RM5b lost to illicit cigarette trade: Oxford Economics

by MARK RAO/BERNAMA PIC

Malaysia is estimated to have lost RM5.13 billion in potential tax revenue to the black market for cigarettes as the high cost of legal brands is driving both supply and demand for illicit trade, according to Oxford Economics.

Consumption of illegal ciggies comprised approximately 59% or 12 billion sticks of the total consumed in Malaysia last year which ranks the country top in terms of illicit cigarette incidence ahead of Brazil (50%), Ecuador (41%), Panama (34%) and UAE (33%).

This is estimated to have translated into a total of RM5.13 billion in total tax evaded by the black market, comprising RM331 million in unpaid sales tax and RM4.8 billion in excise duty, Oxford Economics said in its report.

The excise duty lost is also higher than the RM3 billion estimated to have been collected that year, resulting in a net loss of RM1.8 billion to the Malaysian government.

Oxford Economics director of economic impact consulting for Europe and Middle East Pete Collings said the high cost to purchase legal cigarettes is the main factor behind the rampant illegal cigarette trade in Malaysia as consumers turn to the black market for cheaper alternatives.

“On the demand side, what is feeding into whether a consumer opts for illicit or illegal cigarettes is going to be around affordability,” he told The Malaysian Reserve.

“(Cigarette) duties are pushing prices for legitimate brands far higher than the illegal prices. Therefore, it is far more affordable to go for an illegal cigarette.”

According to the report, the average price for a 20-stick pack of cigarettes retails at above RM15 compared to only RM4.50 for illicit brands. This is in line with excise duties on cigarettes rising to 40 sen per stick against only 22 sen back in 2012.

The cost of legal cigarette brands further comprised 7.1% of the mean household daily income in 2016 and 17.3% for the mean daily income for households in the bottom 40% income group. This is against only 2% and 4.8% for illicit cigarette brands in the respective categories, according to the report.

Collings, who authored the report, said the high cost of legal cigarettes allows black market suppliers to garner huge profits from the trading of ‘smuggled whites’ or cigarettes produced legally abroad to be sold illicitly in Malaysia.

“If you look at the region, legal prices in Malaysia relative to its neighbours (apart from Singapore) is far higher,” he said.

“So, criminal organisations can just purchase cigarettes legally elsewhere and then get across the border through various channels then sell it illegally here.”

75% of Malaysia’s black market for cigarettes in 2018 comprised such illicit whites, smuggled primarily from Vietnam, Indonesia and Philippines whose legal cigarette brands cost less than half of that in Malaysia.

“The dynamic exists in terms of price to give enough of an incentive for consumers to participate in the illicit market and for smugglers to get it into the country and make a profit,” Collings said.

The report by Oxford Economics was commissioned by the British American Tobacco group with the stated goal of quantifying the potential tax revenue lost by the Malaysian government annually to the black market and to highlight the wider economic consequences to the country.