Suppressing Demand of Cigarette

Increment of tobacco excise tariff followed by the increase of cigarette price does not reduce the consumption and production of cigarette.

Suppressing Demand of Cigarette

by Mansur Afifi (Professor of Economics from University of Mataram)


Government ascertains to increase tobacco excise tariff after value added tax of tobacco product decided to rise next year. The increment of tobacco excise tariff causes to the increase of national income from excise. In National Budget Plan of 2016, government targets to get income from excise IDR 155.5 trillion or increase 6.7% from last year target IDR 145.7 trillion.

As the greatest contributor for excise income (96%), tobacco excise tariff rise 23.5% result from increment of excise income. The increase of tobacco excise tariff is regarded as the highest compared to several years ago which was merely 7-9%.

The interesting part is although tobacco excise tariff increased and followed by the increase of cigarette price, demand of cigarette and production of cigarette. In 2013, production of cigarette in Indonesia reached 341.9 billion, then rose become 353 billion in 2014. Cigarette production until the end of 2015 is targeted to become 360 million. This condition becomes anomaly because increment of tobacco excise tariff expected to reduce the demand and production of cigarette.

Excise Function

Intrinsically, excise is government’s pickings for goods that have particular characteristics, the consumption needs to be controlled, the distribution has to be supervised, the usage can bring negative impact for society or environmental, and the consumption needs tax for the balance and justice.

Therefore, purpose of excise especially for cigarette is to control consumption and supervise cigarette distribution because of its effect on health. The excise tax will have an impact on the decrease of people’s willingness to smoke.

Nevertheless, national income target may not be the main reason to increase excise. Actually, excise is an incentive for the consumption of dutiable goods. Therefore, increasing high price for dutiable goods can reduce the demand for that good.

In economic activity, the principal incentive and disincentive is price. Price is a signal for producer to produce and customer to buy. Lower price will increase a tendency to buy good, and vice versa. Thus, higher price becomes disincentive for someone to consume cigarette.

In fact, cigarette consumption does not always in line with that theory. Increment of tobacco excise tariff followed by the increase of cigarette price does not decrease the consumption and production of cigarette. Various factors become reasons behind the increase of cigarette consumption like emerge of new potential smokers, the increase of cigarette consumption each person because the rise of income and addiction factor.

This condition shows that the increment of tobacco excise tariff is not enough to decrease cigarette consumption. Deducting smoking activity does not give incentive for them whom are going to stop smoking but disincentive for them whom are smoking to diminish their consumption if they cannot stop. Back to the function of excise as a production controller then excise has to be designed in such manner to effectively deduct the demand and production of cigarette.

Smoking Disincentive

Except excise, government has to make health promotion program with campaigning healthy life without cigarette continually. Obtained fund from tobacco excise can be used to support the efforts to diminish demand and production of cigarette. Therefore, excise functioning as smoking disincentive gains its objective.

Another disincentive is increasing no-smoking area with enacting law in that area. Public place like school, hospital, market, library, station, terminal, place of worship, city garden, government office and other public places must be free from cigarette smoke. Thus, room for smoker becomes limited so they will decrease their desire to smoke.

Government can add requirement of no smoking to get Local Health Scheme. This requirement is important because smoking activity did by poor family does not only worsen their health but also their wealth. Limited income gained by poor family will make their family suffer because that income must be divided to buy cigarette.

Besides that, if government has a commitment to decrease the amount of smoker, “not smoking” must be one of requirements to apply a job as a civil servant. Therefore, the youth and teenager will not try to smoke because it can threaten their future. Like drugs, every civil servant identified consuming cigarette will get the sanction. Government also has to establish an act of no-smoking for civil servant gradually.

As the consequences of the increment of tobacco excise tariff, government has to anticipate possibility of illegal cigarette which can change legal cigarette. The presence of illegal cigarette causes cigarette supply in market declining significantly and gives a chance for people to consume cigarette with cheaper price than legal cigarette.

If government is careless, increment of tobacco excise tariff will not achieve income target and succeed to deduct consumption and production of cigarette.

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