Adopting Incremental Innovation Approaches in the Digitalization of Village Government Services

Jamaluddin Ahmad(1*)

(1) Muhammadiyah University Sidenreng Rappang
(*) Corresponding Author


Although much research has established the importance of digitalization in public services, in practice, village governments responsible for village community services often obscure public perceptions about the potential impact on digital-based public services. This study aims to provide a more detailed picture of the incremental innovation approach in  the implementation of public services, especially the adoption of digital technology in  the delivery of village government service. This research is  a case study research that uses a qualitative research design. study results underline the importance of the incremental innovation approach. Digitalization impacts public perceptions about transparency, speed, and accountability; willingness to accept changes, especially changes in the use of mobile phones (mobile phones) as needed; and  resultant   social impact. Thus, study results are an invaluable input into the decision-making process related to public services.



incremental innovation; implementation; digitization; public service

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ecosystems (Chang, Hong, and Lee 2008).

Palopo City is one of the areas in South Sulawesi Province that has immense coral reef potential. The ecosystem covers coral reef Palopo City water area is 172 Km2 in area, and 21 Km2  along the beach (Anon 2018). Palopo City was designated an administrative city as part of Luwu Regency. However, in 2002 based on Law No. 11 2002, Palopo reverted to the status of at town (Anon 2020). The immense potential of marine and fishery resources, biological, non-biological and environmental services alike, which areas in the vicinity of makes, Palopo City an attractive area for economic activities. Nonetheless, the increase in economic activities in the area has created dangers for biodiversity in Palopo City. This is especially so with respect to the iridescent and beautiful coral reef ecosystem. Fishing using ecologically damaging fishing gear, is one the key causes of the rising damage to coral reef ecosystem.

Damage to coral reefs in the Palopo City coastal area will certainly have adverse impact on area. Subsequently, the ramifications of local communities, especially traditional fishermen who depend on coral reef resourcesfor livelihood is likely to be very dire. Thus, there is need for Palopo City to adopt sustainable use and management of the coral reefs ecosystem along its coastal area. Considering the importance of sustainable management practices in supporting environmental biodiversity, good coral reef management must incorporate and cover ecological, social, economic and institutional aspects. Status of  management and use of Palopo City waters, this paper aimed at obtaining the general picture about the condition of coral reefs in the area, identify problems that relate to coral reef management, and based on findings of the study, recomended solutions that can help to solve such problems. Specifically, this study being motivated  by the increase in the damage to coral reef ecosystem in Palopo City coastal area as a result of the rapid increase in economic activities in general and fishing using unsustainable methods, in particular, the purpose of this study was to analyze the form and causes of damage coral reef ecosystem in Palopo City waters, map and apportion roles of stakeholders in the management of coral reef ecosystems in Palopo City seas and strategic model for sustainable management of coral reef ecosystems in Palopo City waters.


The research used is a mixed research design, which combined quantitative and qualitative data collection and analysis techniques. Primary and secondary data were used during the research process. Primary data were obtained by conducting direct observation. Meanwhile, secondary data were collected using literature  review of previous research, official reports and documents from various institutions and governments. The following sub section describes techniques that were used to collect data  that were later used in analysis to answer the research question and purposes of the research.

1. Used Underwater photo transect (UPT) method to observe the condition of coral reef ecosystem direct observation.

2. In depth interviews were used to collect social, economic, and demographic data. Purposive sampling was used to determine respondents who were interviewed. The study conducted interviews with eight respondents, who are stakeholders with respect to the use and management of coral reef ecosystem in Palopo City coastal waters. Stakeholders included the local government, non-governmental organizations and local communities.

Meanwhile, data analysis tecniques that were used included, analysis of the condition of coral reefs using Coral Point Count with Excel Extension (CPCe) application (Kohler and Gill 2006). CPCe a standalone application that can automatically conduct random point calculation analysis and is also able to perform necessary substrate calculations on images taken underwater. In addition, CPCe can generate a statistical analysis for each form of coral growth in Microsoft Excel spreadsheet. Stakeholders analysis each stakeholder plays an important role in policy formulation, which depends on influence wielded. Stakeholder analysis involves several steps, according to Ramirez  cited in (Bibin, Vitner, and Imran 2018). These include, namely:

a. Identification.

b. Create a table containing information on the register.

1. Interests, as manifested in motives and attention toward policy. To determine the importance of actors that actors attach to a certain policy, the Likert scale is used. The Likert scale used consisted of five levels, that ranged from 1 (low) to 5 (very high). High level is associated with strong importance attached to coral reef ecosystem management while very low denotes low importance attached to the policy in Palopo City (Table 1).

2. Determining the level of influence. Influence is based  on economic, social, ecological, and institutional aspects inter alia.

c. Subsequent step involved conducting grid actor mapping (Figure 1) to determine the level of importance and influence stakeholder attach to coral reefs ecosystem management policy. Issues that influence the position of the stakeholder in the quadrant depends on category of subject, whether or not he or she is a key player, whether is just part of the crowd, or contest setter (Reed et al. 2009). Thus, the conduct of stakeholder was intended to identify and assess roles stakeholders play in influencing policy in general and resource use on matters of coral reef ecosystem use and management in Palopo City coastal waters.

