KUALA LUMPUR: The incidence of illicit tobacco trade may grow by as much as two percentage points for every 10 per cent increase in excise charges, potentially costing the government an additional RM254 million in uncollected excise taxes.
Datametrics Research and Information Sdn Bhd (DARE), a non-governmental think tank in a study entitled Winning The War On Tobacco Black Market, also revealed that criminal syndicates currently earn RM8 billion per year in total sales revenue from illicit tobacco products in Malaysia, while the government loses approximately RM5 billion in uncollected taxes.
As of May 2021, the illicit tobacco market in Malaysia stands at 57.9 per cent, according to DARE's previous study entitled Illicit Cigarettes Study May 2021 report.
DARE managing director Pankaj Kumar said the agency's 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," he said in a statement today.
Pankaj said raising excise duties 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.
Even if excise duties remained at the current level, 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 Sdb Bhd (GZSB), most smokers (53 per cent) have said that they will switch to cheaper but illicit alternatives because they 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 costly 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 said.
In providing policy solutions to this problem, Pankaj recommends that the upcoming Budget 2022 include better enforcement, especially in the coastal areas and maintaining excise moratorium to reduce tax revenue leakages.
He also proposes reducing price gaps between legal and illicit tobacco products by reducing sky-high duties and imposing stricter legislative moves to clean up illegal products of tobacco sold in the market.
"Malaysia needs to resolve this issue to generate funds towards fulfilling the 12th Malaysia Plan," Pankaj said.