Therefore, the government has announced a plan on the harmonization of sales tax on luxury goods (PPnBM) such as cars to control emission by reducing car production on a high carbon emission vehicle.

Whilst, consumers of low-carbon emission vehicle (LCEV) will get incentive by paying lower sales tax, the government expects to boost LCEV production and at the same time cut emission. However, the sales tax harmonization on luxury goods is considered unfit and ineffective in Indonesia for some reasons.

The tax harmonization consists of increasing or reducing tariff based on the amount of emission produce. First, due to the characteristic of cars as an elastic goods, the higher sales tax will raise the deadweight loss.

If the sales tax increases, the market will suffer the deadweight loss in the form of decreasing of equilibrium trading. According to the Industry Ministry’s proposal, certain types of cars will be subject to sales tax of between 10 and 40 percent (e.g. passenger cars with less than 10 people, which emit more than 250 g/km CO2).

As the increase in car prices due the higher taxes could encourage the people to find another cheaper option such as motorcycles. As an illustration, the number of motorcycle in Indonesia has reached for more than 100 million with an 80 percent proportion of total vehicles (Statistics Indonesia, 2017). Finally, the deadweight loss will increase since both the government will not get tax revenue from the decreasing of cars trade and car manufacturers will loss profit from normal

cars.

As the consequence, the GHG emission from motorcycle will also increase significantly due to increasing number of motorcycles and lack of emission control. At last, consumers may also lose the convenience in riding a car because they substitute it with a motorcycle.

Public policy research also found that for every US$1 extracted in taxes, a $1.35 burden falls on the economy. Regulatory function of sales tax to cut negative externalities will not work here and excess burden will appear.

Evidently, the negative impacts also occur when government harmonizes tariff by reducing it. When incentive for cars emitting below 250 g/km CO2 is not in the optimum value, it can cause inefficiency to the market. These inefficiencies are in the form of tax revenue losses and traffic problem due to the increasing of cars purchase.

In other hand, manufacture might bear the raise of cost production due to the LCEV high cost for research and development. According to the Association of Indonesian Car Producers (Gaikindo) the research and development costs for LCEV are approximately Rp 4.5 trillion. Comparing with the tax benefit, manufacture might choose to cancel producing LCEV and pay normal tax than take the incentive.

The positive Marginal Social Benefit (MSB) from the harmonization of sales tax might never be realized. Consumers have no incentives to cut the amount of pollutant because there is lack of ongoing supervision. Furthermore, customers feel the benefit only once when buying the vehicle. Then, without the right maintenance and driving behavior control, the emission will still increase.

World Resource Institute stated that the largest CO2 emission in Indonesia is produced by industry. By regulating just one aspect of determinant will not give impact to the emission reduction in Indonesia.

While, the harmonization for sales tax for only cars to control emission is considered unfair and inefficient. If the purpose to cut GHG is not achieved, Indonesia will infringe the Paris Agreement. As a country joining Intended Nationally Determined Contributions (INDCs), Indonesia committed to reducing GHG emission by 41 percent below the 2030 business-as-usual (BAU) scenario.

To deal with this condition, the government needs to consider the most proper tax policy. Pigovian taxes have long been applied as the most effective strategy to control negative externalities in other countries. Government can apply few schemes of Pigovian taxes. Philosophically, Pigovian tax is more suitable than sales tax for luxury goods because the latest is used for taxing luxury things to reduce inequality than control negative externalities.

First, instead of harmonizing sales tax, government could apply excise based on maximum emission limit. Excise and sales tax for luxury goods should be totally exempted for cars when engine produce emission below the maximum limit. In the final proposal of the Industry Ministry, the LCEV type hybrid and engine flexi cars are still being taxed at a rate of 2 – 5 percent. In fact, LCEV emission is lower than the common vehicles.

To anticipate decreasing in tax revenue, government could cover it from high excise which is imposed to the high emission cars. Hence, it works such as subsidy from the disobedient to the obedient manufacturer. As a note, the optimum level of emission should be counted considerably to avoid excess burden.

Second, the government could apply another Pigovian tax scheme by imposing emission tax for vehicle owners. The emission tax is levied for the vehicle owner based on the emission rate which can be measured by type of machine and engine. The higher emission produces, the higher tax should be paid by the owner. Thus, it will directly control people behavior to cut emission. People can choose abatements such as repairing vehicle attributes, maintaining engine, or reducing driving miles so that they can pay less for tax.

Third, in order to cut emission from industry as the largest factor of GHG, government could levy carbon tax for the firms. A number of countries have introduced such tax scheme. Singapore, for example, has imposed carbon tax at $5 per ton of emission since 2019.

In conclusion, harmonizing sales tax on cars based on emission can cause unfairness and increase deadweight loss because it just touches one determinant. The government should considering Pigovian taxes which has been proved effective in many countries. By combining few schemes of Pigovian tax altogether, manufacturer, consumer and industry will strive inline reducing emission.

***

The writer is an employee of public relations at the Directorate General of Taxes at the Finance Ministry. The above views are personal.

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