Evaluation of Excise Policy Reform: Downtrading and the Shadow Economy Surge in Indonesia

Authors

  • Affan Chanif Ismail, S.Tr.MKN. Directorate General of Taxes
  • Dr. Yusuf Kurniawan, S.S., M.A. Faculty of Cultural Sciences, Sebelas Maret University

DOI:

https://doi.org/10.31685/1qk3vx73

Keywords:

Tobacco Excise, Shadow Economy, Downtrading, Tax Evasion, Laffer Curve

Abstract

Purpose: This study evaluates the effectiveness of Indonesia’s tobacco excise policy (CHT) reform from 2020 to 2025, specifically examining the market dynamics following aggressive tariff hikes, including adjustments in market structure shifts (downtrading) and indicators of tax evasion. Method: Adopting a descriptive quantitative approach, this study utilized publicly available administrative data and information acquired via official requests from the Directorate General of Customs and Excise (DJBC), integrated with 22 recent empirical studies. The analysis employed descriptive trend mapping to compare the trajectory of cumulative tariff hikes against production shifts from Tier 1 to lower tiers (downtrading indicator) and seizure volumes as a proxy for illicit circulation. Findings: The study revealed a “Fiscal Policy Trade-off.” The cumulative tariff increase of 66.4% (2020-2024) has triggered a severe downtrading effect and fuelled a 75% surge in illicit cigarette seizures. While enforcement initiatives have positively contributed to revenue recovery, the market distortion suggests that the policy might be approaching the limits of compliance as conceptualized in the Laffer Curve. Implications: The findings urge a reassessment of the excise roadmap. Exclusively depending on tariff instruments without strengthening the track-and-trace system and optimizing the Revenue Sharing Fund (DBH-CHT) is counterproductive.

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Published

2026-10-21

Issue

Vol. 7 No. 2 (2025)

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