  Conducting hierarchy process analysis (AHP). This step entails conducing simultaneous qualitative and quantitative assessments. Policy priority setting in  AHP involves, capturing people's perceptions and converting intangible factors into ordinary/categorical measures to facilate comparisoned. Figure 2 shows the hierarchical process in determining strategies for coral reef ecosystems management in Palopo City coastal area  waters.


1. The Condition of Palopo City Territorial Waters

  Environmental conditions constitute one of the key limiting factors for the coral reef ecosystem. The limiting factor affects the distribution and growth of coral reefs. Based on (Nybakken 1988) research, water quality parameters have interdependent relationship between one another. Table 2 illustrates the quality of Palopo City coastal waters.

a. Brightness radiated by Palopo City coastal waters

  Based on the results of measurements in the research location, the level of water transparency falls within the from 72-81% range. The range in the effects is attributable to the differences in depth in each observation station. The compensation point for coral reefs is at the a depth at which light intensity is approximately 15-20% of the surface intensity (Yulianda et al. 2010).

b. Temperature in Palopo City coastal waters

  Water temperature at the three observation stations is around 30ºC. Temperature results fall under the excellent category for the survival and reproduction of coral reefs. Water temperature is an essential factor that determines the life of coral reefs. This is related to the growth and development of coral biota (coral polyps and zooxanthellae). The coral biota can still tolerate a maximum annual temperature of around 36ºC-40ºC and a minimum temperature of 18ºC. Coral reefs grow well at an optimum temperature of 25º-29ºC and survive up to a minimum temperature of 15ºC and a maximum of 36ºC (Estradivari, Handayani 2017).

c. Flow velocity in Palopo City coastal waters

  Based on measurements obtained at the research location, current velocity at the falls in the 0.16-0.18 m/s range, which falls under the slow flow category. Dead current category lies in the speed range of 0-0.25 m/s, the intermediate current category falls in the speed range of 0.25-0.50 m/s, fast current category has speed range of 0.25-1 m/s and speedy current category has speed that is above 1 m/s. Currents are benefical for coral reefs as they facilitate the removal of nutrients, larvae and sediment, while flow helps in cleaning up trash. Meanwhile, current velocity and turbulance also affect the general morphology and taxonomic composition of coral reef ecosystem (Tomascik et al. 1997); (Yulika Sari and Usman 2012).

d. Salinity in Palopo City coastal waters

  The salinity at the observation location was 31°⁄(°°). Thus, salinity measurement result attest to the fact that conditions still support the growth and development of coral reefs. In general, coral reefs can grow well at a salinity of 30-35°⁄(°°) in coastal areas (Tuwo 2011).


2. The Condition of Coral Reefs in Palopo City Coastal Waters

  The existence of coral reefs in Palopo city coastal waters can be found at a depth of between 4 meters and 9 meters. Observation of the coral reef ecosystem in Palopo City waters was conducted using the underwater photo transect (UPT) method. The underwater photo transect method is an advanced development of LIT and PIT methods. At the depth 4 meters at station one the percentage of live corals was 0.53%, 82.07% were dead corals, 0.13% covered by algae, 0% and 17.27% other biotas and abiotic species, respectively. Meanwhile, at a depth of 9 meters, the percentage of live coral cover was 1.6%, dead coral was 75.33%, algae was 0.13%, another biota and abiotic 0%, and 22.93% respectively.

  Observation of coral reef conditions at station two was carried out at a depth of 4 and 9 meters. Result showed that the percentage of live coral cover at a depth of 4 meters was 0%, 69.73% was dead coral, 0% algae, other biotic and abiotic, 0.20% and 30.07%, respectively. In comparison, at a depth of 9 meters, the percentage of live coral cover was 0%, 67.87% was dead coral, 0% algae, other biotic and abiotic species, 0.20% and 31.93%, respectively.

  Observation of coral reef condition at station three was made at a depth of 4 and 9 meters. Result showed that the percentage of live coral cover at a depth of 4 meters was 7.37%, dead coral 82.04%, algae 0%, other biotic and abiotic species, 0.80% and 9.79%, respectively. Meanwhile, at a depth of 9 meters, live coral cover of was 11%, dead coral 69.47%, algae 0%, other biotic and abiotic species 0.40% and, 19.13% respectively.

  Based on the criteria for assessing the condition of coral reefs set by the then ministry of environmental protection (MENLH 2001) No. 4 Year, the inference from result obtained from measurements of the condition of corals cover in Palopo City waters is that between 0% and 24.9% of coral can be categorized as damaged/sour. One of the major causes of damage to coral reefs in the waters of Palopo City is the existence of community activities that have damaged coral reefs in the past. Economic activities that have damaged corals in the past include, fishing using environmentally destructive fishing tools such as fish bombs and potassium that cause serious damage to healthy coral reefs. This is reflected in the high percentage of dead corals of 67.87%-82.07%. Bombing activity breaks and destroys the coral skeleton, leading to excessive high pressure to which coral can not adopt short time. This is corroborated in previous research (Crosby, Brighouse, and Pichon 2002) that found that a large number of human activities in coral reef areas, especially when fishing using explosives, are responsible for breaking and destroying corals.

