Cigarette after Tax: A Fight against Smoking

By Revanza Almaas, a Directorate General of Taxes officer

The government raised cigarette excise rate by 10% to 15% on average in early 2023. This policy was outlined in Regulation of the Minister of Finance Number 191/PMK.010/2022, which covers excise rates for various tobacco products, i.e. cigarettes, cigars, leaf cigarettes, and shredded tobacco.

According to Law No. 11 of 1995 concerning Excise which was later amended by Law Number 7 of 2021 concerning Harmonization of Tax Regulations, a cigarette excise would mean an excise imposed on excisable goods in the form of tobacco products, including cigarettes, cigars, leaf cigarettes, shredded tobacco, and other processed tobacco products.

One type of excise is CHT (cukai hasil tembakau, excise on tobacco products) which is imposed on various types of tobacco products, including Other Processed Tobacco Products (Hasil Pengolahan Tembakau Lainnya, HPTL). In this article, cigarettes will refer to all of them.

Why Taxing Cigarettes?

I think it’s obvious. Smoking is a public health crisis, leading to a devastating cycle of addiction and illness. It's a highly addictive habit caused by nicotine, a powerful stimulant that underpins continued tobacco use. This addiction ultimately generates deadly diseases, including lung cancer, heart disease, and chronic respiratory problems like emphysema. Shockingly, tobacco use is the one of the leading causes of preventable death globally, killing eight million lives each year.

The most effective weapon in this fight, IMF said, is a surprisingly simple one: significantly increasing cigarette excise/taxes. This strategy discourages tobacco use by making cigarettes and other products less affordable. This approach is backed by the World Health Organization's Framework Convention on Tobacco Control, a global treaty promoting tobacco control measures.

By raising tobacco taxes, governments create a powerful disincentive for both current and potential smokers. When tobacco becomes less affordable, people are more likely to quit or avoid starting altogether. This price sensitivity is particularly impactful for young people and low-income groups, who are more likely to be deterred by price increases. These tax-driven reductions in tobacco use translate to significant health and economic benefits for individuals and society as a whole. Fewer smokers mean fewer cases of debilitating illnesses, leading to a healthier population and a lighter burden on healthcare systems. Additionally, the economic benefits extend beyond healthcare savings. Reduced tobacco use leads to increased productivity and generates substantial revenue for governments through the collected taxes. This revenue can be directed towards vital public health initiatives and social programs.

Research by Teguh Dartanto sheds light on a concerning aspect of smoking, i.e. its potential to harm future generations. This study, which combined data from the Indonesia Family Life Survey (2018) with direct research in Demak, Central Java, suggests a correlation between parental smoking and growth in the number of stunted children. This finding raises a critical concern: the negative health effects of smoking extend far beyond the smoker themselves. It can potentially "burn" the future of children, even before they are born. Beyond potential nutritional deficiencies that might arise from smokers prioritizing cigarettes over food, pregnant women exposed to secondhand smoke face additional health risks for themselves and their developing babies. This study underscores the far-reaching consequences of smoking and strengthens the case for comprehensive tobacco control measures.

The Difference

Yes, cigarette tax and cigarette excise exist simultaneously. Both are government levies imposed on cigarette producers or importers as their subjects. Here are the differences.

1. Cigarettes excise is an excise imposed on excisable goods in the form of tobacco products, including cigarettes, cigars, leaf cigarettes, shredded tobacco, and other processed tobacco products (Law Number 39/2007, revoked with Law Number 7/2021).
   Cigarette tax is a levy on cigarette excise that the government collects together with the collection of cigarette excise (Article 1 of Law Number 28/2009, revoked with Law Number 1/2022).
2. The object of cigarette excise is tobacco products (cigarettes, cigars, leaf cigarettes, shredded tobacco, and other processed tobacco products), regardless of whether or not substitute or auxiliary materials are used in the manufacture.
   The object of cigarette tax is cigarette consumption.
3. The collector of cigarette excise is the Directorate General of Customs and Excise, while the collector of cigarette tax is the provincial government.
4. The basis for imposing cigarette excise is the production of excisable goods, while the basis for imposing cigarette tax is the cigarette excise itself.
5. Cigarette tax is a 10% ad valorem tax on cigarette excise. Conversely, in general, cigarette excise is a unit (specific) tax. It is levied in rupiah per cigarette stick or gram of tobacco product. However, there is also ad valorem cigarette excise. Ad valorem cigarette excise is applied to other processed tobacco products (HPTL), including electronic cigarettes.
6. The purpose of cigarette excise is to control consumption and negative impacts on the environment and health, while the purpose of cigarette tax are: (1) to protect society from the negative impacts of cigarettes, (2) to increase funding for health services, and (3) to increase local revenue (penghasilan asli daerah, PAD).

Example

According to Regulation of the Minister of Finance Number 191/PMK.010/2022, the excise rate for locally made hand-rolled kretek cigarettes (sigaret kretek tangan, SKT) in group I is Rp378 per cigarette stick. Therefore, we calculate the excise by multiplying this rate by the number of cigarettes. If a pack of cigarettes contains 12 cigarettes, the excise due will be Rp378 × 12 = Rp4,536 per pack.

According to the Law on Regional Taxes (Law Number 28 of 2009) which was later revoked by Law Number 28 of 2009 concerning Financial Relations between the Central Government and Regional Governments, the cigarette tax rate is set at 10%. Therefore, we calculate it by multiplying this rate by the cigarette excise, 10% × Rp4.536 = Rp453.6 per pack.

The 2023 increase in cigarette excise rates represents a significant step towards public health protection in Indonesia. By making cigarettes less affordable, this policy discourages smoking initiation and encourages cessation among current smokers. This will hopefully lead to a healthier population, a reduced burden on healthcare systems, and potential economic benefits through increased productivity and tax revenue. Furthermore, the policy helps protect future generations from the detrimental effects of secondhand smoke exposure. With continued efforts like this, Indonesia can move closer to a future where smoking is less prevalent and its associated health risks are significantly reduced.

*) This article is the author's personal opinion and does not reflect the attitude of the agency where the author works.

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