Illicit tobacco trade costing Asia-Pacific govts US$14.85bil tax loss, says study

Illicit tobacco trade is costing Asia-Pacific governments an estimated US$14.85 billion in foregone tax revenue, a new policy paper released by the Center for Market Education (CME) shows.

Malaysia is estimated to lose about US$775 million annually, with the estimated lost revenue (55%) exceeding the amount actually collected from tobacco taxation, according to the study.

The study, titled “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 understood not simply as a customs or criminal-enforcement problem, but as a fiscal and policy-design challenge.

The study showed that tobacco tax collection amounts to about US$30.98 billion, while estimated revenue lost to illicit trade reaches US$14.85 billion, meaning 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.

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

Australia has the largest estimated fiscal loss, at about US$9.60 billion, followed by Indonesia, at about US$1.65 billion.

CME said the most severe structural cases are Malaysia and Pakistan, where estimated illicit-market shares reach 55% and 54%, respectively.

“Malaysia is estimated to lose approximately US$775 million 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..

According to the paper, the key policy mistake is to assume that increases in statutory excise rates automatically generate higher government revenue.

“A tobacco tax is fiscally effective only when a sufficiently large share of consumption remains within the legal market.

“When tax increases widen the price gap between legal and illicit products faster than enforcement capacity can respond, consumers have stronger incentives to migrate towards cheaper illegal alternatives,” CME said.

The report said governments should shift their focus from statutory tax ambition to effective revenue performance.

Particularly in markets already experiencing high illicit penetration, the priority should be recovering the legal taxable base rather than continually raising the tax burden on a shrinking legal market, it said.

“The relevant question is not simply how heavily tobacco is taxed, but how much of that tax can actually be collected,” Carmelo Ferlito, CME’s CEO and author of the study, said in a statement.

“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.”

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