3. Level of Influence and Interest of Stakeholders

  The success of management activities in an area is strongly influenced by the ability and willingness of stakeholders to be play their roles in serving their interests in a responsible manner. Stakeholders also influence management activity through impacting on who carries out what, conditions of carrying out activities, and incentive for doing so (Sunahwati, Maarif, and Sukmawati 2019). Thus, the management of coral reefs ecosystem in Palopo City waters will work well if the conduct of its activities gets the support of stakeholders inter alia, the community, government, and non-governmental organizations (Singgalen, Wiloso, and Sasongko 2017).

a. Identification of stakeholders

  The role played is dynamic and depends on position, and exercising of the rights and obligations that are associated with the position (Soerjono 2004). Roles various stakeholders including government agencies, non-governmental organizations and the community, play influence the management of coral reef ecosystems in Palopo City waters. The results of the exercise of identifying stakeholders involved in coral reefs management in Palopo City coastal waters can be describe as follows:

1) The Mayor of Palopo City

The Mayor of Palopo is a stakeholder who has the authority to determine policies on enhancing the protection of areas designed as protect, enforce environmental preservation and improvement of function of protected areas.

2) Palopo City Spatial PlanningAgency

Palopo City spatial planning office is responsible for spatial planning and zooning of the utilization of coastal areas.

3) Palopo City Regional Development Planning Agency

The Palopo City Regional Development Planning Agency (BAPPEDA) has the primary duties of assisting the Regent/district head in determining policies in the field of coral reef area management planning and assessment of its implementation, compiling strategic plans (RENSTRA) in Palopo City and coordinate planning among government agencies, regional technical institutions, and non-governmental organizations (NGOs).

4) Palopo City Marine and Fisheries Agency

The department of marine and fisheries Palopo City is responsible for formulating and implementing policies that relate to coral reef management to ensure sustainability of use, supervise community activities to prevent irrevocable damage to coral reefs, and provides guidance/assistance to communities on sustainable utilization of coral reef ecosystems.

5) Palopo City Environmental Service

Palopo City Environmental Service is responsible for formulating, implementing and evaluating policies, that relate to coral reef utilization.

6) Non-Governmental Organizations

Non-governmental organizations (NGOs) conduct research that generates result that inform policy on improving the management of coral reef ecosystems Palopo City waters. Besides, NGOs, support, criticize government policies on coral reef ecosystem management, monitor policy implementation through forums that aggregate, accomodate, and ventilate community aspirations into the public policy process.

7) Academics

Academia help in providing research based information and knowledge on the effective management of coral reef ecosystems in Palopo City waters, preservation of coral reef ecosystems, evaluate and provide inputs and feedbacks to government policies on coral reefs ecosystem management.

8) Local Communities

Local communities are indigenous people who exercise social control over government policy. This form of social control is also a source of criticism and suggestions on improving existing government policies on coral reef ecosystem management.

b. Mapping Stakeholder

  Stakeholders involved in managing coral reef ecosystems in Palopo City have varying levels of interest and power. To that end, it is necessary to map interests and power of stakeholders with respect to the management of various coral reef ecosystems. (Almutairi et al. 2018) underscores the importance of mapping stakeholders, which is pivotal for identifying the roles play in the policy process as well as identifying information on roles, interests, knowledge, expectations, and influence levels they have.

  Based on the influence (power) and interests (interest), the stakeholders involved in the management of coral reef ecosystems can be categorized into three groups, inter alia, key players, subjects, and contest setters. Figure 6 shows the stakeholders map in managing coral reefs in the Palopo City coastal waters.

1) Stakeholders: Key Players

  Stakeholders who have interest (interest) and influence (power) levels are classified as Key Players (Quadrant II). To quality for this category, stakeholders must be actively involved in policy planning and evaluation (Maxwell and Filgueira 2020); (Reed et al. 2009); (Lu et al. 2017).  (Yehong et al. 2017) underlines the fact that the, key player group of stakeholders should play the most most critical role in the policy. In the case of coral reefs policy management, key players include the Mayor of Palopo, Palopo City Marine Affairs and Fisheries Agency, Palopo City, the Palopo City Regional Development Planning Agency, Palopo City Spatial Planning Service, Palopo City Environmental Agency.

2) Stakeholders: Contest Setter

  Contest setter category consists of actors or stakeholders who have litte interest but high influence (power). Stakeholders who are included in the Group of actors are non-governmental organizations. This category of stakeholders can pose risk, which is why their existence should be monitored with caution (Wang, Aenis, and Siew 2019); (Reed et al. 2009). Enhancing the effectiveness of the various roles stakeholders play, it is necessary to coordinate policy process with them (Oktavia and Saharuddin 2013); (Rahmawati, Noor, and Wanusmawatie 2014).

