The overall progress of tobacco tax policy implementation:
- Relationship between tobacco taxes, price and public health
The Ministry of Finance (MOF) has increased tobacco excise rates annually. When the cigarette production is high, the government will consider increasing excise tax to be as high as the inflation rate. Nevertheless, the main objective of raising tobacco taxes is to increase revenue. The Ministry of Finance Regulation 198/PMK.010/2020 on Tobacco Excise Tariff was signed on 15 December 2020 and officially implemented from 1 February 2021 onwards which raising about 12.5% of tobacco tax rates. The excise tax increases aim to:
- controlling consumption,
- eradicating illegal cigarettes,
- sustaining the labor market, and;
- raising state revenue from excise tax
- Structure of tobacco taxes (ad valorem, specific, mixture of both, minimum taxes, other taxes on tobacco goods)
Indonesia has a complicated tiered specific (per stick) tobacco excise tax system with different (currently 10) tax rates applied on different tobacco products based on type of tobacco product (kretek/non-kretek), method of production (machine-made/handmade), production volumes, and banderol price (HJE) (Table 1). In addition, the retail price (called “Harga Jual Eceran” or “HJE”) of each type of tobacco product is set by the government. Besides excise tax, other types of taxes applied on cigarette products are value-added tax (VAT) (8.4% of HJE) and local cigarette tax (10% of excise).The MOF has attempted to simplify the tobacco tax tiers, very slowly reducing the number of tiers from 19 tiers in 2009 to 10 tiers in 2021.
- Level of tax rates to apply
Table 1: Comparison of 2020 and 2021 Tobacco Excise Tax Rates
(SKM: Machine Made Kretek, SPM: Machine Made White Cigarette, SKT: Hand Made Kretek)
On average, tobacco tax as a percentage of retail prices in Indonesia is 63.50%. Indonesia has an excise policy roadmap covering the years 2007-2020 that specifies the target tobacco tax rate and revenue targets but has not been regulated yet. The government monitors tax structures quarterly in order to achieve its fiscal objectives by:
- Monitor the data of stamp order and production every month
- Monitor the HJE
- Comprehensiveness/similar tax burden for different tobacco products
Cigarettes are taxed differently based on type of tobacco product (kretek/non-kretek), method of production (machine-made/handmade), production volumes, and banderol price (HJE). There are currently 10 tobacco tax tiers with different tax rates. The hand made white cigarette (SPT) tax tier was merged with the hand made kretek (SKT) tax tier. However, the machine made kretek (SKM) cigarette manufacturers pay a higher tariff than do kretek cigarette manufacturers; machine-made cigarettes pay higher tariffs than hand-made cigarettes; and the small-scale cigarette industries pay lower excise tariffs than their big-scale counterparts. This system provides opportunities for consumers to switch from high-priced to equally harmful lower-priced cigarettes and thereby hinders the impact of increasing the excise tariff to decrease consumption.
In Indonesia, only the manufacture and import or export of tobacco products and manufacturing equipment are licensed (according to Excise Law no. 39 2007). Growing of tobacco, transporting commercial quantities, wholesaling, brokering, warehousing, distribution, and retail of tobacco and tobacco products or manufacturing equipment are not licensed. However, transporting license is enforced if the tobacco products are protected from paying excise tax. Technically, there is a document named CK5 that protects the products which excise is not yet paid. During transporting process, the product will be sealed. This is regulated in Law No. 39 / 2007 verse 8 and 9.
- Warehouse system/movement of excisable goods and tax payments
There is no warehousing regulation. The points of excise tax collection are at manufacture and importation, Producers are required to order excise stamps from MOF on days 1-10 of each month for claiming and use in the following month. The law requires tobacco companies to report production and/or sales volumes by brands, prices by brands, and taxes due and paid, but not volumes of raw material inputs. The information reported by the industry is not disclosed to the public.
- Anti-forestalling measures
The new excise tax rate is usually announced in October and is implemented in January of the following year. MOF enforces the sticking limitation. After the excise increase is announced, the excise sticking is limited within 1 month after the new excise rate announcement.
- Fiscal markings
Law PMK No. 108 / 2008 regulates tax stamps in Indonesia. There are 3 types of stamps, one each for hand-rolled, machine-made, and other types of cigarettes. The stamps have different holograms, colors, designs, and other security features, which help identify illegal (tax unpaid) products which are identified by the following characteristics: misapplied stamp (e.g. the machine-made cigarette stamp is applied on the hand-rolled cigarette pack), re-used stamp, and no stamp. Nevertheless, Indonesia does not have a tracking and tracing system. There is also no standard pack size policy; the government only regulates the number of sticks in each pack and the package design (production code, company name, brand, etc.) according to Minister of Finance Decree no 62, 2014.
Tax enforcement is done by the Excise Directorate of MOF. Law number 39/2007 clearly specifies the rules and penalties for violations, such as administrative fines and imprisonment. Besides that, the Excise Directorate has an enforcement board in enforcing and investigating every excise branch office in Indonesia; this unit is known as Enforcing and Investigating Unit. Information sharing and coordination among enforcement agencies (police force and local governments for conducting cross-data, joint analysis, and/or joint audit) is always done in accordance to the national law.
- Use of revenues – financing of tobacco control
Some local governments receive 2% of tobacco excise sharing revenue to finance public health program. However, 50% of the revenue is dedicated to support social health insurance program. The other 50% would be used for improving community welfare, in particular tobacco farmers. Thus, budget for tobacco control program would be a very small part.
Another source of fund for tobacco control program is from local cigarette tax (10% from the excise tax). Half of the revenue is dedicated to public health and law enforcement in tobacco control activities.
However, during COVID-19 pandemic, the central government allowed the local governments to utilize the tobacco excise sharing revenue (health allocation) for activities related to combat COVID-19 pandemic.
- Tax-free/Duty-free sales
The Minister of Finance Decree allows duty-free cigarette importation by international travelers, with the maximum amount of 200 sticks. Indonesia does not apply excise taxes on tobacco products sold in tax- or duty-free stores.
- Protection of tax policies from vested interests
There are no policies in line with WHO FCTC Article 5.3 to protect tobacco tax policies from tobacco industry interference. Verse 6 of Excise Law no 39, 2007 states that the government needs to listen to inputs from the industry through public hearing and discussion with related stakeholders; therefore, the MOF consults tobacco companies when developing tax policies.
Uang yang hilang: Studi kesenjangan penerimaan cukai tembakau di Indonesia PDF 3.1mb (Bahasa)
This report assesses the magnitude of fiscal shortfalls in Indonesia that is missing out on collecting more tobacco tax revenue due to the failure to raise tobacco taxes to the recommended levels, reduce the affordability of smoking, and/or remove complex tax structures. The key findings include: the tax revenue gap in Indonesia is especially large in 2021, because the government did not increase taxes on the hand-rolled kretek cigarettes in this year and continued with its complicated tax system of 10 tiers.