THE ILLICIT CIGARETTE TRADE IN INDONESIA

3.3 Illicit Cigarette Identification

In order to measure the extent illicit cigarette, we employ illicit pack identification method –
measures the magnitude illicit cigarette based on information that objectively collected from the
packs and compares to benchmark the criteria of illicit cigarette pack that we have determined.
In this study, we validate the packs based on two main criteria, which are the legitimate of excise
stamp and pictorial health warning. In our opinion, those criteria are sufficient to identify the licit
and illicit cigarette pack. Although, illicit cigarette is associated with low or cheap price, in
Indonesia the price difference between a pack of the most popular and the cheapest brand of
cigarette is quite big and even the low-priced cigarette may be legitimate. Therefore, we decided
to not using price criteria in illicit cigarette identification. Commented [BEH1]: Let’s come back to price later on. I
still think it’ useful to use price, based on two criteria: is
The observation of the active smoker is focusing to the consumers that have cigarettes pack the price paid in the ballpark of what we would expect
for the tax stamp category? And how many packs are
during the survey. Therefore, we exclude those who claimed themselves as active smokers, but being sold for below what we would expect to be a
legitimate price.
may not having pack during the survey, or was informed that they only consume them in retail
Commented [u2R1]: Pending
both in sticks and gram, during the survey took place. The reason is because the physical presence
of the pack is necessary to identify the licit or illicit cigarettes. Furthermore, to date, none of
study able to assess the legitimate of cigarette by observing stick of cigarettes. In other words,
we only validate the respondents who poses, at least, a pack of cigarette. Commented [BEH3]: Again, we can come back to this.
We have some questions that should help us here, but
We have set the benchmark criteria in order to identify illicit cigarette packs. The benchmark it’s difficult to know how successful they’ll be.

criteria refers to the national standard of cigarette excise tax stamp provided by Directorate We also need to report what percentage of
respondents had packs versus smoked singles.
General of Excise and Customs, Ministry of Finance of the Republic of Indonesia and pictorial
Commented [u4R3]: Pending
health warning provided by Directorate General of Disease Prevention and Control, Ministry of
Health of the Republic of Indonesia. Given our references, the benchmark criteria of illicit
cigarette pack in this study as follows:
1. Missing excise tax stamp,
2. Missing pictorial health warning, Commented [BEH5]: This is a nuance, but are there
any packs without health warnings but with an excise
3. Inappropriate excise tax stamp, and stamp? While unlikely, it is possible that a pack is illicit
4. Inappropriate pictorial health warning. in terms of not having a pack warning but that it’s still
excise tax paid.
Packs with at least one of four were classified as illicit cigarette. However, we validate the packs Commented [R6R5]: done
carefully on the first criteria because a missing excise tax stamp not always can be considered as Commented [BEH7]: You need to explain what
inappropriate means, i.e. stamp for wrong category or
an indication of illicit cigarette pack. The stamp may be removed by consumer or may detached fake stamp.
from a pack accidentally. Sometimes, the stamp that removed by consumer leaving a remain Commented [u8R7]: Inappropriate = the stamp that did
not follow the national standard
pieces of stamp since the legitimate stamp has solid gluing. To address this issue, we justify packs
with missing excise tax stamp were also classified as licit cigarette if it is containing with
legitimate pictorial health warning and or leaving a remain pieces of stamp. Furthermore, the
packs without pictorial health warning even though contain excise tax stamp are be classified to
be illicit cigarette since it is impossible a pack paid excise tax without having pictorial health
warning.
Inappropriate excise tax stamp means the presence of some important features on the stamp
such as national symbol (Garuda), Directorate General of Excise and Customs logo, excise tax
tariff, number of sticks content, minimum a pack retail price, and hologram do not comply with
the national standard. If one or more important features is incorrect or doubtful then we
conclude that the pack has inappropriate excise tax stamp. Moreover, to strengthen our
conclusion we employed Ultra Violet (UV) Light Detector, because the legitimate excise tax stamp
has security that visible only in UV Light. Graphically, the legitimate stamp can be seen as follows:
Figure 1. The Legitimate Excise Tax Stamp on Cigarette Pack with Naked Eye

Note:
a) National symbol
b) Directorate General of Excise and Customs logo
c) Excise tax tariff
d) Number of budget year
e) Minimum a pack retail price
f) “INDONESIA” text
g) “CUKAI HASIL TEMBAKAU” text
h) Number of sticks
i) Type of tobacco product
j) Hologram
 k) Personalization

Figure 2. The Legitimate Excise Tax Stamp on Cigarette Pack with UV Light

Source: Directorate General of Excise and Customs, Ministry of Finance of the Republic of
Indonesia (2018)
Inappropriate pictorial health warning means that the picture size is less than 40% of the main
cover, and the picture does not contain one of the four official pictorial health warning suggested
by the government. If the pack does not contain the official pictorial health warning and the size
do not meet the regulation, we decisively conclude that the pack has inappropriate pictorial
health warning. Visually, the legitimate pictorial health warning is noticed as follows:
Figure 3. The Legitimate Pictorial Health Warning

