Highlighting the fact the excise tax for 2019 had been flat, Finance Minister Sri Mulyani Indrawati told reporters the government had tried to find "a balance" between rising numbers of "young smokers, especially young female smokers" and cigarettes' popularity among Indonesia's poorest, with the possible impact on the livelihoods of tobacco farmers.
Indonesia is the world's second-largest tobacco market, after China.
"On the one hand, we are concerned about health, while on the other we have to pay attention to farmers and cigarette workers ... and also guard against a rise in illegal cigarettes," the minister said.
The tax increase, which will take effect from Jan. 1 and was announced on Friday, will see the government raise the minimum price of cigarettes across categories by an average of 35% and increase the excise tax on tobacco products by 23%.
Nearly 70% of adult men smoke in Indonesia, according to the World Health Organization - one of the highest rates in the world - and tobacco kills 225,720 people each year in the country, or 14.7% of all deaths, mostly through cardiovascular diseases, the WHO said in a 2018 report.
The Indonesian government has been raising taxes on tobacco products almost every year since 2014, but that has not had a significant impact on smoking rates.
The sharp excise hike was criticized by some companies and industry lobby groups on Monday.
Hananto Wibisono, spokesman for Indonesia Tobacco Community Alliance, said in a statement that the increase risked increasing the spread of illegal cigarettes.
"If illegal cigarettes become widespread, then all parties are disadvantaged, from legal cigarette manufacturers, their workers, to tobacco and clove farmers. The government will also be at disadvantage because illegal cigarette producers don't pay excise taxes," he said.
Philip Morris-controlled HM Sampoerna, one of Indonesia's biggest cigarette companies, said they had received no warning for the increase.
"It will definitely disrupt the tobacco ecosystem," HM Sampoerna director Troy Modlin said in a statement.
Gudang Garam and the unlisted Djarum, Indonesia's two of the country's other largest tobacco companies, did not respond to requests for comment.
Both Gudang Garam and HM Sampoerna saw their shares tumble by more than 20 percent on Monday, with analysts warning the increase could hurt the Indonesian tobacco giants' 2020 earnings.
Indrawati told reporters the excise hike would only result in a 10% increase on the labour-intensive, domestic handrolled cigarette industry.
"But for companies whose turnover is over 50 billion rupiah, the increase is relatively higher," she said.
Indonesia aims to collect 172 trillion rupiah ($12.32 billion) of revenue from tobacco excises in 2020, according to government proposals for next year's state budget that is awaiting parliamentary approval.
(Reporting by Maikel Jefriando; Additionaal reporting by Stanley Widianto and Fanny Potkin; Writing by Fanny Potkin and Gayatri Suroyo; Editing by Alex Richardson)
By Maikel Jefriando