The latest hike is only modestly lower compared to the tobacco excise tax hike at the start of 2017. Moreover, the latest hike is much more than analysts and Indonesia's cigarette manufacturers had been expecting.

Indonesian President Joko Widodo said the hike is a difficult decision because various matters need to be taken into account, including tobacco farmers, workers at cigarette factories, the possible increase in the distribution of illegal tobacco products as well as consumers' health.

The government of Indonesia aims to generate IDR 148.2 trillion (approx. USD $11 billion) of revenue from cigarette excise taxes in 2018, up 4.8 percent year-on-year (y/y) from the target set in the revised state budget one year earlier (which was set at IDR 141.3 trillion).

Darmin Nasution, Indonesian Coordinating Minister of Economics, added that the 10.04 percent is an average figure as hand-rolled cigarettes and machine-rolled cigarettes are subject to different rates. Hand-rolled cigarettes face a lower tax increase. This is done in an attempt to ease the negative impact on this labor-intensive industry (the machine-rolled cigarette industry is less labor-intensive).

Besides the new tobacco excise tax increase, the Indonesian government also encourages local tobacco farmers to transform their tobacco plantations and start producing other crops.

For Indonesia's cigarette industry the new hike is a big blow. Hasan Aoni Aziz, Secretary General of the Association of Indonesian Cigarette Producers (Gappri), said the double-digit excise tax hike is yet another challenge for the industry. This move will cause cigarette production in Indonesia to decline, hence it may likely lead to layoffs in the industry.

In the first half of 2017 a total of 146.6 billion cigarette sticks were sold on the Indonesian market, down almost 9 percent (y/y) from 160.8 billion cigarettes in the same period one year earlier. This decline is attributed to continuously rising excise taxes and other negative policies (such as restrictions on tobacco advertisement). Therefore, most analysts say Indonesia's cigarette industry is now in the "sunset stage". However, considering two cigarette manufacturers - Gudang Garam and HM Sampoerna - are among the top Indonesian companies in terms of market capitalization on the Indonesia Stock Exchange, the tobacco industry still forms a huge industry in Southeast Asia's largest economy.

Besides the excise tax on tobacco-products, the Indonesian government also plans to impose an excise tax on plastic bags in 2018.

Read more: Analysis of Indonesia's Tobacco Industry