includes Social Commerce

MR 31 is first and foremost concerned with putting the brakes on social commerce, which is defined as being where a “social media operator provides certain features, menus, or facilities that enable merchants to offer goods or services.” In principle, this definition encompasses every social media platform that allows merchants to offers goods/services to the public.

To bring social commerce within the ambit of the general e-commerce regulatory framework, MR 31 expands the definition of an “e-commerce operator” (Penyelenggara Perdagangan melalui Sistem Elektronik / “PPMSE”). Thus, the New Regulation first defines a PPMSE is a business undertaking that provides an electronic communications platform to facilitate commercial transactions, and then provides an open-ended list of business models that constitute e-commerce activities. Consequently, any undertaking that engages in such activities will be classified as a PPMSE.

The list of e-commerce business models set out in MR 31 is as follows:

1. Online retail;
2. Marketplace;
3. Online classified advertising;
4. Price comparison platforms;
5. Daily deals; and
6. Social commerce

While it is true that other legislation previously implied that social commerce comes within the scope of e-commerce, the situation was not entirely clear. Now, however, MR 31 makes it expressly clear that a platform that hosts or facilitates social commerce activities is a PPMSE, and, accordingly, needs to obtain an e-commerce license.

B. Restrictions on Social Commerce Operators

In response to the demands for protection against social commerce from traditional businesses, the New Regulation imposes the following restrictions on social commerce operators:

• prohibition on acting as a manufacturer; and
• prohibition on facilitating payment transactions.

As the term “facilitating payment transactions” is not defined or in any way restricted in its scope, it should be interpreted broadly so as to include anything that enables payment transactions to be made through an electronic system, such as the use of billing services, check-out features, or collection services for merchants on social media platforms.

C. Minimum Price Applicable to Items Purchased Via Foreign PPMSE

In a further effort to protect traditional business models in Indonesia, MR 31 provides that a foreign PPMSE that engages in cross-border e-commerce must set a minimum free on board price of USD 100 per item for imported finished goods that are sold directly via their platforms to end consumers in Indonesia. Thus, no item that carries a price tag of less than USD 100 (or its Indonesian equivalent) may now be sold by a foreign online merchant into Indonesia. However, MR 31 also provides that the MoT may establish exceptions to this. According to media reports, the ministry is currently working on a list of exempted items that is said to include books, film, music and software. It is expected that the official list will be published by the end of the year.

D. Licensing Changes

As MR 31 expands the scope of a PPMSE beyond conventional e-commerce (such as retail and marketplace), the licensing requirements under the New Regulation have also been expanded accordingly so as to regulate each of the business models listed in section A above. Contrary to MR 50, which was issued before the switch to risk-based business licensing under the Online Single Submission (OSS) system, MR 31 applies the risk-based business licensing approach.[3] Consequently, further administrative requirements need to be fulfilled by foreign PPMSEs before the requisite licenses may be obtained.

E. Requirement to Establish Representative Office

MR 31 introduces new criteria that could trigger the requirement for a foreign PPMSE to establish a representative office in Indonesia.

Previously under MR 50, a foreign PPMSE would be required to establish a representative office in the e-commerce sector if the following criteria were fulfilled:

1. conducted transactions involving at least 1,000  consumers over the course of one year; and/or
2. delivered at least 1,000  packages to consumers over the course of one year.

Consequently, the requirement to establish a representative office was more relevant to conventional trading e-commerce business models, although in practice the above thresholds were interpreted broadly.

Now, however, MR 31 adds another criterion under which a foreign PPMSE is required to set up a representative office in Indonesia, that is, if it carries traffic that accounts for, or it is accessed by, at least 1% of domestic internet users over the course of one year. As a result, a variety of overseas-based e-commerce and e-business models that involve the delivery of intangible goods / services into Indonesia may now also require the establishment of a representative office in the e-commerce sector.

F. Merchant Compliance

As domestic enterprises, local Indonesian businesses are required to comply with Indonesian product standards and licensing requirements, which may be more onerous than those faced by overseas businesses. In order to level the regulatory playing field, therefore, MR 31 imposes similar requirements on foreign merchants that sell products into Indonesia. Specifically, foreign merchants are required to verify their identities and provide certain documents and information to the PPMSE:

• Particulars of identity;
• Copy of business license that has been apostilled by an authorized institution or legalized by an Indonesian Embassy overseas;
• Evidence of compliance with the relevant compulsory standards and technical requirements for the goods/services being sold;
• Numbers of the bank accounts used for transaction payments; and
• Certificate or report confirming the veracity of the merchant’s identity particulars and business license from an independent surveyor in the merchant’s country of origin.

Although they are not directly involved in the manufacturing or trading of goods or services, PPMSEs are also required by MR 31 to ensure their merchants’ compliance with the above obligations.

G. Compliance with Competition Law

MR 31 requires PPMSEs to play an active role in ensuring (i) equal business opportunities for merchants, and (ii) via monitoring, that the prices of goods / services are free from manipulative practices. Additionally, to maintain sound business competition, PPMSEs are required to ensure that there is no:

1. interconnection between electronic systems used for e-commerce and those that are not used for e-commerce; and
2. misuse of data by e-commerce operators and affiliates using operators’ electronic systems.

A PPMSE must also coordinate with the Indonesian Competition Commission (KPPU) within 3 working days of an alleged infringement of competition law by a merchant.  

H. Expanded Takedown Regime

MR 31 confers additional authority on the MoT’s Directorate General of Consumer Protection and Trade Compliance to issue takedown requests to PPMSEs in relation to non-compliant online advertising (including non-compliant offerings by merchants). Previously, the MOT needed to submit a recommendation to the Ministry of Communications and Information Technology (“MCIT”) before content could be taken down.

ABNR Commentary

MR 31 is clearly a protectionist measure in that it attempts to shelter existing interests by, among other things, imposing restrictions on social commerce and a USD-100 minimum price for goods that may be sold into Indonesia by an overseas online vendor.

Notwithstanding intense pressure from traditional market traders and businesses for such protection in the run-up to MR 31’s issuance, the sheer speed with which it found its way onto the statute book caught many PPMSEs by surprise. Coming into force immediately upon its promulgation on 25 September 2023, the impact of the New Regulation on social commerce has been immediate and severe.

Consequently, foreign PPMSEs (including social media operators that allow goods and services to be sold on their platforms) will need to assess their existing operations and come up with new models to compensate for a likely significant loss of business.

Further, the additional criteria that would trigger the requirement for a foreign PPMSE to establish a local representative office in Indonesia will have a significant impact. Indeed, we anticipate that this is also likely to impact digital services providers that sell their products into Indonesia.

As a leading Indonesian law firm for technology, ABNR is ideally placed to help you ensure that your business is compliant with Indonesian law. Should you require any assistance in relation to the impact of MR 31 on your operations, please do not hesitate to contact the authors: partner Mr. Agus Ahadi Deradjat (aderadjat@abnrlaw.com), foreign counsel Mr. Gustaaf Reerink (greerink@abnrlaw.com), and senior associate Mr. Mahiswara Timur (mtimur@abnrlaw.com).[4]