The lower tax rate is expected to boost production of sedans so the country could ultimately ship the car overseas.

Industry Minister Airlangga Hartarto said his ministry had completed the regulation proposal in the middle of last year and sent it to the Finance Ministry. The discussion was currently ongoing between the two ministries.

“We hope to finish the sedan tax issue at the end of the first quarter,” he said in Jakarta on Thursday.

Separately, Finance Minister Sri Mulyani Indrawati said Monday the tax harmonization policy would be discussed at the next Cabinet meeting. “The President will soon arrange a cabinet meeting so we can make presentation regarding the fiscal instrument and cost structure,” she said.

Currently, under Government Regulation No. 22/2014, the government charges a 30 percent luxury tax (PPNBM) on sedans and station wagons with an engine capacity under 1,500 cc, a 40 percent tax on gasoline engines with a capacity between 1,500 and 3,000 cc as well as diesel engines with a capacity between 1,500 and 2,500 cc.

Meanwhile, for minivans and multi-purpose vehicles (MPV) with an engine capacity under 1,500 cc, the tax is 10 percent. The tax for this car type with an engine capacity between 1,500 and 2,500 cc is 20 percent, and for those with an engine capacity between 2,500 and 3,000 cc it is 40 percent.

Cars with an engine capacity above 3,000 cc are subject to a 125 percent luxury tax.

The rule can be traced back to 1984, when the government introduced the higher luxury tax on sedans in order to push the production of MPVs and the local automotive industry.

As a result, more and more car manufacturers lost their appetite for producing sedans. They moved mainly to multi-purpose vehicles (MPV) and hatchbacks, which are more tax friendly.

“In the 1990s, 19 manufacturers made sedans. Now there are only three: Toyota, BMW and Mercedes-Benz,” Association of Indonesian Automotive Manufacturers (Gaikindo) secretary-general Kukuh Kumara told The Jakarta Post.

He described the tax policy as domestic market-oriented as it encourages manufacturers to produce cars that the Indonesian market needs. However, it diminishes Indonesia’s car export capability as other markets prefer sedans to MPVs.

Minister Airlangga Hartarto said the Australian car market was open as all car manufacturers were stopping production due to rising labor costs. However, Australians, who buy two million cars annually, do not want MPVs.

“Currently, the two million yearly demand for cars in Australia is fulfilled by Japan and Thailand. If we can solve this sedan tax issue and conclude the Indonesia-Australia Comprehensive Economic Partnership Agreement [CEPA] soon, this will be the chance for Indonesia to export cars to Australia,” he said.

He added the export would push car factory use, as Indonesia was capable of producing two million cars annually but production recently had only been between 1.4 million and 1.5 million units annually. Of the production number, the local market only absorbed around one million units.

Kukuh Kumara said the export boost would not happen soon after the new taxation rule had been implemented, as it would take time for local consumers to purchase more sedans, which would motivate producers to manufacture more sedan models domestically.

“This is a long term plan over five years or so, but we hope to see the change quicker than that,” he told the Post.

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