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The House of Representatives on Wednesday passed a revised law on value added tax and luxury taxes aimed at helping the Islamic banking sector and lower-income Indonesians. Luxury goods sellers, however, fear the new law could see prices for their goods skyrocket.

“Development in business transactions and the change in consumption patterns were the basis for the VAT law amendment,” Finance Minister Sri Mulyani Indrawati told a House plenary meeting.

The tax law revision, to take effect next April, would scrap double VAT taxation in Islamic financial market transactions and lower transfer costs of taxable assets in corporate mergers and acquisitions. VAT on basic foodstuffs such as eggs, milk, fruit, soybeans and meat would also be dropped to make them more affordable.

Meanwhile, the ceiling for the luxury goods sales tax — traditionally for expensive items like high-end cars, jewelry or top-end apartments — would be set at 200 percent of the selling price, against 75 percent currently. The minimum rate remains unchanged at 10 percent.

“The government is fully aware that these changes are required in order to create a better, more competitive economy over the long term, although in the short term this will lead to lower [tax] revenues,” Sri Mulyani said.

A list of goods affected by the VAT and luxury taxes will be issued with the bill’s implementing regulations next week, but local reports are already speculating that high-end cars and upscale residences, including apartments, condominiums and townhouses, would be affected.

Beny Witjaksono, the president director of PT Bank Mega Syariah, welcomed the tax law if it really scrapped double VAT taxations in Shariah trade financing.

However, he told the Jakarta Globe that he believed Shariah lenders, accounting for a tiny fraction of the country’s lenders, would wait for the package details and signs of increasing demand before they raised lending.

Mukiat Sutikno, the managing director of American company General Motors Autoworld Indonesia, expressed disappointment over the higher luxury tax ceiling.

The country’s automotive sector, he said, is already struggling under the global recession as well as a new regulation allowing regional governments to charge an extra tax on car owners buying additional vehicles.

Car sales were down 27 percent in the first eight months of this year from the same period last year.

“I don’t know the details yet, but hopefully, cars with engine sizes below 3,000cc will not be classified as luxury goods. If this happens, we will have another dark time for the industry,” Mukiat said.

Budi Dharmadi, the Industry Ministry’s director general for transportation, said vehicle sellers and producers should not be worried that VAT increases for cars would be excessive.

“The 200 percent is just a range. For those below 1,500cc, the rate [adjustment] is still being calculated,” Bud said. “It won’t jump that high. Expensive cars sold by producers such as Mercedez-Benz that are above 3,000cc are currently taxed 75 percent. This will increase, but that rate is also still being calculated.”

Jakarta Globe