Indonesia's planned cigarette tax hike to lead to production cut, layoffs

JAKARTA (Reuters) - Plans by the Indonesian government to raise tobacco excise tax and minimum cigarette prices next year will force companies to cut production and potentially cause layoffs, industry associations said on Wednesday.

Indonesia has one of the world’s highest smoking rates and tobacco was responsible for 14.7% of all deaths in the country, mostly through cardiovascular diseases, according to the World Health Organization.

The government wants to reduce consumption by raising minimum cigarette prices across all categories by an average of 35% and cigarette taxes by 23%.

Three associations of cigarette makers warned in a joint statement the steep increase would force them to cut 15% of production volumes, resulting in disruption in the cigarette sector, a 30% drop in absorption of tobacco and clove, job cuts and an increase in sales of illegal cigarettes.

“The tobacco industry is a strategic industry that gives a big contribution of 10% of the state budget, or as much as 200 trillion rupiah ($14.2 billion),” they said in a statement, adding that they were “disappointed” they had not been consulted prior to the announcement.

The industry produced 330 billion cigarettes in 2018, according to government data, while the associations say the industry employs 7.1 million people in manufacturing and sales of tobacco products and tobacco plantations.

Finance Minister Sri Mulyani Indrawati on Monday defended the planned hike, saying the government had tried to find “a balance” between rising numbers of young smokers and cigarettes’ popularity among Indonesia’s poorest, with the possible impact on the livelihoods of tobacco farmers.

Reporting by Maikel Jefriando and Tabita Diela; Writing by Gayatri Suroyo; Editing by Toby Chopra