Background:

• In Indonesia, Law No. 39 of 2007 (Amendments to Law No. 11 of 1995) allows excise taxes of up to 57 percent of the selling price of cigarettes. Currently, though, cigarette taxes comprise significantly less (approximately 40 percent). This results in Indonesia having, undoubtedly, some of the lowest cigarette prices in the Southeast Asian region.
• In the past decade, rapid economic growth in Indonesia, which has increased faster than the increase in retail prices of cigarettes, has made cigarettes significantly more affordable than a decade ago.
• Global evidence has shown that increases in cigarette excise taxes which result in price increases reduce tobacco use (The Economics of Tobacco and Tobacco Control, 2018).
• While the Government of Indonesia has taken steps to increase cigarette excise taxes and simplify excise tax tariffs in recent years, a Presidential decree (PMK 156) not to raise the cigarette excise in 2019 has dealt a blow to these efforts. Furthermore, the Minister of Finance Regulation (PMK 146), which planned to simplify excise tax tiers further, was also stopped in this decree.
• The government's reluctance to raise the cigarette excise tax is caused by concerns rooted in the tobacco industry's argument about the potential for increased illicit trade if the cigarette excise is raised. The Indonesian Association of Cigarette Entrepreneurs (GAPRI) claims one of the reasons for the increase in illegal cigarettes and the decline in cigarette production is because of the high price of cigarettes due to the increase in excise tariffs (Kompas, July 2018). Furthermore, the industry also constructs narratives where the increase will lead to uncontrolled consumption and harm due to the loss of tax revenues.
• Limited research on illicit trade and the impact of increases in excise tax have resulted in ineffective policies and undermined efforts to reduce the smoking prevalence in Indonesia.