Source: Directorate General of Disease Prevention and Control, Ministry of Health

of the Republic of Indonesia (2018)
4. ANALYSIS
4. 1. The Magnitude and The Demand of Illicit Cigarette
There are several ways to measure the illicit trade cigarette. The illegal nature of tax evasion and
the possible social stigma attached to tax avoidance make the task of measuring the scope of
these activities extremely difficult. Yet various stakeholders are interested in understanding the
phenomena, their magnitude, and the degree of market disruption they potentially represent.
This has motivated the development of methods for estimating the scope of tax avoidance and
tax evasion. A lack of reliable data is a major challenge, since those engaged in tax avoidance and
tax evasion do not keep public records, are not willing to provide the data, and/ or are not
interested in cooperating with researchers. Enforcement authorities may have some data, but
are often bound by confidentiality. Therefore, those who estimate the scope of tax
avoidance/evasion either find a way to creatively use the existing data that have been collected
for other purpose, or collect new data with the main goal to assess the scope of tax avoidance/
evasion1.

Table 1. Profile of Respondent Based on Age, Gender, Education and Income

Age % Gender % Education % Income %

Under Primary
18-27 24,31 6,88 IDR 50.000-2.000.000 58,32
School
28-37 27,84 Male 99,24 Primary School 21,81 IDR 2.000.001-4.000.000 34,34
38-47 24,23 Junior High School 22,92 IDR 4.000.001-6.000.000 5,57
48-57 14,78 Senior High School 42,22 IDR 6.000.001-8.000.000 0,84
58-67 8,33 Female 0,76 University 6,18 IDR 8.000.001-10.000.000 0,28
>68 0,49 >IDR10.000.000 0,77
As stated in the previous chapter, this research uses the consumption survey or primary data to
measure the illicit trade of cigarette based on the consumption approach. Data has been
collected from 1440 smokers, using specific sampling criteria. The graphs below explain the
demography of the respondents from 6 districts. Most of the respondents are men, only less than
1% respondent is women. The enumerator rarely found woman smoking in public area like in Commented [BEH9]: Just confirm here that this is
consistent with the male/female smoking breakdown in
most big city such Jakarta and Surabaya. Based on the age of the respondent, most are coming Indonesia.
from a group range between 18-37 years old, totalling more than 50% out of the total respondent.
I think you could have a table of the demographic (age,
As the survey conducted in six districts, the most respondent are entrepreneurs who own small gender, income, etc) of the smoking population and
your survey.
business, e.g.store.
Commented [tp10R9]: Yes, will include the
demographic table
In this research the consumer behavior captured twice between last consumption and habitual
consumption. The purpose of measurement is to ensure whether the last consumption pattern
that happened when the respondent surveyed is alike with the habitual pattern of smoking. The

1
Understanding and measuring cigarette tax avoidance and evasion, Hana Ross, 2015
data explains that the pattern of the respondent is similar between the last (during the survey)
and the habitual consumption. The first similarity shows that the consumers buying cigarette at
habitual consumption. It is explained in the graph below. The second similarity is the kind of
cigarette that being smoked by the consumer. The different answer between the last
consumption and habitual consumption only counts 1%.
Figure 4. Consumer Behaviour Based on Last and Habitual Consumption

From the data above, most of the respondent buy cigarette from peddler/street vendors, only
fews buying from minimarkets. It is not surprising, as 15% of the respondent buy cigarette per
stick including raw tobacco. The geographic area of the survey also affected the characteristic of
the respondent buying the cigarette. As the area of the survey located in district, the number of
minimarket is less than in city. Based on the type of cigarette being consume, kretek cigarette
with filter is the most popular cigarette being consume than any other type of cigarette. The rest
are kretek cigarette, white cigarette with filter and hand clove cigarette. Commented [BEH11]: Can we compare this to the
market share breakdown in official data since it seems
to line-up quite well (nearly identical).
Cigarette consumption risen from 136 billion to 293 billion cigarette in 1995 until 2013(GATS,
2015). Both population and smoking prevalence rose that period. The total populations in For example: last data I’ve seen for 2017 suggests
74% are SKM, 21% SKT and 5% SPM.
Indonesia increase nearly 35%, while prevalence increased by 37%. Meanwhile the estimation of
Commented [tp12R11]: Still looking for national data
illicit cigarette presence in the Indonesian market ranges from -7% to 17% of total consumption Commented [BEH13]: What is the source of this? Can
for 2004 through 20132. Based on the survey, the magnitude illicit of cigarette in 6 districts is we get more up-to-date data?

