RI's tobacco industry prone to tax evasion

Desy Nurhayati ,  The Jakarta Post ,  Bangkok   |  Thu, 04/03/2008 1:35 AM  |  Headlines

Excise taxes on cigarettes should be made simple and easy to implement, and need to be regularly adjusted to inflation and consumer purchasing power in order to reduce tobacco use and prevent tax evasion, the South East Asia Tobacco Control Alliance said Wednesday.

The multiple-rate cigarette tax system implemented by Indonesia is more vulnerable to tax avoidance and evasion than single-rate taxes, researcher Hana Ross of International Tobacco Research of the American Cancer Society said here on the sidelines of a tobacco control workshop.

"Different tax rates on cigarettes and other tobacco products allow tax avoidance and evasion, thus uniform tax and broad-based taxes with less exemptions are recommended," she said.

She proposed that both cheap and expensive tobacco products be taxed heavily, so as to prevent consumers from switching to cheaper brands.

Indonesia currently applies three types of taxes on tobacco products: the ad valorem excise taxes that depend on the type of tobacco product and the size of the industry, the 8.4 percent value added tax (VAT) that is imposed flatly on all types of tobacco products, and a specific tax that excludes non-cigarette products. All of the taxes are applied per cigarette.

The excise taxes range from 26 to 40 percent for machine-made clove and white cigarettes, and from 4 to 22 percent for hand-made kretek (non-filtered clove cigarettes). The variation depends on the type of cigarettes, whether machine or hand-rolled and the production scale.

The specific tax, which took effect on July 1 last year, is imposed only on cigarette products and varies depending on the size of the industry.

Comparing tobacco taxes among Southeast Asian countries, Ross said the mechanism of the specific tax and ad valorem tax was not beneficial as manufacturers might produce lower-price and lower-quality products to pay less tax.

"But the good thing is that it is automatically indexed for inflation," she said.

Unlike Indonesia, Singapore imposes excise duty based on the weight of a cigarette, making it less possible for manufacturers to modify the size of cigarettes.

Theresa Yoong of the Singapore International Bureau of Health Promotion, said each cigarette was taxed 25.5 Singapore cents, with a maximum weight of 1 gram. An additional tax of the same amount is levied for each additional gram.

The workshop also recommended that excise tax be applied at the manufacturer level and certified by a stamp, rather than being levied at the wholesale or retail level, to ease the administrative burden on smaller business and to minimize tax evasion.

Indonesian cigarette products are among the lowest taxed, at 40 percent of retail price. By comparison, Singapore and Thailand tax cigarettes at 64 percent and 63 percent of retail prices, respectively.

The World Bank has recommended an ideal tobacco tax of above 65 percent of retail price.

Recent research by the University of Indonesia found a twofold increase of the cigarette excise duty would not only increase the country's GDP by Rp 335 billion (US$37 million), but also boost workers' annual income to Rp 491.61 billion and create an additional 280,000 jobs.

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