Indonesia’s tobacco industry is experiencing a significant shift following the government’s decision to maintain excise tax rates in 2025 while increasing the minimum retail price of cigarettes. By stabilizing excise taxes and imposing a price floor, the government aims to regulate consumption while ensuring revenue sustainability and promoting public health.
Hence, how is this policy combination could prevent the excessive cigarette downtrading, where smokers shift to more affordable but often lower-quality alternatives?
Excise Tax Stability and Rising Minimum Retail Prices
For years, Indonesia has relied on periodic excise tax hikes to control cigarette consumption and increase state revenue. However, in 2025, the government opted to keep excise taxes unchanged, a decision that provides stability for both the industry and consumers. This move aims to prevent abrupt price hikes that could encourage a shift toward illicit cigarette trade or unregulated tobacco products.
By maintaining excise taxes, the government ensures that the legal cigarette market remains competitive while preventing the financial burden on lower-income smokers from escalating. This decision also allows businesses to plan their operations without the uncertainty of sudden taxation changes.
While excise tax rates remain stable, the increase in the minimum retail price serves as a direct tool to limit accessibility to the cheapest cigarette brands. By setting a price floor, the government prevents the proliferation of extremely low-cost cigarettes, which often serve as an entry point for young smokers and contribute to increased smoking rates.
The higher minimum retail price ensures that even the most affordable cigarette brands maintain a price level that discourages excessive consumption. Additionally, this policy helps bridge the price gap between premium and low-tier brands, reducing the incentive for consumers to down trade to cheaper alternatives.
How These Policies Prevent Downtrading
Cigarette downtrading occurs when smokers shift from premium or mid-tier brands to cheaper alternatives due to price increases. However, the combination of a stable excise tax and an increased minimum retail price addresses this issue in several ways:
- Reducing the Price Gap
By raising the minimum price, the difference between low-tier and mid-tier brands narrows. This discourages smokers from downtrading since they won’t find a significantly cheaper alternative within the legal market. - Discouraging Overconsumption
With higher prices, smokers are more likely to reduce their cigarette consumption rather than shift to lower-quality brands. This supports Indonesia’s long-term public health goals. - Mitigating Illicit Trade Risks
Sudden excise tax increases often drive consumers toward illegal, untaxed cigarettes. By keeping excise taxes stable while increasing minimum prices, the government avoids drastic shifts in consumer behavior that could fuel illicit cigarette sales. - Encouraging Smoking Cessation and Alternatives
Some smokers, unable to afford even the lowest-priced legal cigarettes, may consider quitting or switching to less harmful alternatives, such as nicotine pouches or regulated heated tobacco products.
Impact on the Tobacco Industry
Tobacco companies are expected to adjust their strategies to accommodate the pricing changes. Many may focus on introducing new product lines that align with the revised pricing structure. Additionally, investment in alternative nicotine products, such as e-cigarettes and heat-not-burn products, may increase as companies seek to retain customers who can no longer afford traditional cigarettes.
Retailers and distributors will also need to adjust their inventory and sales strategies to ensure compliance with the new minimum price regulations. This shift may lead to a market recalibration where higher-value products take precedence over high-volume, low-margin sales.
In short, Indonesia’s policy of maintaining excise tax rates while increasing minimum retail prices is a strategic move to curb cigarette downtrading and regulate tobacco consumption. By stabilizing taxes, the government ensures a balanced market, while higher price floors prevent excessive affordability of low-tier cigarettes. This dual approach supports public health objectives while safeguarding government revenue and mitigating illicit trade risks.
As the market adjusts to these changes, the success of these measures will depend on their enforcement and the industry’s adaptability. If implemented effectively, this policy framework could serve as a sustainable model for managing cigarette consumption in Indonesia while gradually reducing smoking prevalence.
References:
[2] https://www.2firsts.com/news/new-regulations-on-tobacco-product-retail-prices-in-indonesia