3) Stakeholders: Subject

  Subject category are stakeholders who have high interest but little power with respect to a certain policy. This category of stakeholders are more likely to become recipients of the impact of the activity thay actively involved in the policy process. Thus, special initiatives are needed to entice their involvement into the policy or activity. Nonetheless, subject stakeholders can be influential in determing the effectiveness of the policy. This occurs if subject stakeholder’s forge collaboration or coordination with other stakeholders (Muzani 2014). Subject stakeholders include the academia and local communities.






























3 years from 2015 to 2017. During the timeframe, a significant differences are prominent related to the tobacco products excise rate and the limit of  retail price . The highest retail price was  raised to ensure that cigarette process in the domestic market were not too low..

Meanwhile, the government has tried to  stabilize the increase in tobacco rate to ensure that it takes into account inflation, economic growth, and the set price. Discussions  on  raising the  excise rate involved the government and occurred  the Indonesian national  legislature (DPR RI).

However, prior to the discussions,  the government had already set target revenue, which the tax on tobacco products was expected to be generated. This was highlighted in the  national budget estimates and as well as had determined an  alternative tobacco products excise policy that took into consideration the condition of the  tobacco products industry  and the aspiration of the tobacco products industry business actors. The government conducted discussion of the revenue target and alternative policy with e financial affairs  commission (commission XI of the Indonesian legislative assembly). Specifically, discussions revolved around  excise tax rate policy and the retail price limit that was initially  intended to ensure that cigarette prices  made it dear to consumer, thereby reducing consumption. 

The  prevalence of cigarette consumption, which was gleaned from  results of a research  conducted by survey conducted by Ministry of Health  served as the  general parameter used to  control cigarette consumption.To that end, implementing the policy was expected to reduce cigarette consumption. Thus, setting the  excise rate had to be in line with the objective that the policy wanted to achieve.  In other words, the excise rate set should have corresponded to the targeted objective, inter alia, heath, revenue, and others.  The objective of the excise tax was to control negative externality, which was to discourage cigarette consumption (La Foucade et al., 2018).

Cigarette consumption in Indonesia showed an increase during 2007-2013 period, with the latter year registering a drastic increase that was  2% higher than the previous 3 years. However, in 2016 cigarette consumption decreased slightly by  3.5%  compared with the level consumed in 2013. This means that on average,  cigarette consumption has decreased by 1.17% annually, which is in line with the expectation  that is stipulated in the  Ministry of Health regulation (Permenkes) No. 40 the year of 2013 concerning the Roadmap  of  Controlling  the impact of Cigarette Consumption Public  Health. The target of the  regulation is to reduce the number of  cigarette smokers by 1% each year during the  2015-2019 period, with the focus placed on reducing prevalence of smoking among underage children and low income earners. The regulation is based on the premise that  children do not fully understand the harmful effects of cigarette smoking  and are highly prone to  health risk associated with smoking. The concern is shared among  other developing countries such as Malaysia (Lim et al., 2018) India (Anjum, 2016), South Africa (Stacey, Summan, Tugendhaft, Laxminarayan, & Hofman, 2018), and  Bangladesh  (Cheruiyot Joan et., 2013), to name just a few case.  Meanwhile, low-income smokers are considered susceptible  because of the detrimental  effect  that cigarette smoking has on their economic condition .

Permenkes No. 40 / 2013 also stipulates the objective of  reducing the number of  beginner smokers  by  1% annually during 2015-2019 period. . However, in 2014 the target was revised downwards to under 1 %  by the Ministry of Health as it was considered too  high, with the target of reaching the prevalence of 5.4 % children smokers by 2019.  

Based on National Healthcare Indicator Survey (Sirkesnas) in 2016, the target was has not been achieved. On the contrary, based on  data released by the of General Healthcare Research (Riskesdas) year in   2013, the prevalence of beginner smokers shows an upward trend from 7.2% in 2013 to 8,8% in 2016. This means during three years, the prevalence of beginner smokers has increased by 1.6% per year. The beginner smokers are those  who are children and  adolescents, hence have limited ability to  pay for cigarettes  compared with adults.

It is thus  disconcerting to note that the  number of beginner smokers is rising, which is cogent proof that cigarette smoking among children is inelastic to the increase in cigarette prices associated with the  raising of excise tax rate on tobacco products.  The problem is difficult to solve because based on research finding, underage smokers being adolescents do so mainly because of the pleasure they derive from the habit, which is difficult to extricate given their  immature psychological stage (Cheruiyot Joan et., 2013).

In 2018, in line with the phased implementation of the stage I of the tobacco excise rate structure simplification roadmap, the government raised the excise tax rate on tobacco products  by 10.04% Prior to raising the excise tax rate in 2018,  table 2 shows the status of  retail selling price of cigarette during 2017-2018 period.

The simplification initiative was  indicated by the combination of IIIA and IIIB categories, as well as HJE of category II on the SKT.  The following,  Table 1 show the outcome of the simplification initiative.

While the indirect goal of the regulation as stipulated in Article 2  of the regulation  PMK 146/PMK.10/2017 on the simplification of the excise tax rate structure is to control cigarette consumption,   the explicit goal as stated in the regulation is to increase revenues from excise tax,  reduce  liability of cigarette companies, and to simplify the excise tax  administration system.  It is thus, apparently that the objective of increasing tax revenue takes precedence over the objective to control the consumption of cigarettes.

