The government rolled out a tax incentive to boost vehicle sales. An effort to keep the automotive industry alive and investors in place.
THE pandemic has kept the automotive business at bay over the past year, forcing Wan Fauzi to switch gear. Ganding Toolsindo, which he founded more than two decades ago, had been a supplier of automotive parts. It now supplies air conditioning (AC) parts to Panasonic Manufacturing Indonesia’s factory. Over the last month, the factory in Cikarang, Bekasi, West Java, has also become a first-tier supplier of refrigerator components for Chinese brand Haier.
Wan Fauzi said the government’s social restriction policy, which has been keeping people mostly at home during the Covid-19 pandemic, had pushed the demand for air conditioning. “The demand keeps rising. We are greatly helped,” Wan Fauzi told Tempo on Thursday, February 18.
Wan Fauzi is the chairman of the Small and Medium Automotive Components Industry Association (PIKKO). Before, Ganding Toolsindo received orders from Sakura Java Indonesia, a company that supplies parts for Yamaha Indonesia Motor Manufacturing. Ganding was tasked to make exhaust brackets for Yamaha motorcycles. “Now, as the automotive sector is down, I take electronics, making mount brackets for AC and refrigerator,” he said.
Wan Fauzi said that some of his colleagues, who remain loyal to car parts, continued to have their businesses battered by the pandemic as demand shrunk. “The only rise in demand is for motorcycle parts,” he said.
The biggest decline was in May 2020. At that time, the average order for car parts was only 20 percent of factory capacity. Some workshops, according to Wan Fauzi, received zero order, and were forced to shut down temporarily because they were unable to survive.
Wan Fauzi . TEMPO/Hilman Fathurrahman W.
May 2020, two months after Covid-19 was first detected in Indonesia, was the lowest point for the car industry. The industry ministry noted that the utilization rate of the machinery and equipment industry, as well as the vehicle industry, fell hardest compared to other sectors, from an average of 80 percent to just 40 percent. Throughout 2020, cars and motorbikes sales dropped by 48 percent and 43 percent, respectively, while spare parts sales fell 23 percent.
Other industries only recorded sales declines by an average of 15 percent. In fact, several sectors started experiencing higher factory utilization in the fourth quarter of 2020, such as food and beverage, electronic goods, computers and optics.
The automotive industry’s deteriorating performances alarmed the government, as it indicates declining consumption, the main pillar of the national economic growth. Last year, the Central Statistics Agency (BPS) recorded that consumption contributed 58.96 percent to the gross domestic product. The automotive industry, along with the manufacturing sector, contributed 19.88 percent.
The coronavirus pandemic’s blow to the Indonesian economy is harder than predicted. Throughout 2020, Indonesia’s economic growth rate stood at minus 2.07 percent, worse than the finance ministry's early projection, which was between minus 1.7 percent and minus 0.6 percent.
This year, the government has different ambitions. Economic growth target is set at 4.5 to 5.3 percent. This was a corrected range from an initial projection in the range of 4.5 to 5.5 percent.
Finance Minister Sri Mulyani Indrawati said economic growth would still be supported by state expenditure, which would be focused on ongoing Covid-19 relief and reinforcing economic recovery efforts. A number of stimuli have been launched to grease the wheels of economic sectors.
The latest stimulus is in the form of an incentive, reducing the luxury goods sales tax (PPnBM) for cars. The relaxation is valid for cars running on engines 1,500 cubic centimeters (cc) and below, including sedans, 4 x 2s, and cars built using up to 70 percent of locally made components. The finance ministry announced the policy on Friday, February 12, one day after the information was disclosed by Coordinating Minister for the Economy Airlangga Hartarto.
The PPnBM rebate is to be applied gradually, starting on March 1. In the first stage, which is from March to May, the tax discount is 100 percent of the normal rate. The second stage, from June to August, the rebate is 50 percent. Lastly, from September to December, the tax cut is 25 percent. The government will subsidize the discounted amount.
The government hopes that a tax rebate can stimulate car sales for middle-class households. “On the consumer side, the end of fasting month celebration Idul FItri, with its homecoming tradition, is also expected to boost the sales of cars,” said a press release from the finance ministry on February 12. “Of course, this can be done if the Covid-19 transmission has flattened.”
