Indonesia has unveiled a new set of incentives to promote the sales of domestically produced and imported electric vehicles (EVs) in a bid to become Southeast Asia’s primary EV market and manufacturing center.
As per a Reuters report, the new regulations, released on Tuesday evening, “will eliminate luxury tax on EVs for the fiscal year 2024 and import tax until the end of 2025.” The rules will also reduce value-added tax from 11% to just 1% for EV buyers this year, extending a tax break that had expired at the end of last year.
The incentives are designed to boost domestic demand for EVs by narrowing the price difference between EVs and traditional vehicles. The government hopes this will encourage foreign investment in local EV production facilities. Indonesia has ambitious goals: President Joko Widodo has set a target of having EVs account for 20% of all car sales by 2025, and the government aims for 600,000 EVs to be domestically produced by 2030, exceeding the total number of cars (505,985) sold in the first half of this year.
Rachmat Kaimuddin, deputy coordinating minister overseeing EV sector development, expressed hope that “these efforts can result in even more products and make them more affordable.”
All of this supports Indonesia’s plan to position itself as an EV production hub, capitalizing on the country’s significant nickel reserves, which are essential for EV batteries. EV adoption also brings additional benefits, such as reducing air pollution in Indonesia’s cities and lessening the burden of fuel subsidies.
Subsidies for the purchase of EVs were first announced in December 2022 and came into effect the following March. They cover sales of 200,000 electric motorcycles and 35,900 electric cars, as well as the conversion of 50,000 combustion engine motorcycles to electric propulsion systems.
Jakarta has also introduced a range of incentives for foreign EV manufacturers to invest in production facilities in Indonesia. According to a policy announced in December of last year, automakers investing in EV plants, or planning to invest, would be eligible for tax incentives on imports of completely built-up EVs until 2025, including the removal of import duties and the luxury goods sales tax on imported vehicles. The latest announcement underlines the government’s determination to lead Southeast Asia’s EV production race.
Despite government incentives, the effect of the subsidies on EV adoption has been less than expected. EVs remain expensive even after subsidies are applied, and the limited recharging infrastructure, particularly in urban areas, has hindered uptake. According to Fitch Ratings, EV penetration reached 4.6 percent in June 2023, up from 2.0 percent in 2022, but “a major shift to fully electric models is unlikely, due to the narrow applicability of government incentives and a lack of EV options below IDR300 million [around $19,200].”
Indonesia also faces challenges in attracting investment from foreign EV manufacturers, with the country historically relying on investment from leading Japanese automakers and struggling to attract leading EV manufacturers such as Tesla and BYD from China. To encourage local battery production and meet the requirements for tax incentives, a deadline was set for companies to produce at least 40% of the content of EVs sold in Indonesia, from 2023 until 2026. As of July, only two electric vehicle models – the Hyundai IONIQ 5 and Wulling Air EV – had qualified for the tax break, according to Fitch Ratings.