It is thus obvious that the main objective of the regulation which is to control cigarette consumption is not in line with the objective of simplifying excise rate structure on tobacco products.  If the government were intent on reducing cigarette consumption, it would not be hesitant in raising excise tax rate on cigarette to a level that smokers would not afford it. In other words, by trying to pursue a policy that while raises cigarette prices it does not so high  that would make many smokers would stop buying,  attests to the reality that the main objective of the policy is to increase tax revenue which is achievable through a modest  increase in the tax rate (Stacey et al., 2018).

As regards the impact of the new regulation on controlling  cigarette consumption,  based on  results of a survey or Riskesdas conducted by the  Ministry of Health in 2018 showed that  the prevalence of beginner smokers falling in the 10-18 year age bracket was  9.1%.  To that end, the prevalence of child smokers was of 0.3%  and 1,9% higher than the rate in 2016 and 2013, respectively. The implication thus is that the prevalence of child smokers show an increasing divergence from the target of  5.4%  set by the  Ministry of Health. In other words, controlling consumption through raising the excise tax rate has so far failed to achieve the objective.

Meanwhile, the   regulation on simplifying the excise rate structure on revenues has been positive. In 2018, government  collected IDR 153 trillion  of revenue, which represented an increase of 3.24 %  over the  revenue target set in the national budget. The tax collected was also higher than the level achieved in IDR 147.49 trillion in 2017 was by a magnitude of 0.14 %. Looking  closely at the  phenomenon, the conclusion that can be made is that the policy has succeeded in achieving the goal of raising government revenues from tobacco products. Nonetheless, the increase in government revenue is attributable to an increase in the tax rate on tobacco products as well as an increase in cigarette consumption.

To That end, the two goals of increasing tax revenue and controlling consumption, are complementary rather than mutually exclusive. This is because cigarette smoking is not a normal good, the demand for which declines with an increase in price, but an ostentatious good and an addiction, the consumption of which, is inelastic. Raising prices on goods of ostentation is the best way to increase revenue as it does not have significant impact on consumption.

Nonetheless, there is another positive development that is associated with the policy. This is the increase in the seizure of illicit cigarettes from the market. In 2018, the government reduced illicit cigarettes in circulation by 5.1%, which was higher than that in 3.56% and 0.36% in 2014 and 2016, respectively. The achievement was largely thanks to strong enforcement measures that involved sting operations in the domestic market, which were well organized and structured; and a series of anti-illicit cigarette preventive campaigns conducted  by the Directorate General of Customs and Excise and the association of the cigarette companies.

Challenges faced in Simplifying  Excise tax structure on  Tobacco products

In general,  the policy of simplifying excise tax rate  structure on  tobacco products  is not a new thing in Indonesia. However, the main goal of the simplification is sometimes not clear or is fraught with inconsistence.  This is reflected in the inconsistences between policy implementation and roadmap stages. The following section looks closer at such inconsistencies.

There is need to reiterate that  according to Cnossen (2005), setting an excise rate aims at achieving one of the following goals, inter alia, discourage consumption, raise revenue, and  reduce externality. Consequently,  the choice of any policy is bound to  have  consequences that may differ from those that are generated by another. In addition, research shows that  the intended goal should influence the setting of the  excise rate. That is, reducing consumption can be achieved  setting higher price which should make the product unaffordable by the targeted  population  with strict monitoring of the policy integral component of the policy (Whitehead et al., 2018).  Nonetheless,  if the goal of the government is to achieve all the goals, it can set a moderate excise tax rate.




, the government simplified the excise rate structure from 19 layers to 10 layers for all categories (SKM, SPM, dan SKT). However, in 2009 the government decided to fall back to the original excise rate structure that comprises 19 layers. This attests to the inconsistency in the overarching goal of levying excise tax. Similar to the Ministry of Finance, the Ministry of Industries uses the excise rate structure  in the 2007-2020  roadmap  regulates tobacco products. However, the simplification roadmap implemented by the Ministry of Industries  did not adopt the target of reducing the rate structure to 4 layers as stipulated in the guidelines for 2015-2017 period, as it preferred to relate lively higher  multilayer structure  of 12  categories for  the same period.  . In fact, in 2015, the constitution court ruling led to the abandonment of the roadmap altogether, with as much as any explanation to the public.  Nonetheless, the governments remain committed to continue its policy of simplifying the excise rate structure on tobacco products as stipulated in the 2015-2020 roadmap. The issuing of an internal regulation by the Ministry of Finance PMK 146/PMK.10/2017, which replaced the previous regulation is evidence of that..