THE Indonesian Automotive Manufacturers Association (Gaikindo) is making numerous efforts to find solutions in dealing with the automotive collapse. Mid last year, the association consisting of brand-holder agents and manufacturers of car parts sent a letter to the industry ministry, finance ministry, and coordinating ministry for the economy. Gaikindo General Secretary Kukuh Kumara said the association found worrisome revelations about the industry’s actual state.
He said that the automotive sector’s downfall became apparent starting in April-May 2020, when the monthly sales figure dropped to 3,700 to 4,000 units a month, well below the usual range of 90,000 to 100,000. As a result, factories utilization rate dropped immensely. Supporting industries, namely small and medium-sized enterprises (SMEs) supplying components and spare parts, were also affected. “We have addressed this through various discussions. Everything is aimed at resurrecting the industry,” Kukuh said on February 19.
Gaikindo then began having intensive discussions about the matter with the industry ministry, from which the idea of tax rebate came, Kukuh said. “Around September, the industry ministry proposed the tax relief,” he said.
At the time, Gaikindo had prepared a simple simulation to propose the stimulus, focusing on car types that are popular among customers. According to Kukuh, 60 to 70 percent of car buyers in Indonesia opt for those sold for less than Rp300 million, which are cars that generally have an average engine capacity of 1,500cc or less. “This category also includes locally-assembled cars, with a high enough local content,” he said.
A worker at the vehicle spare-part and electronic factory of Ganding Toolsindo in Cikarang, Bekasi, West Java, February 19. Tempo/Hilman Fathurrahman W
Bob Azam, Director of Toyota Motor Manufacturing Indonesia (TMMIN), said that out of several types of taxes on automotive products, the industry had actually proposed for levy exemptions at the regional level. “That way, the implementation is easier,” Bob told Tempo.
The types of taxes that are under the authority of provincial governments are the name transfer duties for vehicles (BBN-KB), vehicle taxes (PKB), and the progressive taxes on second car ownership and so on. Meanwhile, automotive products levies that are under the central government are the PPnBM, value-added tax (VAT), and non-tax state revenues.
Bob said that the TMMIN had also suggested the concept of strengthening exports. Under this scheme, the PPnBM exemption is applied to locally made products that are exported. “We only propose. The decision is the government’s to make.”
Kukuh confirmed that there were suggestions from automotive business actors to have the relaxations implemented for local tax provisions. To follow up on this proposal, Kukuh said Gaikindo written to all regional government leaders in the middle of last year. However, he said, the proposal was rejected by regional governments, because 50 to 60 percent of local revenues come from vehicle taxes. “They objected to having it erased,” he said.
Meanwhile, the industry ministry has sought for tax exemption from new car ownership. In his letter to the finance minister on September 2, 2020, Industry Minister Agus Gumiwang Kartasasmita proposed incentives in the form of vehicle tax exemption, including the VAT and PPnBM, throughout September-December 2020.
At the same time, Minister Agus wrote to Home Affairs Minister Tito Karnavian, asking him to help encourage local governments into exempting taxes on new cars. The tax referred to consists of BBN-KB, PKB, and the progressive tax.
Taufiek Bawazier, the Industry Ministry’s Director-General of metal, machinery, transportation equipment and electronics industry, confirmed the two letters during the “Indonesia Development Forum 2020” web seminar held on October 14, 2020. At the time, Taufiek said that tax exemption was needed to make new cars cheaper, more affordable, therefore increasing the competitiveness of domestically produced cars. “Hopefully it gets a good response to mobilize the automotive sector,” Taufiek said.
But Finance Minister Sri Mulyani rejected the proposal. “We are not currently considering giving zero tax on new cars as proposed by the industry and the industry ministry," said Sri during the “Our State Budget” press conference on October 19 last year. Her deputy, Suahasil Nazara, also said the finance ministry prefers providing incentives to all industrial sectors, not partial to just one.
But the finance ministry budged after just three months. In a press release on February 12, it said that a tax discount for cars in the 1,500cc segment had been decided in a limited cabinet meeting after it was discussed by several ministries.
