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Jakarta Post

Raising tobacco tax improves national health, economic benefits

  • Novita Gemalasari Liman and Christian Suharlim

    The Jakarta Post

Barru, Indonesia   /   Sat, December 20, 2014   /  10:04 am

Starting Jan. 1, 2015, the government will officially raise tobacco excise from 56 percent to 65 percent as part of moves to discourage smoking.

Indonesia continually counts as among countries with the highest smoking rates worldwide, with over 62 million or one-fourth of its population being smokers.

This number, combined with low levels of income and education, has resulted in wasted household income in six of every 10 families. Worse, smoking cuts the life expectancy of smokers by 10 years on average.

A reduction in the number of smokers would avert tobacco-related illness expenses of up to Rp 11 trillion (US$880 million) per year. The risk of heart disease would halve only one year after smokers quit, while the risk for stroke would decline to normal level after five to 15 years.

Further, the averted cigarette consumption would translate into an 11.9-percent increase in expendable household income for health plans, education and nutrition.

Essentially, people consume fewer cigarettes when they are more expensive. The World Health Organization has recommended a cigarette excise of 70 percent, which would raise prices to Rp 18,000 per pack.

However, according to Abdillah Ahsan, senior researcher and vice-director at Demographic Institute of the University of Indonesia (UI) in Jakarta, the ideal price to really discourage cigarette consumption is Rp 50,000 per pack, although still far lower than prices in Singapore or Australia.

Raising tobacco excise is the most cost-effective smoking-cessation measure.

Currently, Indonesians consume 10 cigarettes per day on average. Spending as little as Rp 64.4 per person per year would halve tobacco consumption, slash the number of smokers by over 7 million and save over 5 million lives.

The tobacco industry in Indonesia has succeeded in expanding its market by nearly 9 percent per year and made Indonesia the fourth largest cigarette market in the world in 2013. We can predict that this increase in tobacco excise would receive much pushback from the industry.

The industry has tried to advocate against this tax increase in the name of tobacco farmers. Only less than one-third of farmers are involved in the tobacco sector. It is estimated that 86,820 jobs would be lost due to this increase in tobacco tax.

But, as families allocated more and more household expenditure for food, the agriculture sector would instantly grow and call for 140,567 new jobs.

The inelastic demand for cigarettes suggests that the increase in excise would direct more money to the government. Triasih Djutaharta, another senior researcher from UI'€™s Demographic Institute, calculates that the government would collect extra revenue of Rp 20 trillion from the policy.

The extra revenue that the Philippines gained from raising its tobacco tax has allowed the neighboring country to invest in a national health insurance scheme and improve health facilities. Indonesia should execute the same practical action to build the health system and facilities across the country.

Despite the great achievement of increasing tobacco excise, currently the tax rate is tiered by the type and volume of cigarette production. A company producing more than 2 million clove cigarettes by machine (SKM) is taxed Rp 415 per gram.

However, the same company can break into multiple smaller companies to receive a tax rate of Rp 305 per gram, averting more than 26 percent of the tax, diluting the effectiveness of the tax-increase intervention.

Arguably, a uniform tax rate for cigarettes is more effective than the tiered system we currently have. Aside from being administratively easier to control, a uniform tax rate raises more revenue for the government and also prevents people from shifting consumption to cheaper local cigarettes. This is the next step Indonesia should take.

The Philippines started with a four-tier taxation rate in 1997, changed to a two-tier tax rate two years ago, and plans to set a uniform tobacco tax rate in 2017.

By switching to a uniform tax rate, the Philippines is estimated to reduce 30 percent of both its current and future smokers, and acquire additional $1.2 billion to state revenue.

Despite the many steps Indonesia needs to take to further its tobacco-control agenda, this new tax reform is already a big leap.

Indonesia'€™s next steps, including setting a uniform tax rate, monitoring the tobacco market, and developing a proper revenue-utilization plan, will ensure that we are closer to a favorable future: a better, healthier Indonesia.

Novita Gemalasari Liman is a physician in Barru and a research associate at the Suharlim Foundation. Christian Suharlim is a post-doctoral researcher at the Harvard Center for Health Decision Science

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