Government to Revise Indonesia's Tobacco Excise Tax Policy
Every year Indonesia's Tax Office adjusts the excise tax on tobacco products. The adjustment is always made in consideration of the central government's tax revenue targets as well as the input of specific stakeholders (including pro-health lobby groups, or groups that defend the interests of tobacco manufacturers or farmers).
Coming September the tobacco excise will be revised again (while the actual implementation follows in January 2018). Heru Pambudi, Director General of the Finance Ministry's Directorate General of Customs and Excise, said tariffs of three segments will be revised: (1) machine-rolled white cigarettes, (2) machine-rolled kretek cigarettes, and (3) hand-rolled kretek cigarettes.
Pambudi added the hand-rolled kretek cigarettes segment will see the smallest increase in excise tax because hikes tend to have a bigger impact on this labor-intensive sector (cigarette manufacturers could decide to layoff workers).
Besides collecting additional tax revenue, tobacco excise taxes also aim at discouraging smoking, hence improving people's health.
Per July 2017 Indonesia's Tax Office collected IDR 78.7 trillion (approx. USD $5.9 billion), consisting of IDR 58.2 trillion of excise taxes, IDR 18.5 trillion of import duties, and IDR 1.9 trillion of export duties. Pambudi added that this performance is better compared to the performance in the same period one year earlier.
However, Muhaimin Moefti, Chairman of the White Cigarette Manufacturers Association (Gaprindo), urges the government not to raise tobacco taxes as it will impact negatively on the domestic tobacco industry.
Considering production volumes in Indonesia's tobacco industry have not been able to rise over the past three years, another excise tax hike would put too much additional burden on the industry, Moefti said. In fact, cigarette production volumes have contracted by around 2 percent after the government introduced an average 15 percent excise tax hike in 2016. The impact of that shock is still felt in the industry today. Moreover, it is also reason why the government's tax revenue target from the tobacco industry has not been achieved (part of the smoker community could not afford to buy as many packages as they did before).
Indonesia remains an attractive market for cigarette producers. The World Health Organization (WHO) claims that there were 95 million Indonesian smokers in 2015, and - even more alarmingly - 20 percent of the Indonesian youth were categorized as smokers. This also explains why cigarette producers Gudang Garam and HM Sampoerna are among the top ten biggest companies in terms of market capitalization on the Indonesia Stock Exchange.
However, recent government actions - for example drastically hiking tobacco excise taxes and curbing tobacco advertisement - have had a big impact on the industry and therefore many analysts say Indonesia's tobacco industry is now heading for its "sunset".
So far this year shares of HM Sampoerna have fallen 7.05 percent to IDR 3,560 a piece. Meanwhile, shares of Gudang Garam still managed to climb 11.27 percent over the same period.
Stock Performance Comparison: Gudang Garam vs HM Sampoerna:*
GGRM = Gudang Garam
HMSP = HM Sampoerna
* normalized stocks, 1 January 2017 = 100