Government bans new cigarette firms from starting new operations

Rendi A. Witular, The Jakarta Post, Jakarta

The Directorate General of Customs and Excise has temporarily banned existing cigarette companies from setting up new subsidiaries or new players from entering the industry, amid allegations of rampant excise evasion and fraud.

Director General of Customs and Excise Eddy Abdurrahman said that the directorate had been withholding operating licenses for new cigarette companies since January this year, because there was an indication that they were established to evade excise.

"We have decided not to grant operating licenses to those firms until we are sure that the fraud has been eliminated or reduced," said Eddy after a hearing with House of Representatives Commission IX for finance on Tuesday.

Based on the existing regulations, cigarette companies need the prior approval of the directorate and the Ministry of Trade and Industry to operate. The companies cannot operate unless they receive an excise register number issued by the directorate.

Eddy said that the directorate would not issue operating licenses for new cigarette companies, even if they had received a go-ahead from the Ministry of Trade and Industry. The policy would be applied to either existing cigarette companies planning to establish new subsidiaries or new small- scale players wishing to enter the industry, he said.

Eddy explained that recently there was an indication that large and medium-scale cigarette companies established a new small subsidiary in order to evade excise, as the latter was based on a company's scale of business.

The larger the company, the more it has to pay in excise.

According to Eddy, currently the directorate had difficulty in supervising such companies because of their huge numbers and vast proliferation. Most are located in Central Java or East Java provinces.

He said that some of the companies had also faked their excise labels to avoid paying higher excise.

The directorate estimated that the excise evasion and fraud had caused the state to suffer at least Rp 1 trillion (US$119 million) in losses of excise revenue a year.

Some 98 percent of excise revenue comes from the cigarette industry, with the liquor industry contributing the remainder.

Under the state budget, the government has set a Rp 27.7 trillion excise revenue target for 2004, up from Rp 26.3 trillion last year.

The government pledged not to raise excise rates on cigarettes this year to allow the industry to recover from a slump.

As the excise rate will be frozen this year the government can only expect to benefit from an increase in excise revenue if there is an increase in the number of smokers and drinkers.