Malang. Finance Minister Purbaya Yudhi Sadewa is considering adding an excise tier for cigarettes, a move the government says could provide a pathway for illegal tobacco products to enter the legal market.

From a fiscal economics standpoint, the argument that an extra excise layer could broaden the tax base has solid theoretical grounding, said Imanina Eka Dalilah, a senior researcher at the Center for Economic Policy Research, Faculty of Economics and Business, Universitas Brawijaya.

“If this conversion is truly additional in nature, state revenue from excise and indirect taxes could increase, while also strengthening the legitimacy of law enforcement,” Imanina said on Friday.

However, she cautioned that such fiscal gains are not guaranteed in practice. If the new tier instead shifts production and consumption away from existing legal segments toward lower-tax brackets, the result would be revenue cannibalization rather than an expanded tax base.

Imanina noted that concerns voiced by small and medium-sized compliant manufacturers are economically rational. Law-abiding producers could face fresh competition from previously illegal players that are legalized through lighter tariffs.

“In institutional economics theory, this situation risks creating moral hazard, where past compliance no longer offers an advantage over violations that are later forgiven through regulatory changes,” she said.

Imanina added that the additional tier could help curb illegal cigarettes only if it is treated as a transitional instrument, not a permanent solution. International experience shows that conditional legalization reduces illicit markets only when paired with strict enforcement against actors who remain outside the system.

“Without that, rational actors will simply wait for the next policy concession, while legal producers face mounting price pressure,” she said.

According to Imanina, the core issue is not whether an extra excise layer is permissible, but how it is designed and governed. Any new tier must include tight safeguards to prevent consumption shifts and revenue erosion, be temporary with a clear transition period, and impose strict production volume limits to ensure it genuinely converts illegal products into legal ones.

She said the caution expressed by compliant industry players reflects rational concerns over policy consistency and credibility. The government, she added, must ensure that compliance is rewarded, violations are not incentivized, and fiscal objectives are met without undermining the stability of the legal industry.

“Otherwise, an additional excise layer risks becoming a short-term fix that creates long-term problems,” Imanina said.

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