Reducing taxes not the answer to illegal cigarette issue

There have been calls from certain quarters to reduce taxes on legal cigarettes in Malaysia. However, this unorthodox or paradoxical sounding measure does not seem to be a viable measure to resolve the country’s illegal cigarette trade or protect the people’s well-being.

To put things in perspective, there are two different tax structures for domestic and imported cigarettes in Malaysia. Excise tax per stick is levied on locally produced cigarettes sold in the country, while import duty is levied on imported cigarettes.

Both domestic and imported cigarettes are subject to sales tax.

Common sense dictates that if taxes are reduced, this will result in lower cigarette prices.

Inevitably, rising affordability will incentivise people to smoke more or, worse still, encourage young adults or non-smokers to pick up the habit, undermining the government’s goal of reducing non-communicable diseases in the country.

If the health ministry approves such a call to lower cigarette prices, this could also be a financial boon for the licenced tobacco firms operating in the country.

Is this a stand that the health ministry wants to make at this point in time?

How will this tie in with the ministry’s agenda related to smoking? The law does state that the price approval of cigarettes is at the ministry’s sole discretion.

One may recall that the ministry had rolled the “Speak Out: Express Your Right, Protect Your Lungs” campaign in May 2019 to empower people to quit smoking.

Although many have doubted its success, the campaign reflects the government’s stance against smoking.

Black market

The main driver that encourages smokers to switch from legally-sold cigarettes to illegal ones is the affordability or price differential between the two.

The current minimum selling price for legal cigarettes is RM10, while illegal cigarettes can be bought from anywhere between RM3 and RM6.

Common sense will attest that legal cigarettes will always be more expensive than the illegal ones. Therefore, if the prices of legal cigarettes were to be reduced, the prices of illegal cigarettes could follow suit.

The illegal cigarette trade in Malaysia continues to be rampant and has escalated substantially over the last four years with at least six in every 10 cigarettes consumed locally being illicit.

A study by the Confederation of Malaysian Tobacco Manufacturers showed that the illegal cigarette trade in Malaysia hit 62.3% in 2019 from 58.9% the previous year.

Various media reports have indicated that Malaysia loses RM5 billion annually from the illegal cigarette trade, with the black economy making up approximately 21% of the country’s gross domestic product or about RM300 billion a year.

Enforcement is key

In the other extreme to the recent call to reduce taxation on legal cigarettes is the plan by the health ministry to increase the minimum cigarette price from RM10 to RM15.

While this sounds like a good motivation for smokers to kick the habit, industry players are against it for this will only provide untaxed and unregulated illegal cigarettes with significant competitive advantages over their higher-priced legal rivals.

In all probability, meddling with the sin tax equation will not do the trick. If an individual already insists on smoking, he or she will find ways and means to take a puff.

Thus, the best course of action is to maintain the current price of cigarettes while also rigorously addressing the issue of illegal cigarettes, which can be done through beefing up lacklustre or inadequate enforcement.

One wonders what the future holds for the multi-agency task force that was set up by the previous government to tackle illegal trading of cigarettes and alcohol in Malaysia given there has been no action to date.

Such silence is deafening considering that if the illegal cigarette crisis is allowed to continue unabated, it is in a way putting the well-being of our children and the future generations of Malaysians at risk.

 

Roslan Aminuddin is an FMT reader.

The views expressed are those of the author and do not necessarily reflect those of FMT.