Dian Ariffahmi & Dion Bisara

Indonesia Touts Road-Clogging Vision of Cheap Cars for All

A senior official is trumpeting the possibility of even more cars rolling off assembly lines and adding to the country’s notoriously bad traffic congestion.

Edy Putra Irawadi, deputy for industry and trade at the Coordinating Ministry for the Economy, said on Friday that the country would soon be producing economy cars for Rp 70 million ($7,280) each, once the government issues a new set of regulations to encourage producers to use more local content.

At such a price, the dream of vehicle ownership could become a reality for millions more people.

Currently, the cheapest car in the showrooms carries a price tag of about Rp 100 million.

If everything goes as planned, Edy said, the country could be producing some 40,000 economy cars next year and between 300,000 and 600,000 by 2014.

He said the lower prices would be the result of regulations now being drafted to require vehicle producers to employ 60 percent local content.

“By the end of this year the regulations will be on the statute book,” he said. “God willing, we will start to see cheaper cars next year.”

In addition, Edy said, the government is considering offering tax incentives to producers of economy cars, such as the elimination of the luxury sales tax.

“We want to develop the economy-car sector because the market in Thailand is currently saturated. That means we have a good chance of luring foreign investors from there,” Edy said.

Thailand is Southeast Asia’s biggest automotive producer.

Industry players responded cautiously to Edy’s comments. However, they said they would be pleased to see the luxury goods sales tax removed from economy cars. Currently, cars with engines smaller than 1,500 cubic centimeters carry an additional 10 percent luxury sales tax on top of the value-added tax. Those 3,000 ccs or larger carry an additional 75 percent luxury sales tax.

Under changes to the Tax Code passed by the House of Representatives in September, the top luxury sales tax on cars would be raised to 200 percent next year.

“This [economy car] plan was initiated by the Industry Ministry a year ago. But now that the Coordinating Ministry has become involved, it means that something might actually happen next year,” Johnny Darmawan, deputy chairman of the Association of Indonesian Automotive Manufacturers (Gaikindo) and president director of PT Toyota Astra Motor, said on Sunday.

Last week, Gaikindo’s chairman, Bambang Trisulo, said he expected a decline in sales of 20 percent next year from this year’s target of 480,000 vehicles, due to the recent increases in provincial government vehicle taxes and next year’s expected increases in the luxury sales tax.

Under September’s Tax Code amendments, provincial administrations have already increased vehicle taxes to up to 10 percent of the value of a vehicle, double the previous maximum rate of 5 percent.

The amendments also permit the levying of an additional local tax of up to 10 percent on second and third cars owned by the same individual.

Vehicle sales, including commercial vehicles, amounted to 300,334 units between January and August, 27 percent lower than the figure for the same period last year.

A total of 607,805 vehicles were sold in 2008.