Indonesian sugar tax talk chills soft drink makers

BEN OTTO, ANITA RACHMANTHE
NOVEMBER 30, 2015
WALL STREET JOURNAL
Indonesia is exploring a tax on drinks with added sugar, which threatens to compound woes for beverage companies including Coca-Cola that are wrestling with a slowdown in Southeast Asia’s largest economy.
The slowdown has tempered ambitions at global beverage companies in what has been seen as a growth market.
Coca-Cola Amatil of Australia, the main bottler of Coke products in Indonesia, said economic weakness weighed heavily on volume growth in the first half of the year.
Now, finance officials in the world’s fourth most populous nation have asked the health ministry to study whether sugary drinks, including soda and Indonesia’s most popular bottled drink after water, tea, constitute a health threat, according to Suahasil Nazara, head of the ministry’s Fiscal Policy Agency.
That would make such drinks eligible to join an excise list of high-bracket tax items comprising tobacco — one of the country’s biggest tax contributors — and alcohol.
Indonesia has taxed some sweetened beverages in the past under a luxury-goods tax, but stopped the practice in 2004.
The taxes crippled drink makers, according to the local Beverages Industry Association, which said sales of sweetened beverages have averaged double-digit annual growth since taxes were lifted.
Indonesia’s bottled drinks industry remains relatively small, with $US6 billion ($8.34bn) in sales last year, accounting for less that 4 per cent of the total across the Asia Pacific, according to market research firm Euromonitor International.
Proponents of the tax cite its potential health benefits, saying higher prices will cut consumption of sugary drinks that contribute to obesity and diabetes. Sugar intake in the country of 250 million people remains below global and regional levels but is rising fast. Indonesians consumed an average of 14.4 grams of sugar a day in 2014, below the Asia-Pacific average of 16.5 and the global average of 35.9, according to Euromonitor.
Annual growth in Indonesia’s sugar consumption, however, is at 5.7 per cent, faster than the regional average of 5.2 per cent and the 2.2 per cent global average.
A spokesman for the ministry’s customs and excise office said any potential change wouldn’t take place until next year. A tax rate has yet to be proposed, officials and politicians said. Similar taxes in other countries have typically been 10 per cent or less.
Indonesia is struggling with weaker-than-expected revenue as its economy sputters near its lowest growth rate in six years, largely due to tepid demand from China and elsewhere for its commodities. That has lowered tax revenue for ambitious infrastructure and other plans, and cut into consumers’ purchasing power, affecting sales of everything from cars to groceries.
Japanese beverage giant Asahi Group Holdings, which sells bottled tea and coffee as well as Pepsi products in Indonesia, also cited the economic slowdown for it having missed targets this year.
The tax “could be crippling for an industry that’s just getting started”, said Martin Gil, head of Coca-Cola Indonesia, Coca-Cola’s, adding that the decision could be the beginning of a “slippery slope where anything that contains sugar” could be taxed.
Local giant Sinar Sosro, the country’s largest maker of bottled tea, said the tax could may hurt sales in an already difficult business environment and prompt the company to reconsider capital investment plans.
“We haven’t increased prices for two years,” said Putu Hastika, the company’s director of manufacturing.
Iskan Qolba Lubis, a parliamentary member of the Prosperous Justice Party, one of several parties pushing for the tax, said concerns that sugary drinks were linked to obesity and diabetes justified the move.
“This is to keep our people healthy,” Mr Lubis said. Diabetes cases are on the rise in Indonesia, which spends a third of its health insurance budget on treating chronic diseases including diabetes.
A growing list of countries around the world, including France and Mexico, have rolled out similar taxes, with the stated purpose of improving public health. A British government health agency last month advocated a minimum tax of 10-20 per cent on high-sugar products for health reasons.
Berkeley, California, last year became the first US city to pass an excise tax on sweetened beverages. More than two dozen cities and states have tried and failed to introduce such taxes since 2009.
Mexico in 2014 unveiled a 10 per cent tax on sugary drinks and an 8 per cent tax on high-calorie snacks as part of a government effort to trim waistlines.