New excise tax affects regular cigarette prices

New excise tax affects regular cigarette prices

JAKARTA (JP): The newly applied cigarette excise tax scheme
puts makers of regular cigarettes at a disadvantage as it
eliminates their control over retail prices, an analyst said here
on Monday.

David Jap of Trimegah Securindolestari said the new rule would
force makers of regular cigarettes to raise their retail prices,
likely making their products less competitive.

"Under the new scheme, they must follow government-set retail
prices. In other words, they must increase their retail prices.
This will lead them to head-on competition with clove cigarette
makers," he told The Jakarta Post

He said makers of regular cigarette previously sold their
products at much lower prices than clove cigarette makers.

The clove cigarette industry has experienced three price hikes
since November 1997 as regulated by the government, Jap said.

The Indonesian government adopted, beginning on April 1, a new
cigarette excise tax scheme which unifies the tax ruling on
machine-rolled clove cigarettes and machine-rolled regular
cigarettes.

Under the scheme, excise tax on machine-rolled clove and
regular cigarettes produced by big companies and with a minimum
retail price of Rp 225 (2.5 U.S. cents) per cigarette is 36
percent.

The excise tax on machine-rolled clove and regular cigarettes
produced by medium-size companies, with a minimum price of Rp 180
per cigarette, is 30 percent. A 28 percent excise tax is imposed
on similar cigarettes if their per cigarette prices are between
Rp 150 and Rp 175.

The ministry imposes a 22 percent tax on machine-rolled clove
and regular cigarettes made by small companies, with prices
between Rp 130 and Rp 145 per cigarette. A 20 percent tax is,
however, tagged for similar cigarettes that sell for between Rp
110 and Rp 125.

For hand-rolled cigarettes, the government imposes a 16
percent excise tax for those produced by big companies and a
minimum per cigarette price of Rp 150.

For hand-rolled cigarettes made by medium-sized companies with
prices ranging between Rp 100 and Rp 145, the tax is 8 percent,
while tax on hand-rolled cigarettes produced by small firms, with
prices ranging between Rp 10 and Rp 95, is 4 percent.

Adi Harnadi, secretary-general of the Association of
Indonesian Cigarette Producers, said the impact of the new
regulation should not be too big on makers of regular cigarettes
because they would not have to change their prices at once.

"There is a transition period of between two and three years
for them to adjust their retail prices. That will help them much
in adapting to the new scheme," he told the Post.

Large-scale producers of regular cigarettes have been given a
two-year transition period in which they will be able to adjust
their prices by 60 percent during the first year, he said.

While medium and small-scale manufacturers have been given a
three-year transition that will enable them to adjust their
prices by 45 percent in the first year, he added.

"It is the first time the government has applied the same
regulation regarding excise tax and retail price to both makers
of clove and regular cigarettes," Adi said.

Previously only clove cigarette makers had to follow
government-set prices, he said.

Adi said the new regulation had narrowed the price gap between
clove and regular cigarettes.

"Previously, a medium-scale regular cigarette maker could sell
one cigarette for only Rp 50, while a medium-scale clove
cigarette maker had to sell his for Rp 175 each," he said.

"But that's not regular cigarette makers' fault because they
were only following the regulation," he said.

Adi said the new scheme also simplified the categorization of
cigarette manufactures from four groups comprising large, medium,
medium-to-lower and small-scale to three groups by eliminating
the medium-to-lower scale. (cst)