T

he Industry Ministry is set to push the Finance Ministry to reduce the excise imposed on hand-rolled clove cigarettes (kretek) to keep more factories from closing.

Industry Minister MS Hidayat said Thursday that cutting the tax would help ease the burden on the hand-rolled kretek industry, which was struggling amid dwindling domestic sales.

'€œThe hand-rolled cigarette industry is labor-intensive and distinctive to Indonesia so we need to ensure its sustainability. If the factories shut down and the producers shift production to machine-rolled cigarettes, that will add to unemployment,'€ Hidayat said.

The concern over the decline of the hand-rolled kretek industry emerged recently with the closing of two factories owned by Indonesia'€™s largest cigarette maker PT Sampoerna in Lumajang and Jember, East Java, resulting in layoffs of more than 4,000 workers.

The Sampoerna brand, which is controlled by Philip Morris International Inc., has claimed that the share of its hand-rolled cigarettes to national sales had consistently plunged in the past few years driven by a change in cigarette preference among adult smokers. Its contribution to the company'€™s total sales tumbled from 30.4 percent in 2009 to 23.1 percent last year despite its success retaining its position as the market leader in the segment.

At the national level, the market share of hand-rolled cigarettes has dropped from 32.8 percent in 2009 to 26.07 percent at present, according to the Association of Indonesian Cigarette Producers (GAPPRI), which unites kretek manufacturers.

Indonesia'€™s hand-rolled clove cigarette industry currently employs about 800,000 workers, the association says.

The labor-intensive industry is still the government'€™s focus of attention as the sector creates a huge number of much-needed jobs in a country where unemployment totals 7.2 million, or 5.7 percent of the overall workforce.

Hidayat further said that in addition to lowering the excise on hand-rolled cigarettes, the government should also increase a similar tariff on machine-rolled cigarettes to avert a large-scale move by manufacturers to the less-labor intensive production.

The excise tax has been blamed for the decline of the clove cigarette industry in the past few years, as small and medium-sized enterprises could not bear the additional cost.

This year, the government maintained the excise at the same level as last year, with the tariff on hand-rolled clove cigarettes ranging between Rp 80 (less than 1 US cent) and Rp 275 per cigarette, while excise on machine-rolled clove cigarettes is from Rp 245 to Rp 375.

Some local administrations also apply a '€œregional cigarette tax'€, which is set at 10 percent of the cigarette excise. The number of cigarette makers nationwide slumped from 4,900 in 2008 to only 800 in 2013, according to GAPPRI'€™s data.

GAPPRI secretary-general Hasan Aoni Aziz earlier said that the government should act to save the hand-rolled clove cigarette industry by lowering the excise on its output, while at the same time putting a higher excise on machine-rolled cigarettes.

Without a significant policy intervention, more companies might shutter their operations, he said.