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Analysis: Awaiting certainty on cigarette industry regulation

The government has revived its plan to combine tobacco companies’ output of machine-made clove cigarettes (SKM) and white cigarettes (SPM) for tax purposes

Nadia Kusuma Dewi (The Jakarta Post)
Jakarta
Wed, August 21, 2019

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Analysis: Awaiting certainty on cigarette industry regulation

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span>The government has revived its plan to combine tobacco companies’ output of machine-made clove cigarettes (SKM) and white cigarettes (SPM) for tax purposes. Previously, the government had issued Finance Ministerial Regulation No. 146/2017, Article 3 of which stipulates that a tobacco product manufacturer who produces SKM and SPM will be categorized based on the total number of cigarettes output. The categorization is required to determine the tobacco excise charged to the company.

As a consequence, manufacturers whose total production of SKM and SPM exceeds 3 billion cigarettes will be subject to the highest tariff applied to each type of cigarette. This regulation came into effect on Jan. 1. However, in December 2018, the government issued Finance Ministerial Regulation No. 156/2018 to amend the former regulation. In the new regulation, the government removed provisions on combined limits of SKM and SPM production. Furthermore, the government also deleted Chapter IV of Finance Ministerial Regulation No. 146/2017, which stipulated a gradual simplification of the tobacco excise structure from 2018 to 2021.

Combining SKM and SPM production limits remains controversial. Those who support the policy argue that this will create a conducive business climate in the cigarette industry.

The policy can prevent large-scale companies, especially foreign firms, from setting production below 3 billion in each cigarette category to keep their excise rate below the threshold. With the lower rates, large companies could significantly reduce the market share of small or medium companies, according to the policy’s supporters. They also argue that, with this policy, cigarettes sold by large manufacturers would be less affordable, especially for teenagers, as their prices would be higher because of the higher excise.

On the opposite side, some claim that combining SKM and SPM production limits and the simplification of the tobacco excise tariffs structure will put more pressure on industry players as a whole in the midst of increasingly stringent regulations.

The simplification will force medium-scale businesses, foreign and domestic, into a higher excise category and therefore eventually prompt them to hike their products’ retail prices (HJE).

In this challenging macroeconomic situation and amid people’s stagnating purchasing power, cigarette demand will be more sensitive to higher prices. If cigarette makers cannot survive the situation, it will result in job losses and a rise of unlicensed cigarette sales.

The government has said it is still evaluating the impact of combining SKM and SPM output, with the result expected to be published along with the 2020 tobacco excise policy in October. The head of the Finance Ministry’s customs and excise department explained that the planned policy included several goals, namely controlling tobacco consumption, creating a level playing field, improving supervision and compliance of the tobacco product manufacturers and raising state revenue from the tobacco excise.

In general, we understand the concerns of the cigarette industry players with regard to the policy. We are of the view that medium-to-large-scale companies will be most affected by the policy, since they are the biggest contributors in the SKM and SPM categories. According to Statistics Indonesia data from 2015, the number of medium and large companies employing more than 20 workers was only 1.5 percent of the total manufacturers in the industry. Despite their small number, their output dominated the industry, accounting for 95.6 percent of the total production.

Meanwhile, small companies (five to 19 workers) and micro companies (one to four workers) accounted for 30.8 percent and 67.7 percent of the total tobacco processing firms with an output contribution of just 2.5 percent and 1.9 percent, respectively. In this case, we see that large-scale cigarette producers are able to survive due to their scale of production and strong branding and positioning.

We support the government’s efforts to issue a tobacco industry roadmap policy to provide certainty for businesspeople. However, the commitment of all relevant parties is the key success factor. In our opinion, several important steps need to be taken. First, conducting in-depth studies, discussions, final formulation and mutual agreements with various stakeholders, such as regulators, industry players/associations and academia. We need to consider both the positive and negative impacts of the proposed policy, who benefits and who is harmed by the policy, and how big an impact the policy has on industry players and the overall economy. Second, strengthening coordination across institutions, such as the Industry Ministry, the Finance Ministry and the Agriculture Ministry.

Third, disseminating information effectively before implementing the policy. We are of the view that the government should formulate a clear tobacco industry roadmap for the short, medium and long term, so that industry players have enough time to adapt and make business adjustments.

All that said, we realize that achieving a win-win solution in the tobacco industry roadmap is a big challenge. However, there is still hope that the regulation will bridge all relevant parties.

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The writer is Industry analyst at PT Bank Mandiri (Persero) Tbk

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