Malaysia loses US$775mil a year to illicit tobacco trade

KUALA LUMPUR: Malaysia is estimated to lose US$775 million (RM3.2 billion) in tobacco tax revenue annually to illicit trade, with illegal products accounting for 55 per cent of tobacco consumption, according to a policy paper by the Centre for Market Education (CME).

The study, Illicit Tobacco Trade in Asia-Pacific: Taxation, Market Incentives, and Macroeconomic Costs, examines tobacco taxation and illicit-market penetration across 14 Asia-Pacific economies.

It said illicit tobacco trade should be viewed not only as a customs and enforcement issue, but also as a fiscal and policy-design challenge.

Across countries with comparable estimates, tobacco tax collections total about US$30.98 billion, while revenue lost to illicit trade is estimated at US$14.85 billion.

"This means that for every US$100 collected through tobacco taxation, almost another US$48 is estimated to be lost because consumption takes place outside the legal and taxable market," the study said.

The estimated losses are equivalent to about 1.63 per cent of total tax revenue, 4.27 per cent of current health expenditure and 7.71 per cent of government education expenditure across the sample.

Australia recorded the largest estimated fiscal loss at US$9.60 billion, with an illicit-market share of 60 per cent.

The study said this showed that illicit tobacco trade was not confined to developing economies, as large tax-driven price differences could create incentives for illegal supply even where enforcement institutions were relatively strong.

Indonesia recorded the second-largest estimated loss at about US$1.65 billion, despite an illicit-market share of 10.77 per cent.

Malaysia and Pakistan had the highest estimated illicit-market shares at 55 per cent and 54 per cent respectively.

Malaysia is estimated to lose about US$775 million in tobacco tax revenue annually, while Pakistan loses about US$999 million.

"In both cases, estimated lost revenue exceeds the amount actually collected from tobacco taxation, indicating that illicit trade has substantially eroded the legal tax base," it said.

Thailand also faces significant illicit-market pressure, with an estimated share of 28.1 per cent and fiscal losses of about US$567 million.

The study said Bangladesh, the Philippines and Vietnam showed that even moderate illicit-market penetration could result in significant fiscal costs, while Singapore demonstrated that very low illicit penetration was possible where enforcement credibility was strong.

The paper said higher tobacco excise rates did not automatically translate into higher government revenue. When tax increases widened the price gap between legal and illicit products faster than enforcement capacity could respond, consumers had greater incentives to switch to cheaper illegal alternatives.

CME said governments should focus on effective revenue collection and protecting the legal taxable market, particularly in countries with high illicit penetration.

"The relevant question is not simply how heavily tobacco is taxed, but how much of that tax can actually be collected.

"When taxation pushes an increasing share of consumers outside the legal market, governments risk undermining their own fiscal objectives. The legal market is the tax base: protecting it is therefore a fiscal-policy objective, not merely a commercial concern," said CME chief executive officer and study author Dr Carmelo Ferlito.

Ferlito recommended gradual and predictable excise changes, stronger coordination among enforcement agencies, continuous monitoring of illicit-market penetration and greater regional cooperation to combat cross-border illicit supply chains.