Govt considers luxury tax hike for cars below 2,000 cc

Zakki P. Hakim, The Jakarta Post, Jakarta

As part of the new energy conservation measures, the government is considering an increase in the luxury tax for cars with an engine displacement of below 2,000 cc (cubic centimeters), a senior official at the Ministry of Industry has said.

The Ministry's director general of transportation and telematics industries Budhi Dharmadi said the plan was under consideration because cars with less than 2,000 cc account for about 70 percent of the total number of the country's passenger cars.

"We are still doing some research to be able to come up with the best possible solution," Budhi told The Jakarta Post over the weekend.

The research, Budhi went on, was expected to produce a policy that could strike a balance between fuel-conservation measures and tax income on one hand, and the impact on the automotive industry and on future investments on the other hand.

Budhi was part of an inter-ministerial meeting on Friday evening, which was led by the finance ministry's Financial, Economic and International Collaboration Studies Agency (Bapekki) Anggito Abimanyu.

Anggito could not be reached for comment and did not reply to messages left by the Post on Saturday.

Earlier reports said that the government was working on a formula of higher luxury taxes only for private vehicles with an engine displacement of above 2,000 cc -- which roughly accounts for 30 percent of the country's private passenger vehicles.

Nevertheless, the government, Budhi said, still was seeking ways to remain consistent with its plan to exempt the proposed tax for small sedans and public transportation vehicles, as a way to keep the sector attractive for investors.

"But, we already realize that there might be some tough choices to make," he said.

It would certainly be a tough decision, especially in light of the fact that the sector is currently enjoying a healthy growth spurt in recent years. Last year, car sales reached record highs of over 483,000, with the industry association predicting this year's sales would hit 500,000.

"We wanted to come up with a wise solution, one that will have a minimal impact on the local industry and not discourage investment," he said.

The government has been considering several measures to cut down on greater-than-expected fuel consumption, including progressive taxes on private vehicle ownership, where people who already own one vehicle will be taxed more for any additional ones they buy.

There is also a regulation that would require cars with an engine displacement of over 2,500 cc to use only the unsubsidized Pertamax and Pertamax Plus gasoline.

Some local administrations, including Jakarta, are also considering a limit on the number of private vehicles on the streets via a "vehicle lifespan" scheme.

The energy conservation measures are being considered in light of the high global oil prices, rapidly rising domestic fuel consumption and weakening rupiah against the U.S. dollar, which could all force the government to spend more than Rp 135 trillion (US$13.79 billion) this year just to reimburse state oil company Pertamina for the fuel subsidy, about half of which benefits the transportation sector.