Proposal for Cheap Cigarettes Deemed Likely to Expand Access and Reduce State Revenue
A proposal to provide space for the industry to produce cigarettes for the middle-to-lower segment is considered to have the potential to expand the circulation of cheap cigarettes and reduce the optimisation of state revenue from tobacco excise.
The prevalence of illegal cigarettes and the downtrading phenomenon remain a concern for several parties. The issue resurfaced after Commission XI member of the Indonesian House of Representatives (DPR RI), Andi Yuliani Paris, proposed allowing cigarette entrepreneurs to produce cigarettes for the middle-to-lower segment.
Andi proposed the implementation of a special cigarette excise for that group as well as increasing the production threshold to above 3 billion sticks per year. According to her, the availability of more affordable cigarettes could be one measure to suppress the circulation of illegal cigarettes.
However, Project Lead for Tobacco Control at the Center for Indonesia’s Strategic Development Initiatives (CISDI), Beladenta Amalia, assessed that such an approach would instead potentially broaden access to cheap cigarettes.
According to Beladenta, raising the production limit for the machine-made cigarette group with a lower tariff would allow more companies to remain in the low excise bracket despite their increased production capacity.
“If they can produce much more at a fairly low excise rate, that would certainly further multiply the presence of cheap cigarettes on the market,” she said.
Beladenta also assessed that the policy could reduce the optimisation of state revenue from tobacco excise. The more producers that remain in the low tariff bracket, the greater the potential revenue that would not be achieved.
Currently, the excise tariff for machine-made kretek cigarettes (SKM) is divided into two tiers. Tier 1 is subject to a tariff of Rp1,231 per stick, while Tier 2, with a production limit of up to 3 billion sticks, is subject to Rp746 per stick. The difference between the two tariffs reaches Rp485 per stick.
“This would actually be detrimental from a revenue perspective because the potential to obtain greater revenue is not achieved. And this has been evident over the last two years,” she said.
A similar view was expressed by the Head of the Center of Human and Economic Development (CHED) at ITB, Roosita Meilani Dewi. According to her, raising the production limit in the low tariff bracket would give large manufacturers more room to market cheap products without moving to a higher tariff.
“Raising the production limit in the low tariff bracket will allow large manufacturers to flood the market with cheap cigarettes without needing to move up to a higher excise bracket. This will worsen the downtrading phenomenon and trigger a surge in consumption,” she said.
Roosita assessed that the parties who would benefit most from the policy are cigarette companies currently near the production threshold and potentially moving into a higher tariff bracket.
“The biggest beneficiaries are large cigarette corporations that get an incentive not to move up to Tier 1,” she stated.
Therefore, Roosita urged the government to prioritise excise policy reform through tariff structure simplification and stronger law enforcement against illegal cigarettes.
“The government’s main priority should be simplifying the excise tariff structure and narrowing the price gap between tiers, not loosening the production limits,” she concluded.