The success and failure of Indonesia’s new car tax reforms

In October 2021, Indonesia’s government implemented a new vehicle tax structure. How successful will it turn out to be?

Ake Lertsirirungsun, Manager, South East Asia

26 August 2022

Toyota Indonesia is set to produce its first hybrid model in Indonesia either late this year or early next year. Meanwhile, the company ended production of the Vios sedan in Q3 2022 and will import the new generation Vios (otherwise known as the Yaris Ativ) from Thailand instead. As a result of Toyota’s move, sedan production is now confined to premium brands and accounts for less than 1% of Indonesia’s total car production.

This reflects both achievement and disappointment regarding government policy. In October 2021, Indonesia’s government implemented a new vehicle tax structure. In brief, the tax rate was no longer based on bodystyle, but also fuel consumption and emissions level. As such, the tax rate for xEV (electrified) and sedan models (as opposed to heavier bodystyles) became lower than it was under the previous scheme.

There were two key reasons for the tax restructure:

Firstly, the government wanted to catch up with the global trend for electrification and attract carmakers to produce and sell xEVs locally. Note that all locally built models in 2021 were fitted with conventional powertrains.

Secondly, based on local media reports in 2018, this change aimed at incentivising carmakers to build and export sedans from Indonesia via lowering the sedan segment tax rate from around 40% to the equivalent rate for MPVs and SUVs at 10%. The government expected that: a) the lower tax and hence vehicle price would boost demand for sedans and carmakers would reallocate volume to Indonesia for both domestic sales and export; and b) that sedan demand in global markets would be large enough to support export volume from Indonesia.

We agree that the new tax structure will accelerate xEV sales and production in the country, especially since we learned that Japanese carmakers (which dominate the market) now include xEV models in their pipeline of new model launches.

As for the ending of Toyota Vios production, it is not surprising since we did not expect the revised tax structure to boost new investment or expand sedan production in the country. In our view, Indonesia is a 7-seater market in which sales of 7-seater models account for more than half of Indonesia’s Light Vehicle (LV) sales. Meanwhile, Sedan market share remains low and accounted for only 0.7% of total LV sales from October 2021 – July 2022 despite the new lower tax rate for sedans. This illustrates that the sedan segment is not aligned with market preferences.

After failing to attract production of sedan models, the challenge of the next automotive policy will be for the Indonesian government to design a scheme suitable for current market preferences while also being a long-term investment plan to support the local automotive industry.

Indonesia’s neighbours are also set to be regional xEV production hubs with Thailand standing out by virtue of its well-designed automotive growth policies. The Thai government introduced its Eco Car program with a minimum production requirement of 100k units a year aimed at creating and boosting production for new vehicle segments for both domestic demand and export. This resulted in pushing Thai Complete Built Unit (CBU) exports to 1.0 mn units a year. Subsequently, the Thai government introduced an xEV incentive program that required investment for key xEV components without any minimum production quotas. This was intended to build a supply ecosystem and xEV supply chain rather than just focus on vehicle volume targets.