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April 3, 2021

Indonesia Expands Tax Breaks to Larger Cars to Boost Auto Industry

Last month, in a bid to spur its local automotive industry, Indonesia cut its luxury tax on selected vehicles to zero; a month later, they’re now looking to expand that tax cut’s coverage.

To recall, Indonesia 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.

However, realizing that the upper middle class also held back from big purchases during the pandemic, Indonesia’s finance ministry is now moving to expand tax breaks to cover the sale of four-wheel drive cars with displacements up to 2,500-cc (2.5 liters). Aside from engine displacement, only those with 60 percent domestically-sourced components are eligible.

Unlike vehicles with displacements of 1.5 liters and below though, those falling in the next bracket (up to 2.5 liters) won’t be receiving zero tax. Instead, it will receive incentives in the form of a 12.5 to 50 percent discount in luxury tax payments. This will take effect from April until the end of 2021.

Environmental groups have voiced their opposition to the matter citing that the inclusion of larger displacement vehicles, particularly those with four-wheel drive will increase Indonesia’s carbon emissions. As it is, Indonesia is one of the most polluted countries in the world.

On the other hand, Indonesia’s finance ministry thinks that the move will help increase new car sales there by 40 percent. It must be remembered that car sales in Indonesia, the second largest in ASEAN, have yet to recover after plunging dramatically during the COVID-19 pandemic.

The tax cut’s effect on the environment notwithstanding, it is worth reiterating that the Philippines has gone backward when it comes to its economic recovery program amidst the pandemic.

Instead of offering tax incentives on locally produced vehicles like what the Indonesian government’s move, the Department of Trade and Industry (DTI) slapped a 200-day “safeguard measure” targeting completely built-up vehicles.

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