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Illegal cigarettes still in demand despite customs crackdown

 | August 23, 2017

With 57% of cigarettes sold being illegal, tobacco companies blame 40% hike in excise duty in November 2015 for pricing legal cigarettes out of smokers' reach.


PETALING JAYA: The contraband cigarette market will continue to reap the benefits of the rising price in legally sold cigarettes, despite the increased enforcement by the customs department on the illicit trade.

Taking into consideration the billions in lost revenue owing to this problem, the customs department increased its enforcement activities at borders, ports and points of entry over the last six months to weed out perpetrators behind the import of illicit cigarettes, The Malaysian Reserve (TMR) reported.

This may have helped bring down the amount of contraband cigarettes that has entered the country but it has had little impact in actually reducing the consumption of such cigarettes.

“The legal cigarette market has shrunk more than 50% over the last 13 years.

“In December last year, illegal cigarette consumption reached a record high of 57.1%, or 10 billion sticks, of the total 18 billion sticks consumed in the country,” the financial daily said in its report.

What it translates to is that at least one in every two cigarette packs sold in the country is illegal. This is compared with only 14.4% in 2004.

Naturally, the biggest casualties from this lost revenue, apart from the government’s coffers, are the tobacco companies.

Aside from the ongoing campaigns by the health ministry to reduce the number of smokers and the government’s ban on smoking in public areas, the illicit cigarettes trade has hurt the bottom line for these companies.

According to TMR, sales in the last 36 months for the once lucrative cigarette manufacturing business have been in a tailspin.

Leading tobacco company, Philip Morris (M) Sdn Bhd believes that the hike of 40% on cigarette excise duties in November 2015 was the tipping point for the industry.

“We believe that this situation we are facing today stems from consecutive high excise tax increases over time, which have created a wide price disparity between legal cigarettes and illegal cigarettes.

“In turn, affordability issues and weakened consumer sentiment have driven more smokers to seek unpaid-duty cigarettes,” Philip Morris managing director Kang Tae Koo told TMR.

As a result of the hikes in duties, the price of a pack of cigarettes in Malaysia is the third highest in the Asean region, after Singapore and Brunei. The price of cigarettes in Malaysia has increased largely due to the more than 110% jump in cigarette-related duties since 2011.

According to TMR, retail cigarette prices rose from RM5 in the early 2000s to between RM12 and RM17 per pack, at present. Illegal cigarettes are only sold at between RM4 and RM5 per pack.

“This huge price gap between legal and illicit cigarettes will continue to hurt the industry,” Kang was quoted as saying.

Philip Morris has no plans to close or reduce its operations in Malaysia though, unlike two of its main rivals, British American Tobacco (M) Bhd (BAT) and JT International Bhd (JTI).

Last year, BAT closed its plant in Petaling Jaya, Selangor, resulting in 230 people losing their jobs.

At the time, the company had cited falling sales due to the presence of illicit cigarettes in the market and high duties imposed by the government as the reason for its move.

JTI has already announced that it will close its Shah Alam plant by the end of this year with its closure affecting 270 employees.


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