Susiwijono Moegiarso, Secretary to the Coordinating Ministry for the Economy, said that discussions about car tax relaxation went smoothly, the only ‘dynamics’ happened when determining the parameters and segments that will receive the incentives.
According to Susiwijono, the industry ministry wanted the tax relaxation to be implemented for many car categories. Meanwhile, the finance ministry and the coordinating ministry for the economy wanted the parameters to be set first.
An example of a parameter, Susiwijono said, is for the tax holiday applies to cars that are made using at least 70 percent of domestic components. This parameter is needed to ensure that the incentives are not eligible for cars made using imported parts, thus increasing the import balance. Another parameter is to have the tax rebate valid for lower-middle class consumers. The 1,500cc engine category was chosen because it has a large market share, which is around 60 percent.
According to Susiwijono, the plan to put the policy in effect on March 1 this year was decided because the government is racing against time. The government wants to push the economy in the first quarter, as well as take advantage of the Idul Fitri as a moment to boost car sales.
Yustinus Prastowo, the finance minister’s special staff for strategic communication, said that the ministry basically is not against the proposal to discount vehicle taxes. The ministry, he said, initially decided not to provide sectoral incentives. “The approach is holistic. One scheme for all, such as restructuring, guarantees, and others.”
According to Yustinus, the finance ministry finally approved the concept of vehicle tax relaxation that does not affect state revenue targets. This is because the new car tax exemption uses a government-borne scheme. Later, the potential loss of tax revenue will be replaced using the national economic recovery budget. “The value is around Rp2 trillion. Hopefully there will be trade-offs with the VAT, BBNKB and PKB.”
As for the PPnBM instrument, Yustinus said, it was chosen because administratively it is simpler. The tax is only collected once, which is at the factory. “Regional taxes are difficult because the central government cannot make policies for all provinces."
TRADE Minister Muhammad Lutfi will fly to Tokyo, Japan, soon. He plans to visit colleagues at the Japanese automotive company. As a former Indonesian Ambassador to Japan, Lutfi said he knows some of Japan’s automotive industry leaders well. “Daihatsu’s boss is a good friend of mine in Osaka. His name is Mitsui. I will visit them one by one,” Lutfi told Tempo on February 18.
Lutfi plans to submit a simple request to the Japanese automotive factories. “I am going to ask for an allocation so that we could export their cars, around 120,000 units, to Australia,” he said. The value is estimated to reach US$3 billion to US$4 billion, which is expected to increase state revenues from car exports.
Automotive exports are expected to be included in the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA). The bilateral agreement was signed in March 2019. Australia ratified it in November 2019 and Indonesia followed in February 2020. Among its contents are a free trade agreement between the two nations, eliminating import duties on almost all products.
Currently, Lutfi said, the automotive exports value is US$6.6 billion. He hopes that the figure could rise to US$10 billion. “As well as having a multiplier effect, absorbing workers from industries in tier one to six,” he said.
In Japan, Lutfi also plans to discuss the government’s automotive tax relaxation. He said the government wants to mobilize the automotive sector as quickly as possible, as the fears that a number of principal brands from Japan would make decisions that do not bode well with Indonesia, if the domestic car business continues to collapse. “They might decide, for efficiency reasons, to close factories in Indonesia,” Lutfi said. “They could move the production of Pajero, Expander, Fortuner, Kijang, and others to Thailand. That would be a double blow to us.”
He said that several fiscal and macro prudential policy easing, prepared by Bank Indonesia and the Financial Services Authority to support the automotive sector, came at the right time. This is because Japan’s government and private sector are currently preparing their annual budget statements, which usually starts from April until March of the following year. “Japan will approve the annual plan in April. So they are preparing a strategy this year,” Lutfi said.
Bob Azam from Toyota Motor Manufacturing Indonesia also revealed the possibility of regional consolidation in the automotive industry. He said that throughout history, the automotive business—both at regional and global levels—always sought efficiency. The current decline in sales and production volumes creates opportunities for principals to close or merge businesses.
Therefore, Bob hopes that the government will pursue economic recovery immediately. That way, Indonesia can remain as a player in the regional or global consolidation process. “We must not let ourselves become the one consolidated because our economy is lagging behind.”