The Domestic Component Level (“TKDN“) policy is one of the Indonesian government’s strategies to promote national industrial growth, enhance economic self-reliance, and attract sustainable investment. TKDN has become a mandatory requirement for business actors, especially foreign investors, to support the use of domestic goods and services in all their business activities.
TKDN was first regulated in 1984 through Law No. 5 of 1984 on Industry, where Article 16 stipulates that (1) In conducting and/or developing industrial business activities, industrial companies shall utilize and create appropriate industrial technology by leveraging devices available and developed domestically, (2) If the required industrial technology devices are not available or are insufficiently available domestically, the government shall assist in selecting the necessary industrial technology devices from abroad and regulate their transfer to the domestic sector, and (3) The selection and transfer of strategic industrial technology from abroad, which is necessary for domestic industrial development, shall be further regulated by government regulation. This regulation has since been replaced by Law No. 3 of 2014 on Industry, Government Regulation No. 29 of 2018 on Industrial Empowerment, and other legislation that specifically governs the calculation and supervision of TKDN across various sectors.
TKDN requirements in Indonesia apply to goods, services, and a combination of goods and services. In the context of investment, compliance with TKDN is critical for the procurement of goods and services by the government or state-owned enterprises (BUMN). Both domestic and foreign investors must ensure that their projects meet the minimum requirements for using domestic components as stipulated by applicable regulations.
For instance, in the energy sector, power plant projects in Indonesia require the use of domestic components with a TKDN value of up to 65.65%, as mandated by Decree No. 191.K/EK.01/MEM.E/2024 concerning the Minimum Value Threshold for the Domestic Component Level in Goods and Services in Electricity Infrastructure Development Projects. This decree fulfils the mandate of Minister of Energy and Mineral Resources Regulation No. 11 of 2024 concerning the Use of Domestic Products for Electricity Infrastructure Development. Similarly, in the infrastructure sector, regulations mandate that public infrastructure development involves local manufacturers to prioritize domestic producers.
Compliance with TKDN can significantly enhance an investor’s credibility in the local market. It reflects the investor’s commitment to contributing to Indonesia’s economic growth while supporting the empowerment of domestic industries. Such commitment not only provides added value for investors but also helps build trust with local business partners, including suppliers and domestic contractors.
However, implementing TKDN policies is not without challenges. A primary obstacles is the lack of understanding among foreign investors regarding the methods of calculating TKDN and the mechanisms for its supervision. This issue often arises from differences in legal systems, language barriers, and the complexity of regulations, which require more detailed technical guidance to ensure effective compliance.
Compliance with TKDN is not merely a legal obligation but also a strategic opportunity for investors to support Indonesia’s sustainable economic development. By utilizing local resources, investors can strengthen relationships with the government and local communities while fostering a more favourable investment climate. Encouraging TKDN compliance is a crucial step toward achieving synergy between national economic growth and sustainable investment in Indonesia.
If you, a prospective client, have further inquiries about this topic, Schinder Law Firm is one of many corporate law firms in Indonesia that has handled numerous similar matters, with many experienced and professional corporate and civil lawyers in its arsenal, making it one of the top consulting firms in Indonesia. Feel free to contact us at info@schinderlawfirm.com for further consultation.
Author:
Dewi Susanti