Investing in public health through excise taxes, why is it important?

Amru Aginta Sebayang28 Jan 2023

Did you know that not all of the “healthy products” that you see in the market are actually healthy?

It may be in the form of juices or milk, which is healthy, but little did you know, its sugar level is really high, which is making it not that healthy.Especially when people consume a few bottles in a day, without being aware of the sugar it contains. Unfortunately, it still happens to our society these days. When people are still continuing this habit, their health in the future is definitely at risk.

Thus, the role of the government as the policy maker is really important in making health policy to help control the people from excessive consumption of those products. One of the ways is through the implementation of excise taxes.

What are actually excise taxes?

According to Law no. 39 of 2007 or the Excise Law, excise is a state levy imposed on goods that have certain characteristics or characteristics in the law. According to Kristiaji and Yustisia (2019), there are four motives for implementing excise tax. First, excise tax is useful as a source of state revenue. Second, excise tax can control negative externalities, the adverse effects of the consumption of certain goods or services.

Excise tax is not paid directly by consumers of the product, instead, excise is charged to producers or providers of these goods. Based on Freshbook records, excise tax is collected in two ways. First, through charging based on a percentage of the price. Through this method, excise is charged based on a percentage of a product or service. An example is the percentage of excise duty per one flight ticket in the United States.

Second, through unit-based loading. Under this method, excise duty is imposed on each unit of goods sold. For example, cigarettes in Indonesia are goods subject to excise duty per stick. Based on this information, excise tax definitely affects the selling price of a product that ultimately controls consumption. So, what is the difference between excise tax and other instruments?

Excise goods

Certain goods that are subject to excise duty are referred to as excisable goods. According to the Excise Law, excise goods have several characteristics, such as its consumption needs to be controlled, its distribution needs to be monitored, it can have negative effects on society or the environment, or its use requires the imposition of state levies for the sake of justice and balance.

In Indonesia there are three types of excise goods, namely ethyl alcohol or ethanol, beverages containing ethyl alcohol, and tobacco products. Ethyl alcohol has various names, ranging from ethanol, pure alcohol, absolute alcohol, or as it is widely known, alcohol. Ethyl alcohol is a clear liquid and is often the main ingredient in alcoholic beverage products.

Moreover, it is easily soluble and has many benefits. Ethyl alcohol is also often used as the main or complementary ingredient in other products, such as skin care products, paints, and fuel. In terms of processing, ethyl alcohol is often produced in two ways. First, through the fermentation process with the help of microorganisms. Second, through the hydration of ethylene.

Beverages containing ethyl alcohol are also another type of excise goods. Permenkeu (Regulation of the Minister of Finance of the Republic of Indonesia ) No 158/PMK.010/2018 describes it as all liquid goods commonly called drinks containing ethyl alcohol which are produced through fermentation, distillation, or other methods. Some drinks are beer, shandy. wine, gin, whiskey or other similar drink.

The last type classified as excise goods is tobacco products, which include cigarettes, cigars, leaf cigarettes, sliced tobacco, or other tobacco processing. Tobacco or tobacco generally refers to several plants in the Americas.

However, the tobacco that is often referred to is the crop of tobacco plants that is known as the main ingredient for making cigarettes or cigars. There are various ways to consume it, from chewing to puffing.

Tobacco contains a variety of chemicals with nicotine as the most prominent. It is a chemical substance that triggers a feeling of addiction. As a psychoactive substance, nicotine triggers feelings of relaxation and reduces stress. Usually, stopping nicotine consumption can cause various side effects, such as feelings of irritability, anxiety, and difficulty concentrating.

Apart from these three types of excise goods, the Indonesian government through the omnibus law has also discussed the establishment of other excise goods, such as plastic bags, sweetened drinks and carbon emissions. However, its still ongoing and cannot be implemented in the near future.

Controlling the consumption

As an instrument for controlling consumption, excise duty is crucial, especially for controlling the consumption of excise goods which have a negative impact on health. According to WHO, consumption of beverages containing ethyl alcohol, for example, contributes to an increased risk of mental health to the emergence of non-communicable diseases. It causes alcohol dependence and difficulty concentrating. Moreover, it also potentially triggers NCDs, such as cirrhosis, cardiovascular disease, and hepatitis.

On the other hand, one thing that is also very important to note is the consumption of cigarettes as a derivative product of tobacco products. To this day, Indonesia is still the country in Southeast Asia with the highest consumption of cigarettes.

The latest data from the Campaign for Tobacco-Free Kids also states that the prevalence of smokers over the age of 15 in Indonesia has reached 33.8%. Meanwhile, it is known that 19.2% of youth aged 13-15 years in Indonesia also consume cigarettes.

In recent years, the number of child smokers in Indonesia has continued to increase. The 2018 Riskesdas (Basic Health Research) explained that the prevalence of smokers aged 10-18 years had increased from 7.2% in 2013 to 9.1% in 2018. Ironically, the 2014-2019 The National Medium-Term Development Plan (RPJMN) for 2014-2019 actually targets the prevalence of child smokers to drop to 5.4% in 2019.

The 2020-2024 RPJMN targets a reduction in the prevalence of child smoking to 8.7% in 2024. Smoking, especially at an early age, has serious health consequences. WHO data says that around 225,700 people in Indonesia died from smoking or other diseases related to tobacco. Thus, the Ministry of Finance raises excise taxes on tobacco products to 12.5% in 2021.

These policies intend to reduce the prevalence of child smoking and increase the 2021 State Budget excise tax revenue target to reach Rp. 173.78 trillion. The government has also stipulated a rearrangement of the use of tobacco excise revenue sharing funds, of which 25% will be used to support the national health insurance program.

Indonesia is not the only country in Southeast Asia that uses excise tax to reduce cigarette consumption and minimize the negative health impacts. In 2012, the Philippines passed the Sin Tax Reform Act as a regulation that encourages an increase in excise rates on tobacco products.This regulation increased the tariff status of cigarettes from low- and medium-priced goods to premium-priced goods by increasing the price of cigarettes on the market to double the original price in 2017.

As a result, the prevalence of adult smokers in the Philippines decreased from 28.3% in 2009 to 22.7% in 2015. State revenue due to excise also increased threefold from PHP 32.9 trillion in 2012 to PHP 104 trillion in 2016.

These findings show that excise tax is still a very important instrument in controlling consumption, especially for goods that have a negative impact on health.

However, in order to create a healthy society, regulation of increasing excise rates alone is not enough. Regulations to encourage healthy living, qualified health service infrastructure, and an even distribution of health workers are other prerequisites for creating a healthy and empowered society.

The Center for Indonesia's Strategic Development Initiative (CISDI) is committed to creating a healthy, empowered society. Tobacco control is one form of effort to make this happen. CISDI is actively voicing this matter through public education, research, and also program reports.