Abstract
BackgroundIllicit cigarettes comprise more than 11% of tobacco consumption and 17% of consumption in low- and middle-income countries. Illicit cigarettes, defined as those that evade taxes, lower consumer prices, threaten national tobacco control efforts, and reduce excise tax collection.MethodsThis paper measures the magnitude of illicit cigarette consumption within Indonesia using two methods: the discrepancies between legal cigarette sales and domestic consumption estimated from surveys, and discrepancies between imports recorded by Indonesia and exports recorded by trade partners. Smuggling plays a minor role in the availability of illicit cigarettes because Indonesians predominantly consume kreteks, which are primarily manufactured in Indonesia.ResultsLooking at the period from 1995 to 2013, illicit cigarettes first emerged in 2004. When no respondent under-reporting is assumed, illicit consumption makes up 17% of the domestic market in 2004, 9% in 2007, 11% in 2011, and 8% in 2013. Discrepancies in the trade data indicate that Indonesia was a recipient of smuggled cigarettes for each year between 1995 and 2012. The value of this illicit trade ranges from less than $1 million to nearly $50 million annually. Singapore, China, and Vietnam together accounted for nearly two-thirds of trade discrepancies over the period. Tax losses due to illicit consumption amount to between Rp 4.1 and 9.3 trillion rupiah, 4% to 13% of tobacco excise revenue, in 2011 and 2013.ConclusionsDue to the predominance of kretek consumption in Indonesia and Indonesia’s status as the predominant producer of kreteks, illicit domestic production is likely the most important source for illicit cigarettes, and initiatives targeted to combat this illicit production carry the promise of the greatest potential impact.
Highlights
One factor that may fuel illicit trade in the Indonesian market is the presence of a complex tax system, where the excise tax that is levied depends on the type of cigarette produced, the scale of the producing company, the method of production, and the retail price range for the final product
While the trade discrepancies are large compared with recorded Indonesian imports, imports represent a small fraction of domestic consumption, and smuggling is considered a relatively small source for illicit cigarettes available within the Indonesian market
The experience of the Directorate General of Customs and Excise officer consulted for this study indicated that illegal domestic production far exceeds cigarette smuggling, and illicit production comprised roughly 90% of illicit cigarettes
Summary
Merriman [7] identified several approaches to estimate the magnitude of illicit cigarettes, three of which are employed by this paper. Bilateral trade value data for cigarettes were obtained from the United Nations Commodity Trade Statistics Database and used to measure trade discrepancies This series differs from the series used for net export data in the first method and is employed both because it captures mirrored exports to Indonesia and because data exists at the bilateral level, which allows for the assessment of especially large sources of smuggled cigarettes. The Directorate General of Customs was consulted, and based on this consultation, it is believed that illicit cigarettes are overwhelmingly of domestic origin This finding suggests that smuggling plays a lesser role in the availability of illicit cigarettes in the Indonesian market and that results based on the first method will produce results that more accurately reflect the context of Indonesia. The numbers of cigarettes are in turn multiplied by the highest and lowest tiers for each cigarette type, which provides an upper and lower bound for the estimates of tax losses
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