Tackling Indonesia's black market alcohol problem
Daniel A. Witt
The Jakarta Post
In August and September of this year, at least 52 people lost their lives after consuming illicit alcohol tainted with methanol in Indonesia.
A number of investigations, instigated in many cases by the bereaved relatives and friends of victims, have made it clear that retailers and bar owners have been mixing or replacing legitimate commercial products with arak and other forms of traditional liquor. Much of this is produced in unsafe stills that leave high levels of methanol in the products people consume.
Worse still, some producers are believed to be adding industrial methanol to their products to increase their potency. Methanol and ethanol are metabolized very differently by the body.
As little as 10 milliliters of methanol can break down in the body to make formic acid which can attack the optic nerve and cause blindness. As little as 30 milliliters, or just a single shot, can be fatal.
Methanol is tasteless, colorless and odorless, and therefore impossible to detect in a beverage without laboratory testing. When tested, bottles of gin purchased in Bukit Lawang by the father of Cheznye Emmons, a British tourist who recently died after consuming what she thought was gin at a party there, were shown to contain fatal levels of methanol.
In the wake of these tragedies, there will predictably be calls for prohibiting alcohol or for strictly limiting its availability.
However, this approach ignores the fact that it is not the legitimate alcohol market that is the cause of these deaths, but rather the black market. In countries with robust regulatory systems and sensible tax policies in place to govern the sale of alcohol, the illicit sector is small or non-existent.
However, in countries that strictly prohibit or exorbitantly tax alcohol, the black market tends to be a big problem. Revenues go to criminals instead of the government budget, and public health is put at risk.
This is why Indonesia needs to pursue a reform of its alcohol regulation. Reform can ensure that the production, distribution and retail of all products are more effectively monitored and controlled. However, recent developments indicate a move in the opposite direction. In August, the Supreme Court annulled Presidential Decree No. 3/1997, which provided the base for the country's entire regulatory framework for alcohol.
More recently, the government has indicated that it will seek to increase its excise revenues from alcohol. The first development potentially creates legislative dysfunction and opens the doors to prohibition and increased criminal activity.
The second creates further economic incentives for consumers and retailers to turn to potentially lethal black market products, rather than legal products that are increasingly unaffordable and unavailable. This further risks public health and budget revenues.
Punishing the legitimate industry and responsible consumers that choose to drink for the activities of totally separate criminals is counterproductive and dangerous. It will also do nothing to help the government meet its revenue targets. Because of high taxes and poor enforcement, it is estimated that more than 90 percent of all imported spirits enter the market through contraband channels, depriving the government of much needed tax revenue.
To stop poisonings, stabilize tax revenues and reduce criminal activity, Indonesia should reform its tax and regulatory regime for alcohol. The most efficient and effective form of taxation on alcohol beverages is a single, specific tax, levied on the alcohol content.
Having different rates for wine, beer and spirits, or worse yet, having a rate that is based on the value of a product, rather than the volume of alcohol it contains, only encourages tax evasion and illicit production.
In addition, a single rate levied on the alcohol content is endorsed by the World Health Organization (WHO) as the best way to account for the health impacts of alcohol, as the link between the tax paid and the volume consumed is clear.
This approach is widely accepted as international best practice. This is how Singapore taxes alcohol. With this tax regime, Singapore has strong and predictable tax revenues and compliance, low per capita consumption and extremely low levels of illicit alcohol. By contrast, having different rates, or basing the rates on the value of products, encourages tax cheating, as well as other types of fraud and deception.
An appropriate taxation system needs to be supported by a simple, transparent and non-discriminatory alcohol administration framework that is enforced and monitored. Indonesia may also need to examine further regulation of its traditional liquor industry to ensure that responsible producers have a legitimate route to market and that this economic contributor to rural communities is protected.
Experience across both advanced and developing economies demonstrates that the key drivers influencing the illicit trade of alcohol products are excessive regulations and tax levels. This results in a sharp decline of the legal product's affordability and an increase in criminals' willingness to supply, given the opportunity to gain large profits from tax avoidance.
However, when the right tax and regulatory framework is in place that takes into account alcohol affordability and market access considerations, government revenues can be increased while promoting the responsible consumption of alcohol and keeping the illicit trade in check. This is the policy path that Indonesia should work towards over the next few years.
A safe, affordable, properly regulated and taxed legitimate alcohol market is the best defense against the growing threat of illicit liquor. This will protect the people and tourists in Indonesia and generate stable tax revenues.
The writer is president of the International Tax and Investment Center (ITIC), a nonprofit research and education foundation based in Washington, DC. ITIC has worked on excise taxation in over 80 countries, including Indonesia.
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