Tangerang. The illegal cigarette trade not only hurts legitimate tobacco companies but also poses a significant threat to Indonesia’s fiscal health, with trillions of rupiah in potential revenue lost annually.

Additionally, it undermines public health efforts by enabling cheap access to tobacco, particularly for youth. 

Without decisive government intervention, the gap between law-abiding producers and illegal operations will likely widen, threatening the sustainability of Indonesia’s tobacco industry.

For legitimate tobacco companies already grappling with annual tax hikes and restrictive policies, the rise of tax-free illegal cigarettes exacerbates their challenges. Over the past five years, tobacco taxes have risen by an average of 10 percent annually, placing increasing pressure on the industry.

Industry associations raised alarms on Thursday, warning that the proliferation of illegal cigarettes not only erodes government tax revenues but also makes smoking more accessible to young people due to lower prices.

"How can we compete against illegal cigarette producers who avoid about 70 percent of the costs we have to bear?" said Benny Wachjudi, chairman of the Association of Indonesian Non-Clove Cigarette Producers (Gaprindo).

Without the burden of taxes, underground producers enjoy significant profit margins, enabling them to source high-quality materials and sell their products at lower prices, Benny explained during a discussion hosted by B-Universe Media Holdings in Pantai Indah Kapuk 2, Tangerang.

Rising Costs and Shrinking Markets
Government estimates indicate that 22 billion sticks of illegal cigarettes were sold in 2023, resulting in a loss of at least Rp 15 trillion ($940 million) in unpaid taxes.

Benny noted that after years of insufficient enforcement against illegal cigarettes, these products have cultivated a loyal customer base, further jeopardizing legitimate manufacturers. He complained that taxes and production costs now account for 83 percent of every non-clove cigarette produced.

Non-clove cigarettes, also referred to as "white cigarettes," differ from Indonesia's popular kretek cigarettes, which feature a blend of tobacco and cloves that create the signature cracking sound when burned.

Henry Najoan, chairman of the Association of Indonesian Cigarette Factories (GAPPRI), echoed Benny’s concerns. He pointed out that the steep increase in cigarette excise taxes -- around 60 percent between 2020 and 2024 -- has heavily impacted registered tobacco companies while inadvertently encouraging the growth of illegal cigarette production.

In 2019, the combined output of registered tobacco companies in Indonesia reached 359 billion sticks, but that figure dropped to 318 billion sticks in 2023. This contraction has been accompanied by plummeting revenues for legitimate producers, further squeezing the industry.

The decline in legal cigarette production doesn’t mean fewer people are smoking. Instead, it reflects a shift toward illegal cigarettes, Henry said.

Henry proposed a three-year moratorium on tax hikes to provide relief for registered producers, coupled with “extraordinary measures” to combat illegal cigarette production and distribution.

"We urge the government to review current regulations and ease restrictive policies targeting legitimate producers," Henry added.