New excise tax law

The Jakarta Post ,  Jakarta   |  Tue, 07/24/2007 11:46 AM  |  Opinion

The maximum consumption surcharge on tobacco products in Indonesia will increase from 55 percent to 57 percent of their retail prices, and on other goods, either locally made or imported, from 55 percent to 80 percent under the new law on excise tax approved by the House of Representatives last week.

Yet more important is that unlike the 1995 Excise Tax Law, the new legislation for the first time provides clear-cut provisions on how the central government and local administrations shall share receipts from excise taxes, and the criteria for goods subject to this consumption surcharge.

The new law says 2 percent of excise tax receipts collected from tobacco products shall be allocated to the province where the taxable goods are produced, with 30 percent going to the provincial administration, 40 percent to the administrations of the producing regencies or towns, and the remaining 30 percent to other second-level administrations within the producing province.

This means local administrations in Central and East Java provinces -- the main producers of cigarettes -- will benefit greatly from the new legislation.

While the 1995 Excise Tax Law explicitly stipulates only tobacco products and alcoholic drinks are subject to excise tax or duty, the new law opens the possibility of slapping this consumption surcharge on other goods which meet the following criteria: their consumption and distribution should be controlled, and their consumption could cause health or environmental risks.

This means that other commodities besides tobacco and alcohol could in the future be subjected to excise duty, if the government assesses their use or consumption needs to be controlled, either due to health or environmental risks, or for the sake of justice and equity.

It should be noted the excise tax or duty is always collected on top of other indirect taxes, such as the value added (consumption) tax and the luxury sales tax.

Malaysia, for example, has imposed an excise tax on more than 10 kinds of goods, with the objective of controlling their consumption and production. The United States slaps an excise duty on luxury passenger limousines, gas-guzzling vehicles, recreational equipment, petroleum products, firearms.

Indeed, similar to what other countries do with their excise tax laws, Indonesia's new excise duty law also is designed to discourage particular behaviors with regards to particular goods, in addition to raising revenue for the state. The excise duty on tobacco and alcohol, for example, is justified on both grounds.

In developed countries with elaborate social security systems, the excise tax is set at such punitively high rates that this surcharge often doubles or even triples the retail cost of cigarettes or alcohol. The objective is not only to curb smoking and drinking, but to also internalize the external costs for paying for the treatment of cigarette and alcohol-related diseases.

Some economists have suggested that the optimal revenue-raising taxes should be levied on items having an inelastic demand, while behavior-altering taxes should be levied where demand is elastic.

Since excise duties can be imposed at the point of production or importation or at the point of sale, the law allows two kinds of prices -- factory and retail prices -- on which the duties are based. Certainly, the excise duty can be waived or refunded on goods being exported, to maintain the competitiveness of products on the international market.

The new law also improves the administration and collection of the excise tax and law enforcement efforts against tax fraud, and sets performance-based financial incentives for officials at the Directorate General for Customs and Excise Tax.

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