Tobacco: Gov’t to lose RM254mn in revenue leakage

For every 10% increase in excise duties, illicit tobacco trade incidence could increase by as much as two percentage points, potentially causing the government to lose an additional RM254 million in uncollected excise taxes, revealed a non-governmental think tank today. 

The Datametrics Research and Information Sdn Bhd (DARE) Winning The War On Tobacco Black Market also revealed that criminal syndicates currently reap RM8 billion per annum in total sales revenue of illicit tobacco products in Malaysia, while the Government losses around RM5 billion in uncollected tax revenue. As of May 2021, the illicit tobacco market in Malaysia stands at 57.9%, according to the Illicit Cigarettes Study May 2021 report. 

“Our study clearly shows that raising excise duties for tobacco products is counterproductive. Instead of increasing the government’s revenue, placing more taxes on legal tobacco products will only drive more consumers towards cheaper alternatives. 

This will not only cause the Government to lose more in uncollected tax revenue. It can also exacerbate other socio-economic problems like systemic corruption across enforcement agencies fuelled by the ill-gotten gains of this trade, deeper criminal penetration into the country’s policymaking bodies, and reduced investor confidence as the rule of law in Malaysia comes under threat,”Pankaj Kumar, Managing Director of DARE says.

Even if excise duties were to remain as it is, DARE’s study shows that the illicit tobacco trade may still rise due to the affordability factor. In a survey commissioned by DARE and carried out by its market research partner, The Green Zebras, most smokers (53%) have said that they will switch to cheaper but illicit alternatives because they just cannot afford legal products at current prices. 

“More and more consumers are faced with income crunch as a result of job losses and pay cuts due to the COVID-19 pandemic. As legal tobacco products are very expensive compared to the illicit, demand for black market products can only increase, and criminal syndicates will naturally do what it takes to fill this need and make a big profit,” Pankaj explained. 

In providing policy solutions to this problem, Pankaj recommends the Budget 2022 to include:

  • Better enforcement, especially at the coastal areas
  • Maintaining excise moratorium to reduce tax revenue leakages
  • Reducing price gaps between legal and illicit tobacco products by reducing sky-high duties
  • Imposing stricter legislative moves to clean up illicit tobacco products sold in the market

“Malaysia needs to resolve this issue in order to generate funds towards the fulfilment of the 12th Malaysia Plan,” Pankaj concluded. 

Winning The War On Tobacco Black Market report is based on the analysis of publicly available data. The Green Zebras was also commissioned to conduct a nationwide market survey. The full report is available on daresearch.com.my

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