Govt turns to smokers to boost revenue

Urip Hudiono, The Jakarta Post/Jakarta

Attempting to strike two birds with one stone, the government will raise the retail price of cigarettes by up to 20 percent to increase state revenue from excise as well as discourage smoking in the country, the finance minister said.

The price increase could mean that the government is turning to smokers to help balance a likely ballooning of fuel subsidies that could result in a widening of the budget deficit.

Minister of Finance Jusuf Anwar said on Friday the government was planning to raise cigarette prices by between 15 percent and 20 percent so it could meet the excise revenue target.

"We will not raise excise tariffs this year, but raise the retail price of cigarettes instead," he said. "We expect to be able to do this starting July, and that will help increase excise revenue."

Under the prevailing excise law, the government sets the minimum cigarette retail price as a benchmark to charge excise duty, so raising the base price would boost excise revenue. It kept cigarette retail prices unchanged last year to boost sales after an aggressive increase in 2003 saw lower consumption.

As stated in the revision for the 2005 state budget, the excise revenue target was increased to Rp 31.4 trillion (US$3.3 billion) from a previous target of Rp 28.9 trillion. The ministry recently reported that excise revenue had as of May reached Rp 10.54 trillion.

Jusuf further expected that the price increase would also discourage smoking, to which some 70 percent of the country's 220 million population are addicted.

"The price hike will be among our commitments for the Framework Convention on Tobacco Control (FCTC)," he said, referring to an international smoking-reducing treaty that came into effect in February. In several FCTC-compliant countries, smokers are indeed compelled to dig deeper into their pockets to satisfy their habit.

Jusuf said, however, that the government would be cautious in implementing the price hike, to avoid hurting consumption and the tobacco industry, which accounts for 90 percent of excise receipts.

"We will carefully study at what level the price hike would not significantly affect consumers' purchasing power," he said.

"I have also discussed with the Ministry of Industry the possible effects on production costs and the employment capacity of the tobacco industry."

Nevertheless, share prices of the country's largest cigarette maker, PT Gudang Garam, fell 4.6 percent to Rp 13,450 when the news broke.

Similarly, share prices of rival PT HM Sampoerna also dropped 1.8 percent to Rp 8,200, with the Jakarta Stock Exchange Composite Index gaining only slightly by 0.7 percent to 1061.50 points.