Indonesia’s Luxury Tax System Is Proposed to Be Revised, Raising Tax Burden on HEVS

In Indonesia, tax reforms are under consideration, which will increase tax burden on HEVs. This is a preliminary report on the content of the report and its expected effects.

On March 15, 2021, the Minister of Finance Sri Mulyani announced at the Indonesian Diet a draft amendment to the Cabinet Order No. 73 of 2019 (published in October 2019), stipulating new tax rates for luxury tax on vehicles scheduled to be applied in October 2021. In the new system stipulated by the Cabinet Order, preferential tax rates are set for electric vehicles. However, in the proposed revision, the preferential rates on "low-carbon vehicles" (excluding BEVs) have been reduced compared to the original plan. That is to say, the government is considering tax hikes for PHEVs, HEVs and MHEVs.

The revised proposal states that the tax rates for PHEV, HEVs, and MHEVs will be increased in two phases. In the first phase, tax rate on PHEVs will be raised from 0% to 5 percent and on HEVs from 2-8 percent to 6-8%. In the second phase, tax rate on PHEVs will be raised to 8%, on HEVs to 10-12% and on MHEVs from 12% to 14%. In both phases, the tax rate on BEVs will remain at 0%.

As a reference for this, the new system stipulates a minimum tax rate of 15% for ICE vehicles that do not support electrification solutions. Therefore, in the initial proposal, it was estimated that the difference in tax rates between electric and ICE vehicles would be up to 7 percentage points for MHEVs and up to 13 percentage points for HEVs, so that HEVs could maintain adequate price competitiveness. However, the proposed revision will greatly narrow the range of preferential treatment, which may force companies to revise their product and price strategies, possibly leading to farther electrification of mass segments for the public.