3.1%. This number comes from 1225 packs examination that collect from respondent found that Commented [tp14R13]: Done

2
Illicit Cigarette Consumption and Government Revenue Loss in Indonesia. Ahsan 2104
21 respondents have cigarette pack without excise stamp, fake excise stamp and no pictorial
health warning. This number excludes respondent that has no packs or smoke per stick cigarette Commented [BEH15]: Can we break down the features
of each pack and place in a table? Also, I don’t know if
and hand rolled cigarette. This number is quite low than previous estimated number of illicit you’ve done it elsewhere but we need to try and detail
cigarettes. But the point is, it uses different methodology that is not relevant to compare due to the source of those packs, i.e. domestic or
international.
different methodology of measurement. The characteristic of the respondent that consume illicit
Also, this makes me thing we need to look at prices of
cigarette comes from low middle income and low education background. legal cigarettes. Are the prices right for the category or
are they below the price minimum.
Table 2. Illicit Identification Criteria
Commented [tp16R15]: Yes, will add the table

Illicit Identification Criteria Share (%) Unidentified (%)

Absence of tax stamp 2.11

Fake tax stamp 0.33 3.74
Used tax stamp 0.42 7.39
Absence of PHW 0.57
Fake PHW 0.08

Though the number of illicit is quite low, consumers have a good understanding about cigarette
taxation and the existence of illicit cigarette. Seventy-five percent more respondent answer that
cigarette product is taxed and they aware that their cigarette is taxed. It is means that the
awareness of consumer for cigarette is good. The respondent aware that the goods that being
consume is controlled by government.
Table 3. Illict and Licit Cigarette Consumers Based on Educational Background and Average
Expenditure
Education
Elementary Average
Classification Elementary College/
School (not JHS SHS Expenditure
School University
finished)
Illicit 1.2% 1.1% 2.2% 1.7% 1.2% 2,312,500
Licit 98.8% 98.9% 97.8% 98.3% 98.8% 2,419,394

More than half respondent know that illicit cigarette does exist. It is easy to find and to buy illicit
cigarette around. The illicit cigarette generally distributed in a peddler that is owned by
somebody, it is difficult to find the illicit cigarette in supermarket. Only 20% respondent claimed
to consume the illicit cigarette. On the other words, though the illicit cigarette is distributed
freely, consumers prefer to consume ilicit brand due to the taste and probably the risk of
consume illicit cigarette.
 CONCLUSION AND RECOMMENDATION
Conclusion

1. From 1225 packs examination that collected from respondent, it has been found that 21
respondents own cigarette pack without excise stamp, fake excise stamp and no pictorial
health warning (PHW).
2. Although the number of illicit cigarettes are quite low, consumers have a good
understanding about cigarette taxation and the existence of illicit cigarette. More than
seventy-five percent respondents answer that cigarette product is taxed and they aware
that their cigarette is taxed.
2. On the other hand, based on the survey, though the illicit cigarette is distributed freely,
consumer prefer to consume the licit brand due to the taste and probably due to the risk
of consuming illicit cigarette.
3. However, most respondent are unaware that illicit cigarette does exist. This is shown by
the fact that respondents who are aware of non-taxed, illicit cigarettes only amount to 20
percent (293 respondents) of the total number of respondents.
4. Not all respondents who are aware of illicit cigarettes are interested in smoking illicit
cigarettes.
5. Most people who smoke illicit cigarettes get the illicit cigarettes from another person,
instead of purchasing the cigarettes themselves. For those who purchase illicit cigarettes
by themselves, it may be deduced that the lower price is the main reason for them to buy
illicit cigarettes.
6. Accessibility is also a considerable factor in the consumption of illicit cigarette. This is
shown by the fact that the Regency of Banyumas and the Regency of Malang are the
regencies with the largest number of respondents smoking illicit cigarettes.
7. There will be no substantial increase in the demand for substitute cigarettes, even though
the price of cigarette increases drastically. Several matters causing inelasticity may consist
of scarcity of illegal cigarette, especially with a strict tobacco excise monitoring system in
effect; consumers tend to not replace their cigarette to another brand, even if it is sold in
cheaper price; and others.
8. If the excise is increased at the same percentage as the increase of the cigarette price, the
aggregate excise proceeds are projected to increase. Even though there is a “threat” of
the increasing consumption of illegal cigarette driven by the increased price of excise
cigarettes, this will not diminish the proceeds from excise. The preservation of the
amount of excise proceeds occurs as the loss of excise proceeds incurred due to the
change in the consumption of excise cigarette to the consumption of illegal cigarette is
still less than (or compensated by) the increase of the excise proceeds which is pushed by
the increase of the cigarette excise itself.
9. In Bandung Regency, the recorded price elasticity of the demand for substitute cigarette
is higher compared to the elasticity in the surveyed region. The numbers show that the
cigarette consumers in Bandung and the Regency of Bandung is more sensitive to the
increased prices compare to the other regions surveyed, and there is also a factor of
tendency to not revolve on a single brand onlys and the availability of substitute cigarettes
in the region.
10. The research shows that if the cigarette price is increased to 100 percent or even twice
more expensive than previous price, the number of smokers quitting their habit is higher.
The significant price increase will be effective to suppress youth smokers.