When Bigger is Better
A tax discount for buyers of automobiles will not be effective in increasing economic growth. A comprehensive stimulus policy package is needed.
IN order for our economy to recover quickly, the government should rethink its current strategy of providing fiscal stimuli. It appears that President Joko Widodo’s policy to offer a luxury goods sales tax (PPnBM) discount for automobiles will not be sufficient to revive falling consumption, unless there are other policies that provide a better and comprehensive solution.
After a year of discussions, the government finally decided to offer a stimulus in the form of a reduction in the PPnBM for four-wheeled vehicles with a maximum engine capacity of 1,500 cubic centimeters (cc), two-wheel drive, and a minimum of 70 percent local content. This discount will be provided in three-month stages, from March to December. In stage one, from March to May, buyers will not have to pay the PPnBM. In stage two, from June to August, there will be a PPnBM discount of 50 percent, and in the final stage, from September to December, the discount will only be 25 percent.
The government hopes that this tax cut will stimulate the sales of automobiles, after a 48.35 percent drop in 2020, at a time when people’s buying power is still weak as a result of the Covid-19 pandemic. This incentive is being provided for cars with an engine capacity of 1,500cc or less, the largest market segment. Because, unlike other types, most of these vehicles are made in this country, it is hoped that this stimulus will also increase production from automotive plants as well as the derivative sector, which includes the first to the third level of component producers as well as dealerships and financing companies.
There is a basis for these hopes given that the PPnBM is one component of the sale price of new vehicles. Therefore, if it is reduced, it is possible that the prices of automobiles will fall, and people will want to buy them. However, the government is wrong if it hopes to rely only on this incentive as a game changer that will be able to spur on consumption, stimulate industrial activity, and eventually restore economic growth, which is currently in the red, back into positive territory.
Firstly, it is not certain that this PPnBM discount will be a solution to revive the vehicle and automotive industry following the substantial demand shock that it has experienced. After all, it is only a small fraction of the price when compared with other components, including a number of levies that are paid on 1,500cc vehicles.
Ministry of Finance Regulation No. 33/2017 sets the PPnBM for 1,500cc vehicles at 10 percent, the lowest tariff for vehicles. However, as well as paying the PPnBM, buyers also have to pay value-added tax at 10 percent, and regional taxes comprising a transfer-of-title fee (12.5 to 20 percent) and vehicle tax (1 to 10 percent). This means that even if there is no PPnBM, the price of these vehicles will fall by at most 10 percent. Moreover, there is a possibility that buyers do not enjoy this discount if producers or dealers decide to take advantage of the incentive to increase their own profits.
Secondly, this slight difference in price will be meaningless when the purchasing power of middle to lower-income consumers, the target market for 1,500cc vehicles, is still at a low point due to the present crisis. Although dealers are providing huge discounts, in general lower-income people are using their money for other things than new cars. With this state of affairs, the hopes for a revival of industry could come to nothing.
The government should launch a comprehensive stimulus policy able to spur on demand as well as supply. Without efforts to improve buying power, a relatively small tax incentive will be meaningless. In this time of crisis, it would be better if state funds were directed to sectors able to improve people’s purchasing power. Avoid arbitrary programs that simply provide opportunities for corruption.