T

he parliament finally approved the government's plan to enforce a local progressive tax on automotive sales on Aug. 18, effectively imposing a 1 to 2 percent tax rate on the first vehicle owned by an individual and 2 to 10 percent on subsequent vehicles they purchase. Simultaneous implementation across all regions should occur in 2011, after data is integrated in 2010.

The automotive industry has strongly opposed this tax, claiming it will hamper the sector's performance and threaten domestic economic growth.

On the flip side, we are of the view that the industry's concerns of potential losses are exaggerated.

To begin with, a statement released by the government showed that the number of individuals who own more than one car account for 20 percent of domestic car owners, or just 10 million.

Of the 240 million people in Indonesia, only 50 million own a vehicle. Thus, while the implementation of the progressive tax may slow car sales, the number of potential first time buyers remains substantial.

Furthermore, the implementation of the progressive tax will be based on individual names and addresses. This creates the potential for high-income individuals to avoid the tax by registering family cars under the names of different family members. If the government set the tax to cover addresses (one car owner per address), then the impact on car sales would be substantial.

In terms of geographic segmentation, the greater Jakarta area accounts for roughly 50 percent of annual domestic car sales. In an effort to combat traffic problems, it is possible that the regional government of greater Jakarta will impose a progressive tax rate of a maximum of 10 percent.

It is worth noting that 10 percent of the revenue coming from the upcoming progressive tax on autos will go towards infrastructure development, to be managed by local governments.

Having said that, even a more moderate tax rate by other regional governments would mean greater budget allocations for the development of regional infrastructure. This, coupled with higher regional economic growth, would create a broader geographical distribution of cars, which would in turn support car volumes over the longer run.

On another note, second-hand car re-registrations would also be taxed by the government at a rate of as much as 20 percent. This means that a US$10,000 tax would have to be paid on a $50,000 second-hand car if the new owner wanted to register the vehicle in their name. We believe this will result in car owners selling their used cars before the law becomes effective.

However, we believe that a silver lining does exist on this new ruling for the automotive sector, as, over the medium term, the high tax on second-hand car re-registrations should create a preference for car buyers to go for new rather than used vehicles.