Indonesia weighs extra cigarette excise tier as experts warn of downtrading

Proposal to add an excise layer meets expert pushback

A proposal to add a new layer to Indonesia's tobacco excise structure has drawn warnings from experts who say the change would enlarge the cheap-cigarette segment and weaken the country's tobacco control policy, according to Kompas.com. The debate centres on how many tariff brackets the system should contain and where manufacturers are able to position their brands within them.

Indonesia levies excise on cigarettes through a tiered structure in which the applicable rate depends on the product category and the profile of the manufacturer. Each additional layer creates another rung on that ladder. Experts cited by Kompas.com argue that inserting a further tier would give producers more room to place products in lower-tariff positions, with retail prices following the tariff downwards. The issue is not the headline excise increase in any given year, but the ease with which volume can migrate to the bottom of the structure.

Downtrading is the central concern

Downtrading describes consumers switching to cheaper brands instead of reducing consumption when prices rise. It is the mechanism that blunts the effect of excise policy: the rate goes up, the average price actually paid across the market drifts down, and total consumption barely moves. Affordability, not the nominal tariff, is what determines whether tax policy changes smoking behaviour.

Kompas.com reports that experts expect an additional layer to accelerate this shift, because it would formalise a wider distance between premium brands and entry-level legal cigarettes. For manufacturers the calculation is straightforward. If a lower bracket exists, competitive pressure pushes volume towards it, and the brands that stay in higher tiers lose share to their own cheaper stablemates as much as to rivals.

The illicit-trade argument

One argument advanced in favour of an additional tier is that cheaper legal cigarettes would draw smokers away from illegal, untaxed products. Experts quoted by Kompas.com regard this reasoning as ineffective, and their objections fall into several parts:

• Illegal cigarettes avoid excise altogether, so their price advantage does not disappear when a new legal bracket is created.
• Enforcement, not tariff design, determines whether untaxed products reach retail shelves.
• A broader legal low-price segment risks normalising cheap cigarettes rather than displacing illicit ones.

On this reading, an extra layer would concede revenue and public health ground without delivering the enforcement outcome used to justify it. The illicit market would continue to be addressed through inspection, distribution controls and prosecution, none of which change when a tariff bracket is added.

What is at stake for the industry

Tier boundaries are a competitive variable, not only a fiscal one. In a multi-layer system, the position of each threshold determines which manufacturers face which unit cost, and therefore how large producers and smaller, labour-intensive operators compete against one another. Any redrawing of the structure reshuffles that balance, which is why excise design is contested well beyond the health ministry and the tax authority.

The consequences run down the chain. Product mix shifts alter demand for leaf tobacco and cloves, the profile of factory output, and the pricing architecture that distributors and retailers work with. For the state, a market that concentrates in the lowest tiers generates less revenue per stick than the headline tariff implies, so collections can lag behind rate increases.

Kompas.com presents the additional layer as a policy discussion rather than a settled decision, and the report does not indicate that the structure has been changed. Until the tier framework for the next tariff cycle is fixed, manufacturers, leaf suppliers and distributors are working without a firm basis for pricing and volume planning, while tobacco control advocates argue that every new rung in the ladder makes the excise instrument weaker.