Nation robbed of billions by contraband cigarettes, says IDEAS

Malaysia’s open and porous borders and claims of weak enforcements are blamed for the rising imports of illegal cigarettes


The rising trade of the cheaper illicit cigarettes is robbing Malaysia billions of ringgit in tax revenues, denting profits of legitimate levy paying companies and weighing on the industry.

Malaysia’s open and porous borders and claims of weak enforcements had been blamed for the rising imports of illegal cigarettes. The high price of legal cigarettes due to the higher duty had forced consumers to turn to the cheaper illicit products.

Industry experts estimate that in 2016 alone the country was deprived of about RM4.12 billion in tax revenue due to the widespread sales and smuggling of illegal cigarettes.

Customs officers with seized contraband cigarettes in 2016. Based on the 2016 and 2017 estimates — Malaysia lost almost RM9b in revenues due to the consumption of illicit cigarettes (Pic: Bernama)

It is estimated that Malaysians smoke 18 billion sticks of cigarettes in 2016, but 57.1% or 10.29 billion sticks are illegally brought into the country and do not contribute any revenue to the government.

The Oxford Economics report released in July this year quoted the estimated tax loss due to illicit consumption was RM4.7 billion year, higher than the RM4.12 billion estimates of 2016.

This means, based on the 2016 and 2017 estimates — Malaysia lost almost RM9 billion in revenues due to the consumption of illicit cigarettes.

The financial burden to the federal government was added with the millions lost from the smuggling of other products, including contraband beer or liquor.

In a report by the Institute for Democracy and Economic Affairs (IDEAS) late last year, the research organisation said the illicit trade in Malaysia is a major problem: It impacts the country economy, drains the government of legitimate tax revenue, encourages illicit trading and suppresses formal enterprises.

In a policy paper titled: “Illicit Trade in Malaysia: Causes and Consequences”, IDEAS estimated that the government had lost RM8 billion in 2017 due to illicit trade alone, based on the relative distribution of pro-ducts prone to illicit trade including tobacco, food and beverages, machinery and cars.

Price Hike?

The latest numbers from the industry showed illicit cigarette consumption has risen to 63% this year, meaning that for every 100 sticks of cigarettes consumed in the country, 63 sticks are contrabands.

The planned increase in retail cigarette prices next month is expected to drive more consumers to the black market.

IDEAS last week released its policy report titled: “Combatting Illicit Trade: Lessons from Abroad”. The report urged the government to hold off any further price increases and instead review the present tax structure for tobacco products.

The independent research organisation had also suggested that reviews at the policy level should also include the tightening of the enforcement to curb the menace.

In the report, the think-tank said the government should consider a review of the current tax regime as the drastic increase in legal cigarette prices had resulted in stark increases in the illicit trade of tobacco.

“The government should not raise the price any further and instead should review the existing taxation regime in light of experiences in other countries, such as Canada and Pakistan, that have successfully reduced illicit cigarette trade after reforming excise duties,” said the independent research organisation.

The report urges the government to adopt a new tougher strategy to reduce illicit trade. It said many countries had tackled the smuggling of contraband and the spread of counterfeit goods by adopting better technology, stricter penalties and educating the public.

The research organisation has proposed that the government to adopt a new cross-government strategy, with clear political ownership, formalise cooperation with the private sector through the formation of a new Trade Enforcement Committee and set specific targets for seizures and publish data on performance, in line with the scale of the problems to ensure consistent and proactive effort by the different agencies.

The paper also proposes that the government to publish systematic annual statistics on seizures and penalties to allow the public to gauge the overall trends in illicit trade and hold the government accountable for its efforts.

Review Policies

The report also suggest that the authority to review the incentive policies related to enforcement staff across the different agencies, reduce the possibilities of corruption and automate processes where possible as well as staff rotation in high-risk positions.

Ali says it is crucial that the govt steps up its effort to counter illicit trade (Pic by Ismail Che Rus/TMR)

IDEAS’ paper had also suggested a halt to further excise duties hike on tobacco and a review of the current tax regime.

“Multiple tax hikes on cigarettes have led to a drastic increase in the legal price of cigarettes and this has led to stark increases in the illicit trade of tobacco,” said the report, citing Canada and Pakistan’s success in reducing illicit cigarette trades by reforming their excise duties.

IDEAS has also proposed a stiffer penalties of RM100,000 as the current punishment is not sufficient to deter the criminal act, restricting access for certain imports to a single point of entry to allow greater enforcement focus and raising public awareness on the personal health risk associated with consuming illicit products.

The report said a cross strategy with clear political ownership should be employed to combat the rise of illicit cigarette trading.

IDEAS CEO Ali Salman said it is crucial that the government steps up its effort to counter illicit trade, which is draining the country of much needed revenue and harming legitimate businesses.

“The government should follow the example of other countries and establish a clear strategy, governed at the highest levels to tackle this problem. There are also a number of specific steps the government should take, including increasing penalties and improving cooperation with the private sector.

“Illicit tobacco, in particular, remains a major problem and the government should hold back from any further increase in prices and review the existing tax structure, as well as tightening enforcement on known smuggling routes,” he said.

Legal Versus Illegal Brands

The planned increase in retail cigarette prices next month is in view of the Sales and Services Tax (SST) implementation on Sept 1 this year.

Major tobacco firms, British American Tobacco (M) Bhd (BAT), JT International Bhd (JTI) and Philip Morris (M) Sdn Bhd, are expected to raise prices by 20 sen to 50 sen per pack.

Some of the illegal cigarettes are sold as cheap as RM4 in the open market despite questionable content and origin of these illegal products.

A further price hike come November will likely drive more volume away from legal brands in a market already dominated by alarmingly high levels of illicit cigarette consumption.

Today, contraband and illegal cigarettes are sold three to four times cheaper than legal brands at RM4 to RM5 per pack. Meanwhile, premium brands such as BAT’s Dunhill and JTI’s Mevius cost RM17 per pack before the expected increase from SST.

Cigarette prices in Malaysia is the third-highest in the region after Singapore and Brunei, and the government’s strategy to curb smoking by imposing steep duties has only fuelled further illicit cigarette consumptions.

The losses from illicit trades, including from contraband cigarettes, are costing billions, depriving the government of the cash to build the much needed infrastructure, schools, hospitals, basic amenities, scholarships, etc.

For example, the money lost from “stolen tax revenues estimated at RM8 billion annually” could build 32 four-storey hospitals with specialist clinics and 126 beds, or transform thousands of classrooms into Smart Classrooms.

The huge losses to the country has triggered anger among responsible citizens who believe the situation has reached unacceptable levels. Consumer groups have also lambasted the rise in smuggling and illicit trade including the sales of counterfeit products.

Smugglers have imported more fake products from cigarettes to the recent poisonous alcohol that killed more than 21 people to beauty care products, which contain harmful substances including aluminium and cancer triggering content.

Such frustration has rallied more people to demand for more actions from the authority. One such group is the online movement called JanjiLegit to get Malaysians to reject illegal products.

The level of illegal trades and smuggling has reached an alarming level, robbing billions from the country of legitimate revenues, punishing legal and honest business entities and enriching the unscrupulous criminals. It is time for the government to take a stand and resolve the issue in a tough and concerted manner.