The researchers presented their study in Jakarta today (09/10) - Photo: TheInsiderStories

JAKARTA (TheInsiderStories) – Indonesia has the potential to lose Rp1.28 trillion (US$90.46 million) per year from the government’s plan to change the policy structure of cigarette excise tariffs by simplifying and combining the production volumes of hand-rolled and machine-made cigarettes, Padjajaran University research data showed in Jakarta today (09/10), emphasizing that the policy has a negative impact on state revenue, business competition and price variability.

Satriya Wibawa and Bayu Kharisma, two university researchers, have conducted a simulation to study the impact of the merging of hand-rolled clove cigarettes and machine white cigarettes by changing the excise tax price per stick in groups 2 layers 1 and layer 2 group 1.

The simulation shows that the sales of Layer 1 hand-rolled cigarettes will drop by 258 thousand cigarettes per month, a year of losing 516 thousand cigarettes. Then, layer 2 hand-rolled cigarettes dropped by 113 thousand sticks per month, a year lost 1.35 million sticks.

Furthermore, the type 2 layer 1 white cigarette machine will lose 2.53 million sticks per month and lose 30.39 million sticks a year. Then the layer 2 machine-level white cigarette loses 1.59 million sticks per month, a year loses 19.11 million sticks.

“On an annual basis, if the total loss reaches 51.38 million sticks. If the price per pack is Rp25,000, then the country loses Rp1.28 trillion per year,” Wibawa explained in his presentation.

The impact of this production volumes merging, Kharisma said, will extend to various aspects. For layer 2 and 2 class industry players, a drastic increase in tariffs will threaten the continuity of their businesses, causing job losses when many factories are forced to close. Reducing production will also have a negative impact on reducing local tobacco and clove uptake. Currently, second-class cigarettes use 94 percent of local raw materials.

Based on Customs and Excise data, the content of each cigarette in the second-hand clove cigarettes uses 72 percent domestic tobacco, 22 percent clove, and 6 percent imported tobacco. In 2018, local tobacco production was 171.36 thousand tons and was absorbed by the domestic tobacco industry.

Whereas clove production in 2017 reached 10 thousand tons, placing Indonesia as the largest clove producer in the world. Nearly 90 percent of clove production is absorbed by the domestic industry as raw material for clove cigarettes, Statistics Indonesia data showed.

While the impact of simplification on the sales side, companies in the second group are forced to raise cigarette prices. Then the preferences of cigarette consumers will switch to cheaper cigarettes. The retail price of cigarettes, which is increasingly expensive, will potentially result in the entry of cheap illegal cigarettes to the market.

In terms of business competition, this simplification discourse has the potential to lead to oligopoly, when companies affected by this merger are forced to be acquired by large companies. As a result, first group companies become the party that controls and controls the market.

US$1=Rp14,200

Written by Lexy Nantu, Email: lexy@theinsiderstories.com