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March 3, 2021

In Order to Spur Its Auto Industry, Indonesia Cuts Luxury Tax on New Cars to Zero Percent

This is a tale of two countries trying to recover from the economic slowdown brought on by COVID-19.

On one hand, you have the Philippines—a country whose best and brightest decided to levy a safeguard bond on imported mass-market cars to protect its almost non-existent local production. On the other, you have Indonesia—a country which decided, in a bid to spur consumer spending, to go the other way, and slash luxury tax on cars assembled there to zero.

In order to help prop up its automotive industry, Indonesia has drummed up a plan where they’ve reduced the current luxury tax—it ranges from 10 to 30 percent—to zero for locally-assembled two-wheel drive vehicles with an engine displacement of 1.5 liters and below.

The scheme, which will run from March to May 2021 will then be followed by a luxury tax that’s halved for the next three months after that—June to August 2021. After that, the government says they will continue to evaluate the effectivity of the measure, and may extend it even further to help their local automotive sector which employs around 1.5 million people. It’s expected to boost production there by more than 81,700 units.

According to Indonesian government records, 21 cars from 7 brands qualify from the scheme, and this includes the popular 7-seater MPV/SUV segment with entrants such as the Toyota Avanza and Rush, Honda Mobilio and BR-V, Mitsubishi Xpander and Xpander Cross, and the Suzuki Ertiga and XL7 all eligible.

On the surface, the move of the Philippines and Indonesia seem to be two sides of the same coin given that they both protect their respective local automotive production. However, it’s worth noting that Indonesia’s move to cut the luxury tax on locally produced cars doesn’t penalize those who’d rather buy imported cars (or those brands without local production). In addition, the move will not make new cars prohibitive to buy since they will not require new car buyers to shoulder a hefty cash deposit in the case of the Philippines’s safeguard tariff (others though have opted to increase their prices altogether).

For the record, Philippine-based automakers are against the safeguard measure, even those with a local manufacturing presence. Some have said that it will derail the recovery of the automotive sector by as much as 10 percent. And this bad coming from an industry that contributes to about 300 billion pesos in revenues annually, or around 4 percent of GDP.

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