Indonesia moved to reduce the tariff imposed on electronics products last week in an effort to crack down on contraband goods while promoting sales of locally produced items.
The directorate of taxation announced a reduction of the luxury tax on electronic products on February 27. This means that those higher value added goods that used to be taxed at 20% will be taxed at 10%, while those goods that were taxed at 10% would be exempt. The proposal is awaiting final approval from the finance ministry.
The move is a step forward in the government's struggle against contraband goods, particularly small electronics such as mobile phones and music players. Black market goods tend to be 30% cheaper on average than legal counterparts. According to the ministry of internal affairs, an estimated 40% of electronic goods on the Indonesian market are contraband, imported from producers in China and Vietnam.
However, the government hopes that with lower taxes on electronics, there will be less appeal for smuggled items, which carry neither guarantee nor service back-up. Domestic manufacturers have approved the move, hoping it will help their products sell.
"Due to our high taxes, locally manufactured products cannot compete with those imported from abroad," Rachmat Gobel, president director of PT Panasonic Gobel, said on February 20.
While the move to decrease the tax is generally popular among manufacturers, some have suggested the government should move to a flat rate, rather than using different brackets for different goods. Larger electronic products, such as certain flat-screen televisions, are currently taxed at a higher rate than smaller ones.
"Many countries in the region have a luxury tax on consumer goods," the head of an Indonesian consumer goods company told OBG. "But the priority should be to have a flat tax rather than catering it to different models. This would level the playing field."
The tax relief is expected to help alleviate steeper price tags due to growing strain on the cost base of local producers, resulting from high prices for oil, metals and plastics. The Electronics Marketer Club (EMC) has estimated the price increases imposed by producers to be between 5% and 10% since the end of last year.
Despite such pressures, domestic sales are forecast to grow by a minimum of 10% per year into the near future, according to Gobel. Total sales of electronic goods reached Rp15trn($1.7bn) in 2007, with televisions (40% of total sales), refrigerators (23%), air conditioners (18%) and washing machines the top sellers, according to Handojo Soetanto, secretary-general of the EMC.
Stefanus Indrayana, marketing director for Samsung Indonesia, said his company was targeting between 15% and 20% growth for 2008 in sales. Penetration rates are still low: only 50% of Indonesia's 60m households own a television set.
The ministry of industry has set a target for local production to meet 90% of domestic demand by 2025. Investment in the electronics industry achieved an 11% growth rate in 2007 year-on-year, to reach Rp411bn ($45m).
"Investors into manufacturing in Indonesia should focus on the domestic market first, because at the moment it is not an economy turned towards exports," a senior Asian banker based in Jakarta told OBG.
Nevertheless exports are predicted to remain steady during the coming years. Abdul Wahid, director of electronics industry affairs at the ministry of industry, has forecast total value of export sales for electronics to reach between $7.5bn to $8bn in 2008. Electronics exports came in at an estimated $7.6bn in 2007.
Although Indonesian exports may face difficulties in traditional markets, due to slowing growth in Europe and North America, analysts expect that emerging markets in Asia, Africa and the Middle East should compensate for any lag in demand.