Foreign direct investment in Indonesia last year grew 8.5 percent more compared to 2016, thanks to upgraded global credit ratings and easier regulations, the Investment Coordinating Board, or BKPM, said on Tuesday (30/01). (SP Photo/Joanito De Saojoao)

Indonesia Plans to Cut Domestic Sedan Sales Tax, Aims to Buoy Production

AUGUST 14, 2017

Jakarta. Indonesia plans to lower taxes on domestic sedan sales in a bid to promote the country, the biggest car market in Southeast Asia, as a manufacturing hub for sedans, a finance ministry official told Reuters on Monday (14/08).

Sedans have so far been included in the luxury goods category and is subject to higher taxes of about 30-40 percent, versus multi-purpose vehicles (MPVs) that carry a 10-20 percent tax, making them less attractive to car makers and buyers.

The plan to cut the sales tax for sedans has been included in a revision to the country's Value Added Tax and Luxury-Goods Sales Tax Law, which the government will propose to parliament soon, said Goro Ekanto, who heads revenue policy study at the finance ministry's fiscal policy office.

"How much the reduction is and its impact will be discussed further before a decision is made," Goro said.

Industry minister Airlangga Hartanto said by cutting taxes, the government hopes to get car makers to produce more sedans, not only for the domestic market but also for exports.

"We hope to enhance the potential to export sedans and one way to do it is to bring tax on sedans into alignment. In the global market, demand for sedans is much higher than for MPVs and SUVs (sport utility vehicles)," said Airlangga.

Indonesia charges a 30 percent luxury tax on sales of sedans with a cylinder capacity of up to 1,500 cubic centimeter (cc), while sales of 1,500-3,000 cc sedans are taxed at 40 percent. In contrast, sales of smaller MPVs are currently taxed at 10 percent, while larger models are taxed at 20 percent.

A number of brands sell sedans in Indonesia, including Honda Motor and Toyota Motor that have the biggest share of total car sales in the country.

But manufacturers have said the difference in tariffs has discouraged them from producing sedans in Indonesia, which overtook Thailand as Southeast Asia's largest car market in recent years and is growing as a regional production base.

The country's Car Manufacturers Association (Gaikindo) has proposed the tariff on sales of smaller sedans be reduced to 10 percent to match that of MPVs.

A total of 533,903 vehicles, including sedans, were sold in the domestic market in the first half of 2017, up 0.3 percent from a year ago. In 2016, sedans accounted for about 2 percent of the 1.1 million cars sold.

Indonesia can produce more sedans if tax rates are cut, but the industry should focus on domestic market first, before exports, Gaikindo co-chairman Jongkie Sugiarto said.