Indonesia Issues New Tax Incentives to Spur EV Production and Sales

Indonesia’s Ministry of Finance issued new tax incentives to spur electric vehicle production and sales in the country.

The incentives include a removal of the luxury tax on EVs for 2024, the waiver of import tax until 2025, and a reduction in value-added tax on the sale of EVs.

Indonesia is looking to take advantage of having the world’s largest deposits of nickel to develop an integrated domestic electric vehicle supply chain. The government has an ambitious target to become the third largest producer of electric battery in the world by 2027 and produce approximately 140GWh per year of EV battery capacity by 2030.

Further, Indonesia is also targeting to produce 600,000 EVs by 2030.

VAT incentives for local content production of EVs

Consumers who purchase an electric car that has more than 40 percent of its components produced in Indonesia will be afforded a value-added tax (VAT) reduction from 11 percent to 1 percent. This tax break is applicable until December 2024.

The local content requirement will gradually increase to 60 percent by 2027.

Electric buses that are built with between 20 and 40 percent local components will be entitled to a five percent VAT subsidy and so consumers will only pay a VAT rate of six percent.

Luxury sales tax incentive

Companies that import certain completely-built-up (CBU) four-wheeled EVs will be eligible for luxury sales tax exemption as well as import duty exemptions. Further, companies that deliver completely-knocked-down (CKD) four-wheeled EVs will also be eligible for luxury sales tax exemption, however, these vehicles must have been built with between 20 and 40 percent local components.

In addition, businesses must adhere to the investment criteria to be eligible for the incentives. These include:

• Building an EV manufacturing facility in Indonesia;
• The company must build a manufacturing facility to produce internal combustion engine vehicles in Indonesia whose production will transition to EV vehicles either partially or wholly; and/or
• The company invests in an existing EV manufacturing facility to increase production and produce new products.

The facility will be available until December 2024.

Indonesia’s electric battery industrial strategy

Foreign investors will find investment opportunities throughout Indonesia’s EV supply chain, whether it’s investments in nickel smelters or establishing manufacturing operations for EV batteries and vehicles. The country is ambitiously charting its course within the EV industry, aiming to achieve 2.5 million EV users by 2025.

Indonesia holds the world’s largest nickel reserves with an estimated 21 million tons, which roughly accounts for 22 percent of global reserves. The country is also the world’s top producer of metal, with production hitting 1 million tons in 2021.

Although 70 percent of all nickel usage goes towards the stainless-steel sector, there is increasing demand for the manufacture of EV batteries. This demand from electric batteries is expected to account for one-third of total nickel demand by 2030, particularly as countries worldwide look to lower carbon emissions and meet their net-zero targets. As such, Indonesia is aware of the huge economic opportunities this provides and is focused on increasing production capacities along the EV supply chain and becoming an EV battery production hub.

Global EV makers, which include US’s Tesla and China’s BYD, are said to be finalizing deals to invest in Indonesia. Moreover, to complement its nickel-based battery industry, the country is also developing lithium refineries and anode material production facilities. Historically, Indonesian nickel smelters are equipped to produce Class 2 nickel (ferronickel/pig iron) while battery cathode production requires Class 1 nickel that contains at least 99.8 percent nickel.

However, Indonesia lacks rich deposits of lithium. Australia supplies approximately half the world’s lithium and can export this mineral to Indonesia. Most of Australia’s lithium exports currently head to China.

Indonesia’s Minister for Maritime Affairs and Investment, Luhut Binsar Pandjaitan, stated that the government planned to import 60,000 tons of lithium from Australia starting in 2024.

Conclusion

In conclusion, Indonesia’s proactive stance towards incentivizing electric vehicle (EV) production and fostering a robust domestic EV supply chain underscores its commitment to leveraging its abundant natural resources and strategic advantages. By offering tax breaks, exemptions, and incentives, the government aims to attract both domestic and foreign investment, positioning Indonesia as a key player in the global EV market.

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