ILLEGAL trade and smuggling are a big part of the black economy that causes governments to incur tax revenue losses, disrupts legitimate businesses and exposes consumers to uncontrolled and unsafe products.
Illegal trade and transnational criminal activities are estimated to be worth US$2.2 trillion (RM8.7 trillion) a year.
The Malaysian government has taken several steps to stop the trade of illicit cigarettes as announced in the 2021 Budget.
The market share of illicit cigarettes declined to 57.9 per cent in May this year from 64.1 per cent in December last year, according to the Illicit Cigarettes Study (ICS) by the Confederation of Malaysian Tobacco Manufacturers (CMTM). Though there has been a decline, it is still considerably high, dominating over half the local cigarette market.
As the country faces economic instability due to the Covid-19 pandemic, it is time for the government to step up efforts to combat smuggling to prevent leakages that should be used to stimulate economic recovery.
In a recent roundtable discussion with Harian Metro, panellists discussed strategies and solutions to cover economic leakages due to the black market and ways to help revive the country's economy.
The panellists were former inspector-general of police Tan Sri Musa Hassan, DARE managing director and economic analyst Pankaj Kumar and HELP University Institute of Crime and Criminology Senior lecturer R. Paneir Selvam.
Q: Ahead of the 2022 Budget presentation, the Finance Ministry has issued the 2022 Pre-Budget statement on plans to address the problem of economic leakages, especially involving the smuggling of highly taxable goods estimated at RM5 billion annually. In your opinion, why is illegal trade still the main focus of the government?
Pankaj: The problem is that it is still rampant and out of control. In the past, when the government took steps to increase the excise tax on cigarettes, the market price of cigarettes rose sharply by 50 per cent.
Excise taxes also increase the price of genuine goods. The price of a pack of cigarettes is RM17, but illicit cigarettes are cheaply sold at RM4 or RM5 and the price gap is huge.
When there is a difference in demand, the community says, our income has fallen but we want to smoke cigarettes, so how? So they tend to buy non-genuine and contraband goods.
In economic terms, if we look at the size of the cigarette market, it is almost RM13 billion, but RM8 billion involves illegal trade because the market size is controlled by smugglers.
The government misses out on taxing smuggled goods and RM5 billion is lost from excise tax and income tax collection.
Q: When the government raised the excise tax, was it the factor that caused an increase in the smuggling of illegal cigarettes?
Pankaj: Yes, the government raised the excise tax from 2013 to 2016 and this resulted in increased smuggling, from 33 per cent to 63 per cent last year. This year, the figure dropped to 58 per cent due to government efforts through the 2021 Budget, but when the smuggling increased it became too big to control.
It became difficult as genuine items became the minority and smuggled ones became the majority. Although last year the government made five ports for the purpose of transshipment, the smugglers are one step ahead.
They can still smuggle from the ports or maybe they have "connections" in the Customs Department, so when they see a container coming, what they declared in the declaration form does not match what is actually inside the container.
Q: What makes Malaysia a smuggling hub?
Paneir: I will give you the demand and supply theory. When there is demand, the supply will come in through various ways.
We have to accept that the cigarette price in Malaysia is too high compared to the people's income. The cost of living is also high, so consumers will look at ways to reduce their cost of living.
They will look for cheaper cigarettes, which are illicit ones smuggled from outside. This is a big problem that must be given attention by the enforcement authorities and the government.
When the price of cigarettes is high, it opens the door to smugglers and consumers to get the cheaper ones.
Q: The issue of leakage and smuggling is often linked to enforcement agencies. Tan Sri, do you agree that smuggling takes place because many are assisted by 'insiders'?
Musa: Cigarette smuggling occurs when someone brings in goods without being taxed, and brings the smugglers in through the rat lanes. This is a leakage.
I hope the enforcement authorities take stern action against those who carry out smuggling activities, as they must have a syndicate.
Enforcement authorities need to obtain information to curb illegally smuggled cigarettes. Therefore, the authorities at the borders need to work together in tackling the problem of cigarette smuggling.
When they enter the port without declaring to Customs, this is where the smuggling occurs because there is a cooperative relationship with the enforcement team. This is corruption.
If we do not have integrity, it will be easy to smuggle into the country. We need to increase integrity and all departments must cooperate, not only Customs, but the Immigration Department must channel their information.
The same goes for the police, we need to create cooperation between departments.
Q: Why is smuggling still rampant despite various ACTIONS taken by the government?
Pankaj: We are lacking in terms of enforcement and what enforcement we have is weak. Although we allow five transshipment ports, Malaysia has a long coastline that has smuggling locations hence this activity is rampant due to lack of enforcement.
