Indonesia Will Impose Liquid Tobacco Tax 57% Starting July

Finance Minister Sri Mulyani Indrawati in a meeting with Lawmakers - Photo by Finance Ministry

JAKARTA (TheInsiderStories) – Indonesia will impose a 57 percent excise tax on liquid tobacco starting July, 1, instead of banning an electronic cigarette, a senior official said late Monday (04/05). The country has one of the highest smoking rates in the world.

Currently, there are about 300 unsupervised liquid makers known as brewers in Indonesia, producing various liquid products to more than 4,000 vape stores and 900,000 smokers, the customs office estimates.

Since last year, the ministry of finance has announced the planned. At the time, Director general of customs and excise at the Ministry of Finance, Heru Pambudi stated, the main ingredient in this kind of cigarettes is a liquid made of tobacco, which is subject to tax, in accordance with the Tobacco Law.

On Oct. 24, 2017, Finance Minister Sri Mulyani Indrawati signed a ministerial regulation on the excise on processed tobacco products. The new values are available here (in Indonesian language).

Currently, the cigarette excise system in Indonesia is designed based on the types of cigarettes (cigarette versus white cigarettes), means of production (hand-made versus machine-made), and the production capacity of the factories where they have been produced.

This years the revenue target from excise duties is Rp155.4 trillion (US$11.17 billion). The new excise tax is expected to contribute around Rp200 billion rupiah a year, said Sunaryo Kartodiwiryo, a deputy director of tariffs at the Directorate General of Customs and Excise.

Indrawati races to meet the tax revenues target Rp1,894 trillion in this year to finance President Joko Widodo’s program. Indonesia has struggled to lift its economic growth rate above 5 per cent, in spite of rate cuts by the central bank, and deregulation moves by the government.

She admitted, any shortfall in tax collection could mean a widening of the fiscal deficit, which by law cannot exceed 3 percent. The challenge for the government is to achieve its tax targets, while avoiding any disruption of economic growth momentum.

She has called for closer cooperation between the Directorate General of Taxes and the Directorate General of Customs and Excise as part of the government’s efforts to boost tax collections.

The Minister stated that closer cooperation between the two directorates will make it easier for taxpayers to comply with their obligations, which will ultimately improve tax compliance and collection.

“The tax office and Customs and Excise are busy with their own work, but they forget that working together will reduce the burden and improve results,” she pointedly observed.

Collaboration between the two directorates has so far allowed trading companies to use their tax identification numbers, as a valid identification for customs purposes. This means that business players are no longer required to apply for customs identification numbers.

The minister said she wants more than just a single identity number for taxpayers. She wants real-time data collection – which includes trading companies’ complete import and export data – shared between the two directorates, to improve tax compliance, as it will reduce the amount of time and effort currently required to submit separate reports to different government institutions.

Indonesia has had a long-standing issue with tax compliance. In a country of 260 million people, only about 16 million registered taxpayers were required to submit returns this year. Of those, only 11.3 million people have actually paid their dues, official figures show.

The country also has one of the lowest tax ratios in the region. The government is forecasting tax revenue of 11 per cent of gross domestic product this year and expects that to rise to 13-14 per cent by 2021, down from a previous goal of 16 per cent by 2019.

That compares with 17 per cent in the Philippines, 15 per cent in Malaysia and an average of about 34 per cent for countries in the Organization for Economic Co-operation and Development.

In the first 10 months of the year, Indonesia temporarily incarcerated 53 people for failing to pay arrears, the Tax Directorate-General’s office said, without releasing any names.

Forty-five of those have since been released, after paying up Rp 230 billion, while eight remain behind bars, owing a collective Rp 41 billion. Authorities are looking to detain another 23 people who owe a total of Rp1.8 trillion.