Impact of Excise to Retail Price of Cigarettes Case Study of Excise System Comparison in Indonesia for the Period of 2005-2010

vol 17 no.3 Kajian Ekonomi dan Keuangan (2013) by nasruddin djoko surjono

This paper analyzes the impact of implementation of ad valorem , hybrid and specific excise system periods to tobacco price. The main hypothesis HO i.e. there is no difference impact of implementation of ad valorem , hybrid and specific system period to the price. The research question is to answer what fraction of excise is passed on to consumers in each excise systems period and which one of excise system periods has the greatest negative impact on price, which is important to know, when country makes choice on appropriate excise system policy in order to reform their excise system for tobacco control. Monthly data production from 2005-2010 is explored in order to estimate tax incidence in Indonesia. In this period Indonesia has implemented ad valorem , hybrid and specific excise system consecutively. With brands consumption data in Indonesia, the model analyzes by including burden of excise in each excise system in the model. The estimation result of tax incidence model indicates that during government implement specific excise system, the impact of increasing excise is relative higher to the price.

Impact of specific excise rate simplification on cigarette consumption and government revenue in Indonesia

World Customs Journal. Volume 10, Number 1 97.2016

Ade Hidayat and Nasruddin Djoko Surjono

Abstract : This study estimates the impact of excise tariff simplification on cigarette consumption and government revenue. In addition, the study compares the ‘simplification’ case with the ‘no simplification’ case. Several estimation models using unbalanced and sub-balanced panel data, random effect maximum likelihood estimation (MLE) and panel-corrected standard errors (PCSE) are explored to estimate the impact. The results indicate that tariff simplification has a greater impact on raising cigarette prices, reducing consumption, and increasing government revenue than regularly increased excise rates. The greatest impact can be seen in cigarettes produced by large companies and white cigarette machine-made product. The results also suggest that cigarette excise taxes are ‘under-shifted’ to consumers and that producers bear some of the tax burden.

Conclusions Based on the above analyses, the following conclusions can be made:

1. Simplification of a specific excise (tax) rate has a higher impact on raising the prices than the usual rate increase.

2. Increasing the specific excise has the greatest effect in raising prices on tobacco products produced by large manufacturers. The large manufacturers group (Group I/Gol I) is a group of manufacturers that have a production capacity exceeding 2 billion cigarettes per year.

3. The empirical model on tax incidence analysis shows under-shifting, where producers tend to raise prices under the tax increase. This means that producers bear most of the burden of excise.

4. The level of cigarette consumption due to cigarette prices affected by simplification is generally smaller than the consumption of cigarettes which do not undergo simplification of excise rate.

5. Simplification of the tariff structure significantly raises the price and reduces the consumption of White Cigarettes Machine Made (SPM), while it has no effect on consumption of Clove Cigarettes Hand Made (SKT) and even raises this kind of cigarette consumption, likely due to SPM consumers ‘switching’ to this cheaper category of product. SKT is a unique Indonesian tobacco product.

6. Demand for three types of cigarettes—SKM, SKT and STF—is inelastic so it is appropriate to apply the high excise rate to optimise the government revenue from the tax.

7. Simplification of the tariff structure generally has a greater impact on revenue increase than nonsimplification.