Government Preparing Regulation to Combat Illegal Cigarettes
The Indonesian government is actively planning to issue a new regulation intended to significantly curb the widespread circulation of illegal cigarettes, particularly those being sold without the requisite excise bands, a problem that has grown sharply in recent years.
Deputy Minister of Industry Faisol Riza confirmed in Jakarta on Monday that “The concept is currently being prepared,” highlighting the urgency of the matter.
Official data from the Ministry of Industry clearly illustrates the escalation of this issue, showing that illegal cigarettes accounted for just 3.03 percent of the total cigarette volume in 2019.
Alarmingly, this figure climbed to 6.9 percent by 2023, representing a substantial increase in the market share of untaxed products.
Riza specifically pointed out that the majority of these untaxed items are machine-rolled clove cigarettes (Sigaret Kretek Mesin/SKM).
He issued a stern warning that the unchecked illegal circulation is severely disrupting the domestic legal tobacco industry, leading to a noticeable drop in the production output of legal cigarettes.
This disruption has tangible negative consequences, as Riza noted: “Several producers have reported impacts such as idle rolling machines, reduced utilization, and layoffs, which ultimately affect workers’ welfare.”
He explained that Indonesian smokers are highly price-sensitive consumers who often gravitate toward cheaper products, which directly fuels the demand for readily available illegal cigarettes.
To address this complex issue effectively, he urged that a “conducive business climate can only be realized if all parties, including the public, work together to eradicate the circulation of illegal cigarettes.”
Integrated Strategy to Formalize the Tobacco Sector
In parallel with the new regulatory push to restrict the illegal sale of cigarettes, the government is also implementing a strategic, multi-pronged approach focused on tax stability and formalizing producers through the expansion of special industrial zones.
Finance Minister Purbaya Yudhi Sadewa announced last Friday that the government has opted not to raise the excise tax on tobacco products in 2026.
This decision, which offers tax stability, will be coupled with the strategic expansion of Tobacco Products Industry Zones (KIHT) to encompass more regions, following a thorough evaluation of existing zones.
This twin-pillar strategy aims to stabilize the legal market while simultaneously offering a clear pathway for non-compliant actors.
According to Sadewa, a key objective is to actively attract existing illegal cigarette producers to join these special zones.
Operating within a KIHT would enable them to transition into legal entities, operating formally as part of the nation’s tax-paying system.
This move is critical because the continued circulation of illegal cigarettes in Indonesia shows an increasing trend compared to the previous year, representing potential state revenue losses amounting to tens of trillions of rupiah.
The core of the problem lies in the growing sales volume of cigarettes without excise stamps, followed by other issues such as the use of counterfeit stamps, the misuse of legitimate excise stamps, and the fraudulent circulation of reused stamps.
Economic Impact and Future Policy Direction
The persistent circulation of untaxed tobacco products presents a significant economic challenge, not only through substantial losses in potential state revenue but also by directly harming the operational capacity and labor stability of the legal tobacco industry.
The rampant sale of illegal cigarettes directly disrupts the entire legal tobacco industry ecosystem, leading to a measurable decline in overall production volumes and a reduced utilization rate for sophisticated manufacturing machinery, which inevitably translates into adverse effects on the welfare of thousands of industry workers.
The government’s decision to maintain the tobacco excise tax rate for 2026 is a calculated risk, aiming to prevent a sudden surge in the price gap that historically drives consumers toward cheaper, illegal alternatives, thereby exacerbating the problem.
The focus is instead shifted to enforcement and integration.
By extending the KIHT program, the government provides a formalized structure and incentive for smaller, currently illegal producers of cigarettes to join the legal framework.
This not only broadens the tax base but also ensures quality and regulatory standards are met.
Ultimately, the success of this integrated policy—combining strict regulation to curb illegal practices, tax stability, and an attractive path to formalization—will determine Indonesia’s ability to maximize state revenue from the tobacco sector while simultaneously supporting the sustainability and employment capacity of its legal industry.
