Indonesia Offers More Aggressive Tax Perks for Electric Cars

Indonesia Offers More Aggressive Tax Perks for Electric Vehicles

Indonesia, a top supplier of a key battery metal, will aim to boost sales of electric vehicles with a new regulation that will cut tax breaks for hybrid cars.

Battery-powered electric vehicles will retain their 0% luxury tax rate, while plug-in hybrid vehicles will see their tariff increase to 5% from 0%, according to a draft regulation issued by the finance ministry on Monday. Full and mild hybrid types will be taxed at a rate of 6%-12%, compared with a previous range of 2%-12%.

The new rates will apply only to locally-produced vehicles.

This is the latest in a series of initiatives that Indonesia has unveiled to meet its ambition to become a global EV battery hub. The country wants to expand its role as a major source of nickel -- used in the batteries -- to also producing other components as demand for greener transport skyrockets across markets like the U.S., China and Europe.

“Investors who will build electric cars in Indonesia feel that they are not competitive enough because the tax rate is not differentiated from plug-in hybrids,” Finance Minister Sri Mulyani Indrawati told parliament in a Monday briefing.

Higher rates will kick in in two years after the battery-powered EV sector realizes investments of 5 trillion rupiah ($347 million), or when it starts commercial production with an investment of the same amount. After this, plug-in hybrids will be taxed at a rate of 8%, while other hybrids will see a tariff of 10%-14%, the draft rules showed.

While Southeast Asia’s largest economy has caught the attention of the world’s major battery makers, the government is also keen to prop up the usage of electric vehicles in the fossil-fuel dependent country, especially where traditional and hybrid cars remain cheaper. Only 120 electric vehicles were sold there in 2020, about a tenth of the sales of hybrids, industry data showed.

Indonesia, among the countries most vulnerable to climate change, has shown renewed focus on reducing its carbon emissions, with the government weighing incentives for clean-energy use and expanding its renewables sector.

“Indonesia can have more opportunities to become a big player in electric vehicles,” said Febrio Kacaribu, head of fiscal policy at the Finance Ministry. “Battery-powered EVs have more impact to reduce gas emissions rather than hybrid ones.”

Meanwhile, lawmakers from various parties expressed reservations about the proposal during the same briefing, saying it might be premature to hike taxes.

The transport sector accounts for nearly 30% of the country’s total emissions, with land transport comprising the bulk of it. Indonesia has committed to reduce its emissions by at least 29% by 2030 under the Paris Agreement.

©2021 Bloomberg L.P.