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Indonesia eyes scrapping of perks for cheap cars program

Publication Date : 26-03-2014

 

The Indonesian government is considering scrapping tax incentives for the country's low-cost green car (LCGC) program as its economic costs and controversies seem to outweigh its benefits.

Finance Minister Chatib Basri said on Tuesday that he had sent a letter to the Industry Ministry demanding a thorough evaluation of the program.

“Our concern here is related to fuel subsidies. The LCGC program was initially intended to use non-subsidized fuel, but in reality some of the cars are still using subsidized fuel,” he said, adding his ministry was authorized to review any policy it had issued.

Chatib went on to say he was exploring the best solution to the issue, including formulating a rule with the Industry Ministry that would require future LCGC cars to have engines that would only run well on high-octane, non-subsidized fuel.

The request for the review came a mere 10 months after the program’s launch, with Chatib signing off on the tax breaks only weeks after becoming finance minister.

Under the program, automakers are exempt from paying a “luxury goods sales tax” once they commit to manufacturing LCGCs locally.

The cheap, fuel-efficient cars fall into two categories: cars with gasoline engines up to 1,200 cc and diesel; and semi-diesel engines of up to 1,500 cc. Both models must get at least 20 kilometers per liter of fuel.

The policy was initially aimed at spurring automobile exports, but eventually created a maelstrom of controversy as the tax breaks were exploited for domestic production.

Detractors of the program include Jakarta Governor Joko “Jokowi” Widodo, who has said the policy encouraged people to drive cars instead of using public transportation, ultimately making traffic worse and increasing subsidized fuel consumption.

The program effectively lowers the price of the vehicles to around 100 million rupiah (US$8,800), which is well within the reach of Indonesia’s lower middle-class.

In response to Chatib’s demand, Industry Minister MS Hidayat said that the government was still seeking an appropriate formula that applied to all consumers and “allows us to know when the car owners use subsidized fuel”.

Industry Ministry director general for high-technology industry Budi Darmadi argued that his office’s role was limited to only disseminating information about the termination of the purchase warranty once an LCGC was found to run on lower-octane fuel.

In the future, the Industry Ministry would encourage LCGC owners to install a radio frequency identification (RFID) unit, a mechanism introduced by state-owned oil and gas firm Pertamina to monitor subsidized fuel consumption, he said.

Production of the cheap cars is expected to attract component suppliers to set up local production units, thus spurring growth in the domestic automotive industry.

With more cars produced locally, automotive imports would decline, easing pressure on the country’s trade deficit.

Astra Daihatsu Motor (ADM), one of the four producers joining the program, began exporting its cheap cars in February, with the first delivery going to the Philippines.

 

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