Foreigners Criticize 0 Percent Down Payment Policy For New Vehicles

JAKARTA - The incentive policy for luxury goods sales tax incentives borne by the government (PPnBM-DP) for motor vehicles in the form of down payment (DP) exemption is being criticized by Fitch Ratings.

The international credit rating agency said these steps were insufficient to offset the overall drop in demand given the hit purchasing power of the COVID-19 pandemic.

This is because the tax cuts that the Ministry of Finance plans to implement in early March will be limited by targets with a relatively short period of time. In fact, finance companies and banking financial service institutions will remain selective in lending.

This was the joint statement of three officials of Fitch Ratings Indonesia Senior Analyst - Corporates Felita, Director - Corporates Olly Prayudi, and Associate Director of Non-bank Financial Institutions Roy Purnomo in a press statement last weekend, February 19.

"Cutting car taxes and looser down payment rules are unlikely to have an impact on increasing vehicle sales and demand for financing in 2021," he said.

In Fitch's records, sales of four-wheeled vehicles are around 600,000-700,000 units in 2021, far below 1 million units in 2019 after sales slumped to 532,407 units in 2020.

"We estimate 55 percent of the reduction in vehicle sales volume in 2020 will be for vehicles that are not covered by the tax cut, and buyers of cars under 1,500cc who will be included in the tax cut are typically consumers whose purchasing power is more affected by the pandemic," he said.

Furthermore, the lower car prices from the tax cut will also gradually decrease as the tax reduction drops from 100 percent in March-May, to 50 percent in June-August, and 25 percent in September-December 2021.

Prudent credit guarantees will also provide some support for auto demand until the economy shows signs of improving.

Then, the central bank's policy rate cut recently to 3.5 percent following a series of cuts since 2020, which did not materially encourage car purchases as car financing rates fell only slightly.

"The impact of further reductions in minimum down payment regulations should also be limited, as finance companies are likely to remain selective despite greater interest in making loans compared to last year," he said.

Meanwhile, the tax cuts may provide little impetus for Indonesia's financial and leasing industry. It also may not support a significant shift from used to new cars as the premium price on new vehicles will remain material despite tax savings.

To note, new car financing remains the largest component of industrial lending with nearly 30 percent of financing receivables.

"We expect sales in February 2021 to continue to fall as some consumers postpone their car purchases to benefit from the tax easing starting March 2021," he explained.

Business actors are optimistic

Separately, PT. Astra Daihatsu Motor's Marketing Director and Corporate Planning, Amelia Tjandra, said that as ATPM (the sole agent for the brand), she was very happy if many people could buy vehicles through the tax incentive package launched by the government.

However, he emphasized, the policy of giving 0 percent DP packages is the leasing authority. In addition, not all buyers automatically get 0 percent DP facility.

"Leasing doesn't want those who buy cars not to be able to pay installments, right," she said during a virtual press conference in Jakarta, Friday, February 19.

She also explained that this policy would certainly affect the company's sales. This is because 80 percent of Daihatsu's sales come from credit.

"Daihatsu welcomes all government policies, we hope this policy can be implemented by leasing companies immediately," she said.

Government motivation

The government, through the Ministry of Finance, initiated motor vehicle tax incentives by targeting the ≤ 1,500 cc segment of the sedan and 4x2 categories. This segment was chosen because it is a category that is of interest to the middle class and has local purchases of more than 70 percent.

The tax discount will be carried out in stages until December 2021, provided that 100 percent of the normal rate will be given in the first three months from March 1 to June 30. Then, 50 percent of the normal rate for the following three months, and 25 percent of the normal rate in the third stage for the next four months.

This strategic move is said to have the potential to bring back the sales of passenger cars which have been sluggish due to the impact of the pandemic.

The tax discount is also targeted at increasing the utility of automotive production capacity, boosting middle-class household consumption enthusiasm, and maintaining the momentum for the recovery of economic growth that has become increasingly evident.

"On the consumer side, Eid Al-Fitr' with its homecoming tradition is also expected to increase the purchase of motorized vehicles, which of course can be done if the COVID-19 pandemic has sloped," said the Ministry of Finance as quoted by VOI on Monday, February 15.

The Financial Services Authority (OJK) itself still does not have the courage to talk much about PPnBM-DTP incentives. Through the Chief Executive of Banking Supervision, Heru Kristiyana, the authority only provided a statement that it would accommodate the government's initiative on the tax policy.

"Later we will support and adjust it by lowering the RWA (weighted assets according to credit risk) of motor vehicles with qualifications," he said.

Although the OJK does not specify when the regulation will be released, it is certain that the regulation in question will be completed this month considering that the implementation of PPnBM-DTP for motor vehicles will take effect on March 1.

Meanwhile, Bank Indonesia (BI) clearly supports the tax collection policy by transmitting it in the form of eliminating down payments.

BI Governor Perry Warjiyo has even agreed that a down payment of at least 0 percent is applied to all types of vehicles.

"Loosening the provisions for down payment for motor vehicle credit/financing to at least 0 percent for all types of new motorized vehicles, to encourage credit growth in the automotive sector while still paying attention to the principles of prudence and risk management, effective March 1, 2021, to December 31, 2021," he said in a virtual press conference, Thursday, February 18th.