Fiscal Policy Office Ministry of Finance of The Republic of Indonesia Development of Excise and Other Product Specific Taxes Priorities for Reform in Indonesia Dr. Nasruddin Djoko Surjono Deputy Director of Customs and Excise Policy Division International Conference on Tax, Investment, and Business (ICTIB) 2016 Jakarta, 24May 2016
Presentation outline 1. Basic Excise Policy Consideration 2. Development of Excise Policy On Tobacco Excise On Alcoholic Beverage 3. Strategic Excise Policy Priorities 4. Developing an Excise Roadmap Slide 2
Basic Excise Policy Considerations The characteristics of excisable goods as stated in article 2 of Excise Act no. 39/2007: TOBACCO PRODUCTS Its consumption needs to be controlled Its circulation needs to be monitored; Excisable Goods in Indonesia (Article 4) Its consumption may negatively impact for society or the environment, or ALCOHOLIC BEVERAGES ETHYL ALCOHOL Its consumption needs to be imposed by tax for the sake of fairness and balance Extensification of Excisable goods (subject to excise) regulated further by the Government Regulation 3
Excise Tax Policy a. If made in Indonesia: 1. 275% of factory price; or 2. 57% of retail price. b. For imported products: 1. 275% of customs value plus import duty; or 2. 57% of retail price. Current excise tax system: Tariff & Tax Base Specific tariff system by considering the type of tobacco, production group, and minimum retail price. a. If made in Indonesia: 1. 1.150% of factory price; or 2. 80% of retail price. b. For imported products: 1. 1.150% of importing price plus import duty; or 2. 80% of retail price. Current excise tax system: Specific tariff system by considering the alcohol content. Regulation Tax rates could be changed from a percentage into basic price in Rupiah for each unit of goods subject to excise. (Art 5, para 3) Excise tax policy to achieve revenue considering the industry conditio n and the aspiratio ns of industrial businesses is submitted to parliam ent for approval. (Art 5, para 4) Changes in excise tax policy has several objectives, such as controlling co nsum ptio n, generating revenue, and/or monitoring the goods subject to excise, among others. (Art 5, para 5) Considerations in using specific tariff system: 1) Government does not distort the market; 2) Fits to perform control function; 3) Allows simple administration system in co llecting and controlling; and 4) Government does not have to set the base price. Current Policy 4
Tobacco Excise Policies in Last 5 Years 2010 2011 2012 2013 2014 2015 2016 Excise Tariff Adjustment 16,0% 6,0% 16,3% 8,5% 0% 8,72% 11,33% Local CigaretteTax - - - - 10% 10% 10% Total Adjustm ent (Excise + Local Tax) 16,0% 6,0% 16,3% 8,5% 10% 9,59% 12,46% Production (billion sticks) 292,22 317,82 325,76 345,88 344,52 348,10 351,6/344,6 Growth of Production 8,8% 2,5% 6,2% -0,4% 1,04% + 1% Key performance indicators of excise tax policy: Production Growth Smoking prevalence Number of labors Revenue Cigarette price Etc... MoHealth Decree no. 40 year 2013; the target of prevalence decreasing 2015-2019: 1% per year 10% in increasing tariff Riskesdas 2007-2013
Development of Excise Tax Policy on Tobacco Excise Tax Structure on Cigarettes 2016 Group Machine-Rolled Clove Cigarette Machine-Rolled White Cigarette Hand-Rolled Clove Cigarette Source: PMK-198/PMK.011/2015 Class of Prod. Min. Retail Price Tariff (Stick) (IDR/Stick) (IDR/Stick) I > 2 billion 1.000 480 > 740 340 II <=2 billion 590-740 300 I > 2 billion 930 495 II I <=2 billion > 2 billion > 800 305 505-800 255 > 1.115 320 775-1.115 245 > 605 155 II > 350 million 2 billion 403-605 140 IIIA > 50-350 million 400 90 IIIB 50 million 370 80 Advolorem Excise System 1995-1995-2007 2007-2008 2009- present Hybrid Policy Specific Raise the selling of retail price and tax rate; Simplify thestructure ofexcise tariff Since 2011, the government has simplified the structure of excise tariff, from 19 tiers to 15 tiers,13 tiers, and 12 tiers at present 6
Total Excise Revenue vs Total Tax Revenue 120.0 100.0 8.8% (Billion US$) *1 US$ = Rp 13.000 8.4% 8.4% 8.4% 9.7% 10.1% 82.9 10.3% 88.2 11.7% 95.1 12.0% 10.0% 80.0 60.0 6.3% 7.4% 54.3 53.2 51.8 60.4 70.7 75.4 8.0% 6.0% 40.0 33.0 4.0% 20.0-2.9 3.4 3.9 4.4 5.1 5.9 7.3 8.3 9.1 11.1 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total Excise Revenue* Total Tax Revenue % Excise : Total Tax 2.0% 0.0% *) Total excise revenue from Tobacco, Alcoholic Beverages, and Ethyl Alcohol ü More than 95% of excise revenue comes from Tobacco products (dependency) 7
