April 15, 2019

Tobacconomics Research World Tour: Second stop—Indonesia

Last week, we took you along with us on our trip to Karachi, Pakistan, for SPDC’s seminar on the “Macroeconomic Impacts of Tobacco Use in Pakistan.” This week, we will be discussing a recent event organized by our partner, Prakarsa, in Jakarta, Indonesia, held on March 27th. The purpose of this meeting was to launch and present their new research: “The Illicit Cigarette Trade in Indonesia.” We are excited to disseminate these noteworthy findings, so let’s begin!

Indonesia has some of the lowest cigarette prices in the Southeast Asian region, and consequently, one of the highest smoking rates in the world. Global evidence has shown that increasing cigarette excise taxes that result in increased prices causes declines in smoking. While Indonesia has taken steps in recent years to increase taxes and reduce the number of tax tiers, the government chose not to increase taxes in 2019.

One of the reasons that the Indonesian government has not taken stronger policy steps with regards to tobacco taxes is based on the misplaced fear that increases in taxes will lead to increases in the illicit trade of tobacco products. This narrative has been created by the tobacco industry to deter tax increases, and has mostly remained unchallenged due to the limited local evidence on illicit trade and the impact of increases in excise tax. In this case, the results are ineffective policies and undetermined efforts to reduce the smoking rate in Indonesia.

This is where Prakarsa comes in. Prakarsa is a think tank in Jakarta, Indonesia, which conducts research on the role of the state, civil society and business world; carries out capacity building; produces and promotes new knowledge about social policy, fiscal policy, and sustainable development; and manages networks to improve effectiveness. As a Tobacconomics partner, the primary objectives of their research were to 1) generate credible and transparent estimated of illicit trade; and 2) analyze the effect of large cigarette tax increases on smoking behavior within the country.

Illicit Trade in Indonesia

According to Dr. Nasruddin Djoko Surjoni, Deputy Director for Customs and Excise at the Ministry of Finance, Indonesia, “compared to other countries in Asia, the percentage of illicit trade in Indonesia is relatively low. The correlation between high tariffs and high percentage of illegal cigarettes cannot be deduced during the 2010-2018 time period.” Dr. Nasruddin suggested that the next steps would be to anticipate tax avoidance and evasion, and the relationship between the increase in excise tax and illicit trade.

Prakarsa’s research did just that. In a survey of nearly 1,400 smokers, they collected cigarette packs from 1,201 survey respondents to identify illicit cigarettes through common identifiers, such as the validity of excise tapes and health warning images. Some additional key points from their report in relation to illicit trade are as follows:

  • Less than 2% of all cigarette packs (or 20 packs) examined in the study were illicit. These packs either did not have excise bands, had counterfeit excise bands, or had counterfeit health warnings.
  • Illicit trade has declined over time, continuing a trend described by previous research. These declines coincided with the largest increases in excise taxes and cigarette prices in Indonesia.
  • The low level of illicit trade is likely a function of market domination by certain brands, while the decline in illicit trade is likely a result of improved tax administration and enforcement, including consolidation of excise tax tiers and improvements in tax stamps.
  • The low levels of illicit trade and high levels of compliance should encourage further tax reforms, including tier consolidation and increases in excise taxes.

The Effect of Cigarette Price Increases on Smoking Behavior

At the meeting, researchers from the country confirmed that large price increases caused by increased taxes will lower the rate of smoking dramatically, and can even cause one-third of smokers to quit. This will lead to a “triple win” solution: prevents early death, creates a healthier population, and generates additional revenue.

For this portion of the study, Prakarsa surveyed 1,440 smokers in 2018 on whether they would continue to smoke if the prices of cigarettes increased by either 50% or 100% (for comparison, they are currently increased by less than 10%). Faced with a 50% increase, 12% of respondents said they would quit smoking, and faced with a 100% price increase, 32% said they would quit.

Some key conclusions from the research:

  • Indonesia has very low cigarette prices due to low cigarette taxes and a large number of tax tiers. This contributes to Indonesia having one of the highest smoking rates in the world.
  • Global evidence shows that increases in taxes lead to an increase in prices and decrease in the number of smokers and lower smoking initiation for youth.
  • New research in Indonesia confirms that large prices increases, as a result of large tax increases, will result in dramatic declines in smoking, and could result in up to a third of smokers wanting to quit.

Based on the results from the study, Prakarsa proposed a few policy recommendations at the meeting:

  1. Increase cigarette excise taxes by a large percentage, which could lead to an increase in prices per pack and make them less affordable in Indonesia.
  2. The government should continue to simplify excise tax tiers and invest in tax administration and enforcement as the best means of combating illicit trade.

Overall, the central finding of Prakarsa’s research is that illicit cigarettes in Indonesia are rare and, contrary to the claims of the tobacco industry, do not undermine the objectives tobacco tax policy.