Automotive Sales at Risk as Government Plans 12% VAT in 2025

Jakarta is bracing for a significant shift in the automotive market as the government announces plans to implement a 12% value-added tax (VAT) in 2025. This move is expected to drive up vehicle prices, potentially dampening consumer enthusiasm and reducing sales across the sector.

Impact of the 12% VAT on the Automotive Industry

The introduction of a 12% VAT is stirring unease among automotive manufacturers and consumers alike. With prices set to rise, many fear that the affordability of vehicles will be compromised, leading to a downturn in sales figures.

Hyundai Motors Indonesia is among the first to voice concerns. Budi Nur Mukmin, the company’s Chief Marketing Officer, shared his apprehensions: “This new policy undeniably presents new risks to the market. We are still assessing its impact on sales. It adds pressure to an already challenging environment.” The company is currently awaiting further details on the policy’s implementation to better strategize their response.

The looming VAT hike comes at a time when the Indonesian automotive market is already grappling with high non-performing loans (NPL), which could further strain consumer financing options. Hyundai anticipates that the four-wheeled vehicle market in Indonesia could see a decline of up to 8% as a result of the new tax.

In response to these challenges, Hyundai is diversifying its offerings by introducing new models like the hybrid Hyundai Santa Fe, aiming to sustain consumer interest despite the anticipated price hikes.

Manufacturers’ Strategies to Mitigate VAT Effects

Automotive manufacturers are scrambling to find ways to cushion the blow of the impending VAT increase. Astra Honda Motor (AHM), a leading two-wheeler manufacturer, is actively adjusting its strategies to stay afloat in this changing landscape.

Octavianus Dwi, AHM’s Marketing Director, stated, “We will adjust the selling price every year to align with regulatory changes and market demands.” This proactive approach is aimed at maintaining competitiveness and ensuring that their products remain attractive to consumers despite the added tax burden.

• Product Diversification: Launching new models that cater to different market segments to attract a broader customer base.
• Flexible Financing Options: Enhancing financing packages to make vehicle purchases more manageable for consumers facing higher costs.
• Cost Optimization: Streamlining production processes to reduce costs and minimize the impact of increased taxes on final prices.

These strategies reflect the manufacturers’ commitment to navigating the challenging market conditions brought about by the new VAT policy.

Government’s Stance and Future Projections

President Prabowo Subianto has clarified that the 12% VAT will be applied selectively, primarily targeting luxury goods such as cars and motorcycles. He emphasized that basic necessities will remain exempt to protect the general population from undue financial strain.

“We will implement the 12 percent VAT policy, but selectively, only for luxury goods. For the rest of the population, we will continue to protect them,” Prabowo affirmed.

This selective approach aims to balance the need for increased government revenue with the necessity of safeguarding essential commodities. However, the automotive sector, being a significant part of the luxury goods market, will bear the brunt of this tax hike.

Potential Market Adjustments:

As the market adjusts to these changes, both manufacturers and consumers will need to navigate the new economic landscape carefully. The coming years will be crucial in determining how effectively the automotive industry can adapt to the increased tax burden and maintain its growth trajectory.