The Shares of Excise Revenue 2006 2015 3.16% 0.4% 1.5% 0.11% TOBACCO PRODUCTS ALCOHOLIC BEVERAGES ETHYL ALCOHOL 98.1% 96.73% The share of excise revenue from tobacco slightly reduce but still dominant untill now 8
International Best Practices on Tobacco Tax Administration Best Practices 1) Use tobacco excise tax increases to achieve the public health goal of reducing the death and disease caused by tobacco use 2) Set tobacco excise tax levels so that they account for at least 70 percent of the retail prices for tobacco products 3) Rely more on specific tobacco excises as the share of excise taxes in retail prices increases 4) Rely more on excise taxes than on import duties 5) Where revenue increases are a goal, rely on tobacco tax increases to achieve revenue increases 6) Automatically adjust specific tobacco taxes for inflation 7) Increase tobacco taxes by enough to reduce the affordability of tobacco products 8) Include tobacco excise tax increases as part of a comprehensive strategy to reduce tobacco use 9
International Best Practices on Tobacco Tax Administration (2) 9) Use a portion of tobacco tax revenues to support other tobacco control and/or health promotion efforts 10)Do not view low taxes and prices for some tobacco products as a pro-poor policy 11)Do not allow concerns about the regressivity of higher tobacco taxes to prevent tobacco tax increases 12)Do not allow concerns about employment impact to prevent tobacco tax increases 13)Do not allow concerns about the inflationary impact of higher tobacco taxes to deter tax increases 14)Adopt new technologies to strengthen tobacco tax administration and minimize tax avoidance and evasion 15)Strengthen tobacco tax administrators capacity by licensing all involved in tobacco product manufacturing and distribution 16)Ensure certain, swift and severe penalties for those caught engaging in illicit trade in tobacco products Source: WHO Technical Manual on Tobacco Tax Administration 10
Development of Excise Tax Policy on Alcoholic Beverages Excise Tax Structure on Alcoholic Beverages 2006-2014 2006 2010 2014 Category Content Of Alcohol Excise (IDR per Litre) Domestic Production Import Luxury Tax Cate gory Content Of Alcohol Type Excise (IDR per Litre) Domestic Production Import Excise (IDR per Litre) Domestic Production Import A1 s/d 1% 2.500 2.500 40% A2 >1% s/d 5% 3.500 5.000 40% B1 >5% s/d 15% 5.000 20.000 40% B2 >15% s/d 20% 10.000 30.000 40% A 5% Beer 11.000 11.000 13.000 13.000 B >5% - 20% Wine 30.000 40.000 33.000 44.000 C >20% s/d 55% 26.000 50.000 75% C > 20% Spirit 75.000 130.000 80.000 139.000 Policy Simplify thestructure ofexcise tariff Eliminate the Luxury Tax => Excise in 2010 Adjust the tariff (inflation/ economic growth) 11
Priorities of Strategic Excise Policy Formulation of tariff policy; Define specific excise rate increase with the intent of increasing the selling price of the product, thereby reducing the level of consumption. Extensification of goods subject to excise; The Indonesian government is conducting feasibility studies related to some types of items to be defined as goods subject to excise. 12
Priority to Extend the New Excisable Goods 1 Fulfill the characteristics of excisable goods as stated in article 2 of Excise Law (negative externalities) 2 3 High potential of state revenue Policy-making process involves the relevant ministries and stakeholders 5 4 Supported by Parliament & Public Harmonization with the other policies (investment, business, industrial and labor) 6 Administrative feasibility aspects of excise collection 13
Strategic Excise Policy Priorities (2) Law enforcement; Law enforcement against illegal trade of goods subject to excise; use of fake excise stamps, without excise stamps, and excise stamps not as intended. This resulted in the avoidance of tax payments that should be paid. Audit and Verification; Effective audit and verification carried out on companies based on risk management. 14
Developing an Excise Roadmap Reduce Ad hoc Excise Tariff Adjustment Use excise tax increases to achieve the public health/environment goal of reducing negative externality Simpler is better Automatic adjustment of specific excise taxes for inflation Strengthen tobacco tax administrators capacity to monitor tobacco product markets and evaluate the impact of excise increases Adopt new technologies to strengthen excise administration and minimize tax avoidance and evasion A roadmap has the benefits of: Agreed reform and implementation milestones; and Effective timeframes and lead-in periods 15
Fiscal Policy Agency Ministry of Finance of The Republic of Indonesia