House of Representatives Rejects Proposed 2026 Cigarette Excise Tax Hike, Recommends Minister of Finance Reconsider Increase

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Indonesian Regulatory News: Debate Over Cigarette Excise Taxes

Jakarta, CNBC Indonesia – Indonesian politicians are debating whether to increase cigarette excise taxes in 2026 as the government seeks to increase tax revenue. Members of House of Representatives Commission XI are urging the government to refrain from raising cigarette excise (CHT) rates, citing pressure on the cigarette industry.

Hanif Dhakiri, Deputy Chairperson of Commission XI (PKB Faction), stated that raising CHT rates would be inappropriate given the current pressures on the industry. He proposed exploring innovative measures to achieve tax revenue targets without increasing tariffs. He highlighted the labor-intensive nature of the cigarette industry, warning that higher taxes could lead to job losses.

Harris Turino, a member of Commission XI (PDI-P Faction), echoed these concerns, pointing to recent terminations at Gudang Garam, a major cigarette manufacturer. He argued that a 10% increase in CHT would make it impossible for cigarette companies to cover production costs. Turino suggested focusing on eradicating illegal cigarettes as a way to boost revenue without increasing taxes.

The government is currently targeting Rp334.30 trillion in customs and excise revenue for 2026,a 7.7% increase from the estimated Rp310.35 trillion in 2025.

Finance Minister Purbaya Yudhi Sadewa has indicated a willingness to review the CHT policy for 2026.He acknowledged the issue of illegal cigarettes and suggested that successful action against them could perhaps reduce the need for tax increases.

In 2023, action against illegal cigarette products resulted in revenue of Rp1.76 trillion. The Ministry of Finance is still exploring potential strategies.

What potential modifications to the excise tax proposal might the Minister of Finance consider to gain support from the House of Representatives?

The Vote and Its Immediate Impact on Tobacco Taxes

Yesterday, September 15th, 2025, the House of Representatives voted down the proposed increase to the national cigarette excise tax slated for implementation in 2026. The bill, initially championed by the Minister of Finance, aimed to raise taxes on each pack of cigarettes by $2.00, a move projected to generate important revenue for national healthcare programs. The vote was surprisingly decisive, with a margin of 235 to 188 against the increase. This rejection signals a potential shift in legislative priorities regarding tobacco control and revenue generation.

The immediate impact is the preservation of the current cigarette tax structure. Consumers will not see an increase in the price of cigarettes at the start of 2026, and tobacco companies will avoid the anticipated financial burden. However, the Minister of Finance has indicated a willingness to revisit the proposal, possibly with modifications.

Key Arguments Against the Excise Tax Increase

Several factors contributed to the House’s rejection of the proposed tax hike. Representatives voiced concerns across a spectrum of issues, including:

* Economic Impact on Border States: Lawmakers from states bordering countries with lower cigarette taxes argued that a significant increase would exacerbate cross-border shopping, hurting local businesses and reducing overall tax revenue.This phenomenon,known as “cigarette tourism,” has been a long-standing issue in these regions.

* Potential for Increased Illicit Trade: Opponents warned that higher taxes would fuel the black market for cigarettes, leading to an increase in counterfeit and smuggled products. This not only deprives the government of revenue but also poses public health risks due to unregulated products.

* Regressive Tax Concerns: Critics highlighted that cigarette taxes disproportionately affect lower-income individuals, who are more likely to smoke and less able to absorb the increased cost.This argument framed the tax as a regressive measure, potentially exacerbating economic inequality.

* Recent Legislative Focus on Flavored Tobacco: The recent passage of legislation aimed at prohibiting flavored tobacco products (as reported by the American Lung Association – https://www.lung.org/media/press-releases/house-passes-bill-prohibit-flavored-tobacco) was cited as sufficient action taken regarding tobacco control, rendering the excise tax increase redundant.

The Minister of Finance’s Response and Potential Revisions

Following the vote, the Minister of finance released a statement expressing disappointment but acknowledging the concerns raised by the House. The statement indicated a commitment to working with lawmakers to find option revenue solutions and potentially revise the excise tax proposal.

Possible revisions being considered include:

1. Phased Implementation: Introducing the tax increase gradually over several years to mitigate the immediate economic shock.
2. Targeted Tax Credits: Offering tax credits to businesses in border states to offset potential losses from cross-border shopping.
3. Increased enforcement: Strengthening efforts to combat illicit cigarette trade and ensure tax compliance.
4. Alternative Revenue Streams: Exploring other sources of revenue, such as taxes on e-cigarettes and other tobacco products, as highlighted in the recent flavored tobacco ban legislation.

Past Context: Cigarette Excise Tax Trends

The history of cigarette excise taxes in the nation is marked by periods of significant increases followed by periods of stability.

* Early 2000s: Saw considerable tax hikes at both the federal and state levels, driven by growing awareness of the health risks associated with smoking.

* Mid-2010s: A period of relative stability, with tax increases becoming less frequent.

* Recent Years: Increased focus on alternative tobacco products, like vaping, and the introduction of taxes on these products.

Understanding these trends is crucial for predicting future policy changes and their potential impact on the tobacco industry and consumers. The current rejection of the 2026 tax hike could signal a return to a period of stability, but the Minister of Finance’s willingness to reconsider suggests that further changes are likely.

Impact on the Tobacco Industry and Related Sectors

The rejection of the tax increase provides a temporary reprieve for tobacco companies. However, the long-term outlook remains uncertain, especially considering the ongoing efforts to regulate and restrict tobacco products.

* Tobacco Manufacturers: Will avoid the anticipated financial burden of the tax increase, allowing them to maintain current profit margins.

* Retailers: Will continue to benefit from stable cigarette prices, avoiding potential declines in sales due to higher costs.

* Agricultural sector: Tobacco farmers may experience continued stability in demand, although the long-term trend towards declining smoking rates remains a concern.

* Healthcare System: Will not receive the additional revenue projected from the tax increase, potentially impacting funding for healthcare programs.

Future Outlook: What to Expect Next

The coming months will be critical in determining the future of cigarette excise taxes. The Minister of Finance is expected to engage in negotiations with the house of Representatives to