Producing Tobacco Province Now Entitled to Excise Proceeds

The Constitutional Court recently rendered a decision that effectively widens the scope of Article 66A (1) of the Law No. 39 of 2007 concerning excise. The law stipulates that two percent of excise income is to be distributed to ‘provinces that generate excise from tobacco products.’ Previously the provision has been interpreted as entitling provinces where the tobacco products are produces.

In its submission, the applicant, the West Nusa Tenggara Province, argued that the distribution of excise in the law is unconstitutional on the basis of economic equality under Article 33 (4) of the Constitution. The Court agrees that the applicant, as the largest tobacco producers in the last three years, has been prejudiced by the provision in Law 39/2007. Under the previous interpretation of the provision, only provinces having tobacco manufacturer will be entitled to the excise, while the provinces with tobacco producing plantation will not be entitled at all. However, the Court held that excise proceeds should be utilized to improve the quality of tobacco as raw materials as well as the quality of the environment. Consequently, provinces with tobacco plantation will now be entitled for a portion of the excise.

It is important to note that the court did not declare the above provision as not binding per se, as such finding would render a legal vacuum where no provinces will benefit from the excise. Instead, the court decides that the provision is conditionally unconstitutional, if the provision excludes all tobacco producing provinces from receiving a portion of the excise. The court also instructs the government to allocate the excise proceeds from no later than the 2010 fiscal year. The Directorate General for Levy and Excise has stated that it will comply with the ruling and will initiate revision of relevant regulation.

The government has reportedly considered the possibility the ruling’s application to other tobacco related products, such as cloves. However, it remains unclear whether the distribution of excise for other products, where the locations of raw material and manufacturing differ, will be affected.