SINGAPORE: The Indonesian government plans to raise the cigarette excise tax rate by 23 per cent come January 1, 2020.
The move has been praised by anti-tobacco groups but strongly criticised by tobacco and cigarette industry and tobacco farmers. If implemented, retail cigarette prices will rise by 35 per cent.
The new cigarette excise does send a powerful signal of Indonesia’s commitment to tackle its alarming health problems stemming from cigarette smoking.
But will this increase in retail prices effectively discourage smokers in Indonesia? Probably not.
SOME OF THE CHEAPEST CIGARETTES IN THE WORLD
Currently, the price of cigarettes on the market ranges from 10,000 to 76,000 rupiah (US$0.71 to US$5.40) a pack. A pack of 20,000 rupiah cigarettes, for instance, will cost 27,000 rupiah next year – a huge increase but insufficient to drastically alter behaviour.
After all, cigarette excise taxes in Indonesia are the lowest in the world. Countries in the region like Singapore and Thailand have seen excise taxes reach 90 per cent and 84 per cent of the purchase price.
This hike in price rise may see consumers switching to a cheaper cigarette brand but it is not enough to get them to kick the habit entirely. Illegal cigarettes remain easily available in the country.
A price rise will therefore do little to reduce cigarette consumption, without a more comprehensive policy to address smoking.
THE HUGE COSTS OF SMOKING
Indonesia has the world’s third-highest smoking prevalence country, after China and India. Almost 40 per cent of the total population aged 15 and above smoke, according to World Bank data, while the Indonesian male has been ranked the world’s top smoker with 76 per cent smoking.
According to the 2018 National Socioeconomic Survey, the poorest quintile spent 12 per cent of their total monthly expenditure on cigarettes.
Ironically, because cigarettes are cheap, for the poor, cigarette expenditure exceeds spending on food, a much needed nourishment. Such high spending on cigarettes has serious welfare implications.
Studies also show that paternal smoking is associated with an increased probability of chronic child malnutrition.
The country has deep-rooted smoking habits due to long-term exposure to cigarettes. Youths can easily purchase cigarettes and children are constantly exposed to cigarette advertisements from a young age.
Over the years, Indonesia has implemented policies to reduce smoking, including visual warnings of the dangers of smoking plastered on packs, restrictions on smoking in public spaces, and curbs on advertisements on cigarette products.
Nevertheless, all these policies have not dampened smoking in the country. Most worryingly, the number of pre-teen child smokers has shot up, reaching 13 percent of the total children population.
Smoking has taken its toll on Indonesia. Smoking-related diseases, such as lung cancer, heart disease, stroke, hypertension, tuberculosis, and chronic respiratory diseases, have become the main causes of death in Indonesia.
These have also contributed to the ballooning deficit of the Healthcare and Social Security Agency, the government arm in charge of the country’s universal healthcare insurance system, reaching 16.5 trillion rupiah (US$1.17 billion) last year.
THE POWER OF BIG TOBACCO
Indonesia is not a signatory to the WHO’s Framework Convention on Tobacco Control (FCTC). The complex reasons why Indonesia has not cracked the whip on smoking run deeper.
The Indonesian tobacco industry sustains the livelihoods of many people, from tobacco farmers to factory workers as well as distributors, marketers and more all along the supply chain.
Moreover, the industry also contributes significantly to the state’s tax revenue. This year, cigarette excise taxes are expected to contribute around 159 trillion rupiah (US$11.3 billion).
Next year, it is expected to reach 172 trillion rupiah (S$12.5 billion). Tobacco excise alone contributed a whopping 96 per cent of the total excise tax revenue or about 8 per cent of the overall anticipated state’s tax revenue in 2020.
Big Tobacco companies have strong lobbying groups that can influence policy. The industry is controlled by three companies (HM Sampoerna, Gudang Garam and Djarum), which collectively own a 70 per cent market share.
THE DILEMMA OVER TACKLING SMOKING
On one hand, the Indonesian government wants to reduce smoking prevalence in the country by raising cigarette excise.
On the other, it also plans to liberalise the cigarette industry, including clove cigarettes (kretek), by opening the sector up for foreign investment. The argument is new investments in the sector will create jobs and boost exports.
The Indonesian government has also argued that opening up the sector will help revive small and medium-sized producers of tobacco, which have been shrinking in the last few years.
It might have a point, where allowing foreign investments can boost competition and efficiency, in an industry dominated by three big companies. A fresh injection of capital could also spur the growth of small- and medium-sized tobacco producers.
However, this plan has been criticised by tobacco control activists, who argue that most tobacco products are not exported but largely consumed inside the country, which runs against the government’s goal of controlling smoking.
A TOUGH BALANCE
The government must find the right balance of multiple objectives, including health promotion, revenue generation, employment, and supporting local small-medium industries.
Going forward, if the ultimate objective is to promote better health by reducing smoking, Indonesia should consistently increase cigarette excise and tax to a point that deters vast numbers of consumer from making a purchase.
A study from the Demographic Institute at the University of Indonesia shows that a tax increase that reaches the global benchmark of 70 per cent of the sale price, which is double than the current plan, would have the optimal effect of significantly discouraging smoking.
Many developed countries have successfully achieved this, making smoking less affordable, including countries like Australia, New Zealand and Singapore.
This increase in government revenue should be channelled to fund health, education, research and development, and other productive spending, to stimulate growth.
Finally, the government must also channel efforts to create alternative jobs or compensate those who might lose out in such an endeavour.
Siwage Dharma Negara is Senior Fellow and Co-coordinator of the Indonesia Studies Programme at the ISEAS - Yusof Ishak Institute.