Figure 2. Number of Layers of  Cigarette Categories

Source: Directorate General of Customs and Excise (2018)


From the perspective of implementing the excise rate structure simplification policy, another consideration is the tradeoff between simplicity and fairness principles.  Adopting a simple  excise rate structure  makes the calculation of the  excise tax burden easier for the tax administration authority. In is also true that a simple tax rate structure increases obedience of taxpayers, which in turn leads to high tax compliance. In that respect, a simple tax increases fairness among taxpayers as it reduces the number of potential taxpayers who opt not to comply with their tax obligations. Nonetheless, higher tax rate under a simpler tax rate structure implies that obedient tax payers face a higher tax burden than prior to the implementation of the simplification policy. Higher tax burden translates into a decline in competitiveness of tax abiding tobacco product companies and an even higher incentive from noncompliant tobacco companies to avoid the tax burden.

 In this case, thus, the simplification of the excise rate structure creates  horizontal unfairness for companies in the same industry and operate under similar conditions.  With regards to the impact of the policy on tobacco product companies that operate on difference scales, simplification of the tax rate is a source of unfairness for small scale tobacco products firms. This is because in order to  comply with simplified tax rate structure, small scale tobacco product firms have to move up to upper category of the tax structure, which implies that they have to pay higher excise tax on their production than before, and sometimes face the same level of  excise tax in percentage terms  with large tobacco product producers. Paying the same tax rate on smaller production volumes than larger producers while implies larger tax burden from the latter, it is regressive for the former, hence the source of unfairness (Suprihanti, M. Sinaga, Harianto, & Kustiari, 2018).

Such unfairness if it continues forces small scale tobacco product producers to reduce employees, contract production, and eventually fall into bankruptcy and close their businesses.  Since the implementation of the roadmap that is aimed to simplify excise rate structure, the reality on the ground reflects a situation that is characterized by a growing number of small-scale producers scaling down productions, reducing workers, and closing operations. Small scale craft tobacco producers have borne the brunt of the fallout.

Moreover, simplification of the excise rate structure which merges many rate categories into fewer, by so doing increases tax burden for tobacco product producers who in turn pass on the tax burden to consumers into higher tobacco product prices.  The increase in tobacco product prices increases the attractiveness of tobacco product producers to avoid excise tax, thereby increasing the volume of illicit cigarettes in  the market(Curti, Shang, Chaloupka, & Fong, 2019)). This is especially the case for  small-scale tobacco products firms who face stiffer competition with large producers as a result of the implementation of the excise rate structure simplification policy.

Nonetheless another argument discounts the above fears by  noting that even if small scale tobacco product firms were to resort to selling excise tax free cigarettes  (illicit cigarettes) on the market,  the existence of a fewer tax rate categories reduces the likelihood that such act will go undetected by the tax administration authority.  . There are few types of excise tax stickers that serve as evidence of excise tax compliance, which reduces the chance that tax avoidance or illicit cigarette distribution will go unnoticed and unpunished. Reducing the number of categories that serve as references in imposing excise tax, has another implication. This is the requirement that in the event production volumes for a given excise rate category is exhausted, additional production implies moving into a higher tax rate category, and by extension higher tax burden. 

To continue production without facing higher tax burden, tobacco producers buy excise tax stickers from producers in the same tax brackets or categories. By doing so, such acts of tax avoidance go undetected by tax at tax administration authority. To that end, more systematic and regular monitoring of not only cigarettes that are circulating in the market but also production facilities is necessary to reduce all forms of tax avoidance (Alderman, 2012). Strengthening enforcement of monitoring activities is exactly what the government embarked on in 2018, and results of the excise showed that the policy is having expected outcomes.

Excise tax policy is by its nature driven by the goal of controlling consumption of the commodity on which the tax is imposed. Nonetheless, the reality on the ground is that cigarette consumption in Indonesia remains high compared with per capita levels in other countries in South East Asia. Figure 2, which depicts data for 2018 on per capita tobacco consumption in South East Asia released by Southeast Asia Tobacco Control Alliance (SEATCA)  provides ample evidence of that



Figure 3. Cigarette Consumption per Capita of ASEAN Countries

Source: SEATCA, 2018


Figure 3 shows that  cigarette consumption per capita in  Indonesia is the highest in ASEAN. In 2016, Indonesians consumed an  average of  1673 cigarettes , which is very high for a country with a population that while is the largest in ASEAN, it is not predominantly cigarette smokers.  WHO data  corroborates the  above data which  describes the  Indonesian cigarette market is the third largest in the World  after China and India. Another aspect of cigarette smoking in Indonesia relates to the fact that while the habit is facing a downward trend in other countries, cigarette consumption per capita in Indonesia is among the three countries that  experienced an  increase during 2011-2016 period. Consequently,  controlling cigarette consumption should be among the top policy priorities of the Indonesian government.

 Nonetheless, government policy continues to emphasize generating tax revenue as the centerpiece of its excise tax policy rather that efforts to control cigarette consumption. The roadmap on simplifying excise rate structure implemented since 2002, which has experienced a number of revisions, attests to the fact that the excise rate has not been raised to such a level that would discourage cigarette smokers from reducing consumption, which supports the argument that the overarching  goal of the excise rate structure simplification is to increase revenue rather than controlling cigarette consumption. 

It is also true another implication of the roadmap on simplifying excise rate structure is tying tax rates that apply to production volumes and scale. Firms do not have the flexibility to change level of tobacco product production volumes and scale in line with market conditions (Barber & Ahsan, 2009) . All in all, the focus of the current policy is on maximizing government revenue from excise tax returns. This is because tobacco product industry remains an important contributor to national budget revenues, which explains the rationale behind the orientation of current policy on excise rate structure simplification.

