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Domestic cigarette producers may face a hike of more than 5 percent in the excise tax next year, a levy analysts say would further hurt producers after a July regulation capped tax deductions they could claim for spending on advertising.

In February, the government hiked the excise tax for cigarettes by an average of 7 percent. Anti-smoking activists said it was not enough to pay for the health costs of smoking, which a 2008 World Heath Organization study said killed more than 400,000 Indonesians in 2008.

“The policy is still being studied by the Fiscal Policy Agency,” said Anwar Suprijadi, director general of customs and excise at the Ministry of Finance. “It’s possible it [the excise tax] could be increased by more than 5 percent.”

The tax, which would take effect from Jan. 1, 2010, will vary depending on the cigarette classification, he said.

The ministry would also simplify cigarette classification to ease tax collection and ensure producers cannot avoid paying the excise tax by producing certain type of cigarettes, Anwar said.

Currently, the government has 10 cigarette classifications. Machine-rolled cigarettes, produced by a company with annual production of more than 2 billion cigarettes, are charged the highest tax of 40 percent. Hand-rolled cigarettes, produced by companies with production of less than 6 million cigarettes, are charged just 4 percent.

Finance Minister Sri Mulyani Indrawati said a number of government institutions were discussing the potential tax hike.

According to Anwar, the ministry is collecting input from health organizations, which support higher taxes to curb smoking. The labor and transmigration departments, on the other hand, opposed the proposed tax hike due to fears of job cuts if the industry suffers. Anwar said producers were also being consulted.

The customs and excise office expects to take in Rp 57 trillion in excise revenue in 2010 from taxes on cigarettes and alcohol, up from Rp 54.54 trillion this year. The cigarette tax contributes 98 percent.

Naya Tirambintang, a tobacco analyst with PT Danareksa Sekuritas, said the tax hike would clearly be bad for cigarette companies because it would increase their costs, which later would be passed on to consumers.

Cigarette producers had been knocked by the government’s new regulation that capped the advertising tax deduction. They said it forced them to cut advertising spending.

Cigarette companies rely heavily on advertising and promotions to boost sales.

Naya said that if prices kept increasing, some consumers “may possibly shift to cheaper cigarette products, which may also trigger a flood of illegal products onto the domestic market.”

Niken Rachmad, a spokeswoman at PT HM Sampoerna, one of the biggest cigarette firms in the country, declined to comment on the proposed tax hike. But she said producers wanted to see the government increase efforts to combat illegal cigarettes, or products that are sold without excise tax stamps. “They are threatening the legal producers,” Niken said.