WHILE the government has sought to reduce tobacco use through aggressive taxation, the unintended consequence has been a flourishing illicit market.
High taxes may not serve their intended purpose in the long run. Consumers - particularly those from lower-income groups - are more likely to purchase cheaper, illegal cigarettes to cope with rising prices.
This shift has been so profound that the major industry players in Malaysia have had to make drastic operational changes. One has shuttered its factory operations and another has followed suit.
A third player has ceased local cigarette manufacturing, focusing instead on its cast leaf plant in Seremban. These closures represent not only a loss of jobs but also taxable income for the government.
Illicit trade threatens the viability of legitimate businesses while shrinking government revenue from tobacco taxes. As legal businesses struggle, the government loses out on excise duties and other taxes, creating a ripple effect that extends beyond the tobacco industry.
To address this growing issue, the government must reconsider its taxation approach.
One potential solution is the implementation of a multi-year tax calendar, which would see moderate, predictable tax increases on a biennial basis.
Such a system would help avoid sudden price shocks, giving consumers fewer reasons to turn to the illicit market. Additionally, it would allow businesses to plan their finances and operations more effectively, ensuring greater stability in the marketplace.
A multi-year tax plan would also provide the government with a clearer view of future revenue trends, allowing for more accurate fiscal planning.
Moreover, the government should explore a balanced tax strategy, combining both ad quantum (tax based on the quantity of goods) and ad valorem (tax based on the value of goods) methods. This hybrid approach would allow for more nuanced taxation that takes into account product price and quality, helping to level the playing field between different tobacco products while still maximising revenue.
A well-thought-out tax system is essential to curb the illicit cigarette trade and protect government revenue. By adopting a multi-year tax calendar and a balanced taxation approach, the government can encourage consumers to purchase legal cigarettes, support legitimate businesses and secure a steady stream of income from tobacco taxes.
In doing so, we can better tackle the growing issue of illicit products and safeguard both public and fiscal interests.
S. SARAVANA KUMAR
Head of SST & Customs,
RDS Advocates & Solicitors,
Kuala Lumpur
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times