That may explain why the roadmap on  excise rate structure simplification of the tobacco products encapsulated in regulation  PMK 146/PMK.10/2017 is essentially flawed as a policy tailored toward controlling cigarette consumption.Categories of tobacco products and producers is one of the areas that not in line with the professed goal of controlling cigarette consumption. Table 4 shows the categories in detail.


Table 3. Summary of the Excise Rate Structure Simplification Roadmap on Tobacco Products Excise


Types of Cigarette







IIA and IIB combined

SKM I and SPM I combined




IIA and IIB combined

SKM II and SPM II combined




IIA and IIB combined



IA and IB combined


IIIA and IIIB combined




Source: BKF(2018)


Based on  4,  the first stage simplification for hand-made or craft cigarette (SKT) involved combining  IIA and IIB  and  IIIA and IIIB.  If the simplification is aimed to control consumption, the government should not target the SKT level. However, the trend of SKT consumption has declined in the past few years. Some of the SKT consumers are currently using the SKM. This is supported by the market share of SKM, SPM, and SKT over the last five years, as depicted in the following figure 3.



Figure 4. Market Share of Each Category Tobacco Products 2013 – 2017

Source: Fiscal Policy Office (2018)

Figure 4. shows that the market share for SKT and SPM has continued to decline in the last three years, while that for SKM shows an upward trend since 2013. This means that smokers’ preference for SKM cigarette products has been rising and getting higher. It is also true that SKT market share is the smallest among the   three types of tobacco products. In any case, SKT has the smallest market share of all cigarette types. To that end, government efforts to combine the three types of SKT as attempt to control consumption can only have little impact of total cigarette consumption. That said, such a policy should generate higher revenue from excise tax.

Nonetheless, the second stage of the simplification process is  appropriate  as it combines categories IIA and IIB of SKM and SPM. This is because given the large  market share of the two cigarette types, combination of the two categories increases the   capacity of the policy to  control cigarette consumption as it affects large number of cigarette smokers. Moreover, merging the two categories of the two key players in the tobacco product industry, the policy affects not only many tobacco consumers but also producers. To that end, the policy is unlikely to trigger conflicts among producers.

Nonetheless, decision on government policy to take should also take into consideration the possibility of intervention from some of the key stakeholders who deem it not in line with their interests. Intervention if not countered or dealt with wisely can hamper or even derail efforts to achieve policy objectives, controlling consumption and generating revenue through the  simplification of the tax rate structure. In that end,  the success of the policy in part depends on the way and capacity of the government  to   deal with intervention into the policy implementation process.. According to results of a SEATCA study on Tobacco Industry Interference Index on ASEAN plus other 5 other countries that have relatively high intervention   in tobacco products policy process. Countries have a score that ranges from 1 to 100, whereby higher scores reflect high intervention of the tobacco products industry in government policy process. Table 5 shows country and respective score of ASEAN and other 5 countries of Asia on intervention into government policy on the tobacco products industry.


Figure 5. Intervention by the Tobacco Products Industry in Several Countries of Asia

Source: SEATCA (2018)


Indonesia has a score of 79 on the index, which is only second from Japan, which has largest score of 85  on the index. Based on the index, Indonesia ranks among the countries with very high intervention in tobacco product industry, highest score in ASEAN, and second only to Japan, on the index. In one of the indicators used in compiling the index was degree of participation in the tobacco product policy process.  Indonesia received a high score  of 15 out of 20 on that indicator alone, which reflects the high involvement of nonstate actors in shaping the composition and direction of excise tax policy on tobacco product industry. Participation in the tobacco product policy occurs in the form of lobbying of producers to  key policy makers and politicians which in part played a role in delaying and watering down the policy of restructuring  excise rate structure tiers  (Shirane et al., 2012).

Intervention in the excise rate structure simplification policy is evident in the postponement of the continuation of the stages of the road by Indonesian Minister of Finance. In an announcement in early November 2018, the Minister of Finance, Sri Mulyani disclosed the decision that  the excise tax on tobacco products for 2019 would remain the same as that applied in the previous year. Thus, the announcement was an acknowledgement that stages in the simplification roadmap could not go as planned, in part due to intervention in the implementation of the policy. The issuing of the Ministry of finance regulation PMK 156/PMK.10/2018, which revised the previous regulation and in effect formally deferred the continuation of the second phase of the excise rate structure simplification policy that would have reduced tax rates to 8 tiers.

 In essence by late December 2018, the government has abandoned the roadmap to simplify excise rate structure applicable on tobacco products, which in part was a reaction to insistent intervention effects from lobbying efforts spearheaded by tobacco product companies and other interested parties. The discontinuation of the roadmap has some vital lessons learned on effective policy making. The government failed to convince all the key stakeholders on the importance of simplifying the excise rate structure, specifically members of the tobacco products industry.  The public were not at all consulted on the benefits and process that the roadmap on simplifying excise rate structure on tobacco product would take and how it would affect them. The public, in other words were passive recipients of a policy that while impacted them in various ways, they were not consulted during its design let alone its implementation. And this is at a time when accountability of public policy is one of the touted principles of good governance in a democracy (Wicaksono, 2015) (Kiwang, Pandie, & Gana, 2015).

