Jakarta. The Indonesian government’s plan to lower tax on domestic sedan sales will be finalized by the end of this month, paving the way to create the biggest car market in Southeast Asia and a major sedan manufacturing hub to supply neighboring countries, especially Australia, Industry Minister Airlangga Hartarto said on Tuesday (13/02).
The government currently imposes a luxury goods tax on domestic sedan sales, which has meant that sedans have been less competitive in the market than cars charged with lower taxes, especially multi-purpose vehicles (MPV).
The low price of MPVs in Indonesia has spurred demand for this type of vehicles and allows local manufacturers to build a production base for them, scaling it up large enough to make and export locally made MPVs to neighboring countries where they have proved to be more than competitive.
The same cannot be said for locally made sedans, which has meant that Indonesia is missing out on the largest segment of the world car market.
"We are discussing the tax revision with the Finance Ministry; we aim for a decision to be made by the end of this month," Airlangga told reporters on Tuesday.
Sedans up to 1,500 cubic centimeter cylinder capacity are currently subject to a 30 percent luxury tax. Sedans between 1,500 cc and 3,000 cc are charged a 40 percent tax as soon as they are delivered from the factory to the dealers.
Meanwhile, minivans and low-emissions city cars only get a 10 percent tax, 20 percent on the larger versions.
The sedan tax is waived if the car is headed overseas for export.
Airlangga has not indicated how much the sedan tax will be reduced.
The tax cut is expected to encourage more Indonesians to buy sedans and boost domestic sedan production, which in turn will encourage sedan manufacturers to increase their production in Indonesia.
"The first goal is to increase sedan sales domestically. The same tax on sedans will make car companies consider opening more factories in Indonesia," said Haris Munandar, the Industry Ministry's secretary general.
Due to the higher tax, car manufacturers normally choose to produce sedans to be sold in Indonesia in neighboring Thailand, which has the largest automotive industry in Southeast Asia and is a major regional car production base for MPVs, SUVs (sport utility vehicles) and also sedans.
Local car makers sold 9,000 sedans last year, less than one percent of over 1 million cars sold in the period.
Indonesian automotive industry's production capacity currently stands at 2 million units per year, half of which are dedicated to the ever-popular MPVs.
But Indonesia has only managed to produce 1.5 million cars every year at most in the past several years.
Manufacturers are putting a lot of hope on the tax cut to give them a reason to meet the 2 million production capacity.
According to Minister Airlangga, one of Indonesia's most potential markets is another neighboring country, Australia.
The land down under needs 2 million cars per year but its car industry is currently in a slump and struggles to produce those numbers.
"Australia is one of our targets, because car factories there are closing down. Now is a good opportunity to enter their market," Airlangga said.
Australian car manufacturer Holden, America's Ford and a host of Japanese manufacturers have all closed down their factories in Australia since 2013, as labor costs rose much higher than in nearby developing countries.
Australia's biggest car suppliers now are Thailand and Japan.
Indonesia and Australia are currently in talks to finalize the Comprehensive Economic Partnership Agreement, which is expected to create closer economic engagement between the two countries.