Who should Malaysia blame for its booming illicit cigarette trade?

Photo: Firdaus Latif/CC BY 2.0
Share on LinkedIn1Tweet about this on TwitterShare on Facebook0

The Malaysian government has raised taxes on cigarettes. Is this a way to increase the falling government tax revenue?

By Joelyn Chan

The National Health and Morbidity Survey 2015 reported, about five million of the Malaysian population aged 15 and above were smokers. Deaths caused by smoking are set to increase to 30,000 in the year 2020. The government has decided to raise cigarette prices once again to curb the nation’s rising cigarette consumption.

Using cigarette tax hike as a solution has failed to work

Price hikes intensified around the year 2014, and there was a sharp decline of 12% in legalised sale of cigarettes. During the most recent tax hike, prices for a pack of 20 cigarettes rose from RM17 (US$4.02) to RM21.50 (US$5.08). Illicit cigarette trade filled up the gap left by legal sales. Its penetration rate increased from 36.3% in 2011 to 51% in 2016. This resulted in an estimated loss of RM4.4 billion (US$1.06 billion) in government revenue last year. From the year 2011 to 2015, average cigarette prices went up by more than 30%. If the price hikes do deter consumers, there should have been a corresponding decrease in total cigarette consumption.

Source: Nielsen Cigarette Study 2016

The Malaysian government needs to relook at its future strategies

Attempts to minimise the prevalence of smoking failed due to the absence of policies to restrict black market activities. The government had oversimplified the problem by assuming price hikes would decrease the cigarette consumption in lower income families. However, with cheaper alternatives available, the citizens turned to illegal cigarettes with price tags of RM3 – RM8 (US$0.71 – US$1.89). Customs director-general Datuk T. Subromaniam appeared to be in denial, as he commented, “It (tax increase on cigarettes) is merely a measure to reduce the number of smokers in Malaysia and increase tax revenue. We cannot solely blame taxation for the rise in illicit cigarettes.”

On a larger scale, Malaysia’s tobacco industry has taken a hit. In the first half of 2017, British American Tobacco – the country’s biggest cigarette manufacturer – reported a drop in 22.1% of revenue when compared to the same period in 2016. The decreasing revenue trend continues with further contraction of the legal cigarette market.

According to Framework Convention on Tobacco Control (FCTC), excise duty should constitute at least 70% of the final retail price. The government had been quick to implement excise tax that constitutes roughly half of retail price today. However, the same speed did not apply to FCTC’s guidance on tobacco control programmes. The revenue collected from cigarette sales was used to finance local smoking cessation programmes like mQuit. From the year 2016 to 2019, the Health Ministry targets to help 390,000 smokers quit the habit. The targeted quantity of smokers is only equivalent to 7.8% of the current smoking population, and resources allocated are evidently insufficient.

Malaysia’s current minimum legal age for smoking is 18. Countries like Singapore and Sri Lanka have made progress to raise the age requirement to 21 while Malaysia is still debating on its 2018 tobacco bill. Although the government has designated non-smoking zones, there seemed to be negligible enforcement and issuance of fines.

Is Malaysia’s government just too incompetent?

The government may have been aware of the possible consequences in hasty cigarette tax hikes. It decided tax hikes were necessary to meet its budget deficit target. “As per the trends of past years, there is usually a surplus to offset the deficit from the first half, in turn keeping the deficit within the target,” said Lee Heng Guie, executive director of Socio-Economic Research Centre.

Malaysia achieved its budget deficit target of around 3% despite billion-dollar losses in oil revenue. Together with cost-cutting measures, sin tax made up for any shortfalls in revenue. The cigarette industry holds the second place in terms of total excise collection, which contributes significantly to indirect tax (22.9% of the 2017 Federal Governmental budget).

Additionally, the government has failed to control its illegal cigarette trade. The responsibility of clamping down on illicit cigarette trade falls on the shoulders of Royal Malaysian Customs Department (RMC). RMC failed to meet its aim of cutting illegal cigarette consumption to 25% by 2015. This year, Subromaniam said, “The department aims to reduce the number of contraband cigarettes in the domestic market by 50 per cent in two years, but we are confident we can do better.” This confidence came with a call for harsher policy changes.

Instead of fines up to 20 times the value of the contraband cigarettes or a maximum of three years jail term or both, the Customs Department has proposed a change to Section 135 (1) (d) of the Customs Act 1967. The proposed amendment would enforce an increase in minimum cigarette or liquor fine to RM100,000 (US$24,000). As the government stays focused on policy writing, the nation will have to suffer the repercussions for a longer time.

Malaysia’s difficult journey ahead

Malaysia has set out big dreams for a smoke-free nation by 2045 and a reduction in smoking prevalence to 15% by the year 2025. This approved plan has tied in nicely with WHO’s FCTC, for which Malaysia is a long-term signatory. However, the nation is still far from its goal. The Malaysian government cannot prosper by cashing in on stopgap solutions that worsen future problems. It needs to rethink its strategies and stub out illegal smoking.