But what is more important is what else can the government do to address the cigarette smuggling, apart from steps taken last year. In a report by DARE, we analysed a number of appropriate measures that the government should take, which include tighter enforcement and integrated operations of all enforcement agencies on an ongoing basis rather than occasionally.
Moreover, the household income fell sharply because of Covid-19. If we look at the monthly income statistics, the income of 50 per cent of Malaysians fell to RM2,062 last year compared with RM2,442 in 2019.
This is the answer to why smuggling is still rampant. Market demand and supply is there, but there is no control.
Q: Since Jan 1 last year, the government has been combatting the tobacco black market aggressively. Is it enough or is there room for improvement?
Paneir: We can clearly see the efforts made by the government, but this involves organised crime. Criminals are clever to use government machinery such as the Customs.
They can find people to bribe to get help, and this involves not only the Customs but Immigration (Department) and the police too.
The government may be taking necessary steps but in every organisation there are "insiders" known by the criminals to get information. We cannot put the blame fully on the government, there is action but it is not enough.
For example, we can use artificial intelligence and drones to monitor the borders. When there is a foreign boat coming into the country, we can identify those bringing such items in.
The government must invest in artificial intelligence to prevent smuggling.
Q: Tan Sri, can you elaborate on the scenario where the criminals will always look for ways to carry out their 'profitable' operations though they have to face obstacles?
Musa: Yes, it is true the smugglers will continue to look for ways to make black money which profits them. This causes the government to lose revenue as no taxes are paid and these cigarettes are sold under the table.
This is how they gather illegal money. All enforcement officers must have high integrity because they are the officers who look after the interests of the country.
If they are the ones who cause leakages to the government, how can the government help the people? If they care about their own pockets, then the people will be neglected.
Q: What are the factors that led to the sharp increase in smuggling activity?
Pankaj: One factor is the government increased the excise duty and this increased smuggling exponentially to 63 per cent. The high excise duty caused smuggling activities to become rampant.
If we want to control this, then we have to look at the benefits of increasing the excise duty. If we do an analysis of the past five or six years, the demand for cigarettes has been the same even though we increased the tax.
Even if we increase tax, people are not going to stop smoking. Hence, increasing excise duty is not the answer to stop the demand or habit of smoking. The government has to look at other techniques.
The government should decrease the excise duty and based on my analysis, for every 10 per cent increase in excise duty there will be an increase of two per cent of smuggling and a loss of RM254 million in tax collection for the government.
Imagine if the excise duty increased, the government will lose even more. Besides that, the government must bridge the price gap between genuine cigarettes and illicit ones.
The government also needs to improve minimum wage, household income and the overall salary of the people.
Paneir: Increasing cigarettes price will not solve the issue. We could do a moratorium on excise duty and not increase it anymore.
Q: Tan Sri, can you explain the modus operandi of criminals using ports and national waters for their activities?
Musa: There is smuggling in both. If the smugglers have close connections with the authorities, they can even smuggle through legitimate channels.
They will see who is on duty and if it is someone they know then they will bring in their goods. Another way is to smuggle the goods illegally through the rat lanes at borders.
Q: Has the Covid-19 pandemic reduced smuggling activities?
Pankaj: It has, because the smugglers could not distribute the goods to shops for sale. This could also be a reason for the decline in smuggling activities to 57.8 per cent this year.
But now the country's borders are being reopened and interstate travel is also allowed, so smuggling activities will return.
Paneir: Smokers are consistent, they will not change. Smuggling will continue, but the Movement Control Order (MCO) slowed it down.
Their modus operandi might change, for instance there was a case last month where smugglers used vegetables boxes as a cover for their illegal activities. They will always look for ways.
Q: What can the government do to reduce leakages, especially in the illicit cigarette trade, to improve economic recovery?
Pankaj: It is a structural problem. The government cannot tax Malaysians as only 15 to 16 per cent of them are paying taxes. It is too low. Our tax system is not right.
The government must change methods of tax collection from those working and companies so that we can improve tax collection.
For the past 10 years, the GDP percentage for tax collection was 16 to 17 per cent and now it has fallen to 11 per cent.
We have to look at tax collection, why is it only imposed on cigarettes, liquor and gambling?
The government could introduce new taxes. In Indonesia the government is increasing value-added tax from 10 per cent now to 12 per cent in 2025 and also introduced a wealth tax, where the tax is imposed on the rich.
Paneir: The government must change its strategy to resolve the issue. They must think outside the box.
People must be educated not to purchase illicit cigarettes as it can cause health problems and the government should improve border security.