It is thus, without having strong public ownership of the policy, it is difficult for the government to achieve the objective of reducing the prevalence rate of child smokers to  5.4%. The abandonment of the roadmap that would have envisaged an increase in the excise rate on tobacco products and by implication higher cigarette prices, complicated the task even the more. 

Nonetheless, the hope is that the postponement is temporary, with the hiatus giving the government and all key stakeholders time to work out an arrangement that will lead to an improvement in the roadmap prior to its continuation and restoration. However, even if the roadmap were to resume, some adjustments in its timeline will have to be made since an 8-tier framework that was envisaged to occur in 2019 is no longer possible. To that end, prior to relaunching the new policy, coordination with relevant ministries, including Minister for the coordination of economy affairs and other nonstate stakeholders, is imperative.

 Based on the existing legal framework which is embodied in  Presidential Instruction No. 7 / 2017, reaching decisions on policies that by nature are of immense and nationwide importance and relevancy,  as gauged by the impact they have on the population,  , the line ministry and head of the government institution have  an obligation to   deliver the draft policy plan to the President for subsequent  discussion  in the Ministerial Meeting, plenary cabinet meetings and Closed Cabinet meetings.  

The postponement of the implementation of the roadmap in 2018, is a repeat of what occurred in 2014. It happens that both 2014 and 2018 had one commonality which is that they were years when the government as gearing itself toward an intensely contested general elections. Thus, in both 2014 and 2018, the government temporary halted the implementation of excise rate tax increase that would have occurred, an action, that can be interpreted as aimed to reduce political knock-on effects among voters. To that end, the direction of policy on tobacco products in Indonesia, is heavily influenced by intervention, both direct and indirect. The implication of this is that politics, which is short term in nature, can trounce long term considerations such as economic rationale and protecting the health of a country’s citizens.









Based on research results government policy on simplifying excise rate structure on tobacco products, which has the goal of reducing the prevalence of child smokers, has yet to be achieve it.  Despite a decline in the prevalence rate of all smokers that currently stands at 3.5%, the prevalence rate of early age smokers (10-18 years), shows a steady increase of 7.2%, 8,8% , and 9.1% in 2013,  2016, and 2018, respectively. To that end, as a policy with an expressed aim of controlling cigarette smoking among children and adolescents, it has failed. The prevalence rate of early age cigarette smokers prevalence in 2018. On the contrary, the government has achieved marked success in its goal of increasing tax revenue from excise tax on tobacco products.

To that end, the government has achieved success in increasing tax revenue from tobacco in the aftermath of the implementation of the roadmap on simplifying excise tax rate structure on tobacco products but continues to face obstacles in reining in rising child smoking.  . It is also worth noting that one of the ramifications of the policy is the increase in the illicit cigarettes in the domestic cigarette market.

It is a problem that the government must strive to resolve, since availability of cheap illicit cigarettes does not only undermine the goal of increasing tax revenue but also makes the task of reducing the high prevalence rate of child smokers even more difficult to achieve. One of the challenges of the policy is the different repercussions it has on small scale producers versus large scale producers, and SKT producers versus SKM and SPM tobacco producers. The demand for SKT is already in decline but the policy seems focused on that sector that contributes small and declining percentage of the cigarette consumption.

 O the contrary, despite controlling a large and rising market share of the cigarette consumption , the policy seems to  be in favor of SKM and SPM, which underscores the fact that the main goal behind  the roadmap on streamlining and simplifying excise rate structure is not what is professed (controlling consumption), rather increasing tax revenue.

Research results lead to several recommendations.

1)  The government should  focus on the main goal of excise tax on tobacco products, which is to control consumption rather than as an avenue to generate as much tax revenue as possible. . One of the ways to achieve that is to ensure that sharing of revenue that is generated from excise tax collection Dana Bagi Hasil Cukai Hasil Tembakau (DBHCHT) should also be put to better use in supporting activities that control cigarette consumption including counseling  on health matters, establishment of alternative economic activities and  training  current tobacco workers  and  farmers in preparation for new livelihood  after cessation of employment in the  cigarette industry.

2)  Effective control of cigarette consumption should be reflected in the restructured excise rate that is higher on  SKM and SPM cigarette products than on SKT.

Improving and enhancing coordination of policy design and implementation with relevant stakeholders, particularly the Ministry of Industry and the Ministry of Health, and not stakeholders, including tobacco product producers, tobacco product workers or their representatives, civil society organizations with interest on tobacco product industry and public health. To prevent a repeat of biased policy and the conflicts it generated within the tobacco product industry, the resumption and continuation of the roadmap, should only occur after key sticking points that are the source of disagreement are resolved,  but at the same time,  minimizing  the influence that the strong lobby from large cigarette products producers have on the structure,  composition, and targeting of the simplified excise tax  rate structure.

















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