Illegal cigarettes made up 60% of the Malaysian market in 2018 – here’s why that’s causing major problems

The study also found that the level of illicit market penetration in Malaysia was the highest among the world’s top 100 tobacco markets.
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The growth of illicit cigarette trade in Malaysia has caused a number of major problems in the country, including the loss of billions in ringgit (RM) to tax evasion, a study has found.

The Economics of the Illicit Tobacco Trade in Malaysia report released in June revealed that in 2018, about 60 per cent Malaysia’s cigarette market was made up of illegal products, an increase from 56 per cent in 2017.

The study conducted by Oxford Economics and commissioned by British American Tobacco (BAT) also found that the level of illicit market penetration in Malaysia was the highest among the world’s top 100 tobacco markets.

After the Malaysian government imposed an excise hike in 2015, BAT Malaysia raised prices of cigarettes in the country by almost 40 per cent, the report said. However, Malaysia lost around RM1.5 billion (US$360 million) due to taxes evaded by the illicit trade in 2018, the report revealed.

“By falling outside the legitimate market, sales of illegal cigarettes avoid both excise duty and the sales tax on final prices. In so doing, they deprive the government of substantial revenues,” the report said.

The report added that a total of RM13.5 billion in excise hikes has been lost to the illicit trade since 2015 – more than the amount that the US Department of Justice cited was lost in the 1MDB scandal.

Criminal activities

Citing New Straits Times, Oxford Economics said that the sale of contraband cigarettes in Malaysia has enabled smuggling syndicates to generate profits used to fund more smuggling activities and other types of criminal activities.

“Illegal tobacco benefits from, and propagates, corruption in Malaysia, undermining the rule of law and governance, and diminishing the country’s attractiveness to international investment,” Oxford Economics said in the report.

Decline of legal cigarette sales

And of course, illegal cigarettes are a threat to legitimate cigarette businesses in Malaysia.

According to Oxford Economics, the average price of a legal pack of 20 cigarettes is RM15.87. In comparison, a pack of illegal cigarettes can cost just RM4.50, half the minimum price legislated by the government.

And while total cigarette consumption (both legal and illicit) has increased by 7 per cent since 2015, the sale of legitimate cigarettes has dropped by nearly a third.

Loss of jobs

Due to the growth of the illicit trade, two Malaysian cigarette factories – run by BAT and Japan Tobacco International (JTI) – closed in 2016, the report added. These factories not only contributed to Malaysia’s Gross Domestic Product (GDP), but also generated tax revenue and provided employment to locals.

At the peak of production in 2013, the two factories are estimated to have supported around 5,750 jobs in Malaysia, making up over 14 per cent of employment in Putrajaya that year.

Furthermore, the total value of tax revenue generated from the factories through employment and economic activity in 2013 was estimated to be RM161 million.

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