Gde Anugrah Arka, Jakarta – Indonesia is set to introduce a new excise tax scheme which could significantly alter the make up of the lucrative cigarette industry and affect two of the biggest and most widely held locally-listed firms.
Permana Agung, the finance ministry's director general in charge of customs and excise, said the scheme was aimed at reducing government interference in the sector while ensuring a sharply higher 2002 budget excise revenue target was met.
"Details of the new scheme are expected to be finalised next month and be effective in January. The impact for the budget and for the industry could be significant that's why we are moving cautiously," Agung told Reuters in an interview on Wednesday.
The cigarette industry is a key revenue earner for the cash strapped government, contributing more than 90 percent of excise revenue. Indonesia increased its targeted excise revenue by 27 percent to 22.35 trillion rupiah ($2.37 billion) under the 2002 draft budget.
Agung said the new scheme would end the government's role in setting minimum retail prices, allowing big firms to introduce cheaper brands and compete head on with smaller companies for the first time in years.
Under the current complex scheme, set up in under the Suharto administration, the government sets minimum retail prices to which the excise tax is based. The amount of cigarette excise tax is determined by several factors, including the volume of cigarettes produced by each firm and type of machinery used in production. Firms with larger volumes and more advanced production methods are slotted into the higher minimum price segment to avoid direct competition with smaller firms.
Fears of a price war
The cigarette industry, one of the few sectors to survive the country's prolonged economic crisis relatively unscathed, is dominated by locally-listed giants Gudang Garam and Sampoerna and unlisted Djarum. Together they control almost half the local annual production of 230 billion cigarettes and some analysts say the new scheme could see them take over considerable market share from smaller companies. The big three are also run by Indonesia's minority ethnic Chinese while some of the smaller firms are controlled by indigenous Indonesians.
This dichotomy also makes the government nervous about the impact of a possible price war. Agung said the government, fearful the new scheme could trigger a price war, would introduce temporary measures to protect smaller operators.
"Small firms will not be able to compete with say Gudang Garam which may cut prices so low and drive out the competition. In this case there would be a price war and we don't want this to happen," he said. "The scheme will be accompanied by a regulation whereby firms will not be allowed to lower existing selling prices for their products," Agung said. He did not say how long that regulation would be in place.
The government currently defines large firms as those producing more than six billion cigarettes annually, while mid-sized companies are those with annual output of 2-6 billion cigarettes.
More freedom on taxes
Agung also said producers would be able to decide which price brackets they wanted their products to be taxed. Some analysts say Sampoerna – which has to pay more excise tax because it sells more premium products – would stand to benefit more than its peers under the new scheme. They say the scheme would allow Sampoerna to lower its selling price, putting them into a lower price segment and therefore lower its tax burden.
But Agung said the new scheme would not allow this to happen. "For example, if the [retail] price is up to 1,000 rupiah, [the excise cost] will be 10 rupiah, for those between 1,000 to 5,000 [the excise cost] will be 15 rupiah ... So if Sampoerna sets high prices, it has to pay high excise taxes," he said.
Excise taxes are a huge drain on cigarette companies. The government currently applies an excise tax of up to 40 percent on cigarettes as well as an 8.4 percent value added tax.