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Excise tax hike will not kill off industry
What does the government have to do to boost state income, cut the number of smokers and at the same time retain a robust cigarette industry? Raise the excise tax by more than 60 percent, says a University of Indonesia (UI) study
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What does the government have to do to boost state income, cut the number of smokers and at the same time retain a robust cigarette industry? Raise the excise tax by more than 60 percent, says a University of Indonesia (UI) study.
The study, carried out by UI's Demographic Institute, dispelled the myth that raising the tobacco excise tax would lower sales and thus the state's potential tax revenue, researcher Abdillah Ahsan said at the release of the study Thursday.
Abdillah said an excise tax hike would force tobacco producers to raise the price of cigarettes, which would "reduce cigarette consumption by low-income people, empowering them to spend more on other things -- a move that could generate economic value".
If those on low incomes spend their money on products other than cigarettes, economic output would increase by Rp 335 billion; it would also lead to increased revenue for people of Rp 492 billion and employment of an additional 281,135 people, the research found.
These findings are based on the assumption the excise tax is raised to 57 percent from the current average of 37 percent.
Last year, the government received Rp 41.3 trillion in tobacco excise tax revenue.
Under the 2007 excise tax law, tobacco products can be hit with an excise tax of up to 57 percent of their retail price.
"The monthly cigarette consumption of people on low incomes is equal to 15 times what they spend on meat, or eight times what they spend on education," Abdillah said.
In 2005, Indonesians spent Rp 50.8 trillion on cigarettes, the research found.
"The number has risen over the past three years," Abdillah said.
At the same time, with the same level of excise tax, tobacco manufacturers can continue to grow, as 77 percent of Indonesia's tobacco industry is dominated by large companies, which will be less affected by excise tax, the research showed.
"Cigarette demand is (relatively) elastic; it will not drop by as much as prices will increase," another researcher, Diahhadi Setyonaluri, said.
Cigarette prices in Indonesia are much lower on average than those in neighboring countries. In Malaysia, a pack of cigarettes costs about US$2, while in Singapore about $7.
Indonesia remains a haven for tobacco companies. In 2005, global tobacco giant Philip Morris International acquired PT Hanjaya Mandala Sampoerna, now Indonesia's largest tobacco company, for $4.8 billion.
In the first half of 2008, Sampoerna recorded a profit of Rp 1.96 trillion. PT Gudang Garam, the second-largest producer, booked Rp 891.36 billion in profit.
The study also found that raising the tobacco excise tax to 57 percent would reduce the number of people dying from smoking-related diseases by 2.4 million per year.
According to the 2004 national socioeconomic survey, 63.1 percent, or about 138.82 million, of Indonesians are smokers.
