Indonesia is considering a 'luxury tax' on all mobile devices rather than just high-end smartphones in an attempt to boost local manufacturing. BMI forecasts show smartphones will continue to increase as a percentage of the overall mobile unit sales in Indonesia and believes the higher tax may lead to a larger grey market for the most popular devices.
A possible 20% tax on devices over IDR5mn (USD442) was under consideration in October 2013, even after the existing tax on imported consumer goods rose to 7.5% from 2.5%. The smartphone will join other products such as luxury cars, perfume and musical instruments at the higher tax rate. The government first announced its plans in relation to smartphones only, saying the increase would boost tax revenue and decrease the trade deficit. However, the Jakarta Post suggested on April 7 that all smartphones would be considered luxury goods and be subject to the tax.
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Indonesia is home to major handset manufacturer Foxconn, which agreed in February 2014 to invest USD1bn in a smartphone manufacturing unit in the country. The company will certainly benefit from any move that increases the price of handsets in Indonesia as the tax hike is expected to encourage greater growth in the local market. The government's decision to encourage greater sales of locally-produced smartphones through taxation may have been an important factor in the manufacturer's decision to locate in Indonesia.
The opportunity gained by Foxconn will be significant, with 12.03mn smartphones sold in Indonesia in 2013, according to BMI's Consumer Electronics Industry database. We expect this to rise to 35mn in 2018, as 3G and 4G networks expand and consumers are increasingly accustomed to using smartphones and data connections for many different types of services. However, the decision to add to tax offers considerable downside potential to our 3G and 4G subscriber outlook as well as the smartphone sales projection.
The Indonesian population is the fourth largest in the world and one of the Asian region's most significant markets for ICT development. While the development may boost state coffers, BMI believes greater and longer term impacts will include an increase in the grey market as well as lower revenues for mobile operators, which in turn will pay lower tax on their profits. The decision could also affect further developments of mobile services such as mobile health services, mobile financial services and mobile commerce, depriving the country of major developments alongside its regional peers.