A losing battle against illicit cigarette trade

THE numbers have reached a staggering level. For every two cigarettes smoked in Malaysia, one is an illicit cigarette.

In other words, the share of the cigarette black market has reached 57.1 per cent as at December 2016, based on Nielsen Cigarette Study 2016.

The estimated volume of the illicit trade is 11 billion sticks. Assuming an excise rate for the government of 40 sen per stick, the government revenue forgone is a huge RM4.4 billion.

This means a revenue loss of RM4.4 billion, enough to construct a big number of hospitals and schools.

Industry sources say they expect the illicit levels to breach the important 60 per cent mark by this year if nothing else changes.

This will result in more revenue losses for the government. Right now, illicit cigarettes are priced between 17 and 25 sen per stick at the retail level.

This compares with 85 sen per stick for legitimate cigarettes. This includes the excise rate of 40 sen per stick.

No wonder the industry volume for legitimate cigarettes has been on a sharp decline. Last year, the volume fell 25 per cent to just eight billion sticks from 2015, much less than the number of illicit cigarettes.

What are the implications of the influx of the cheap and readily available illegal cigarette segment, which the main industry body describes as a crisis spiralling out of control?

One worrying effect is that the number of smokers is on the rise, not on the decline.

Seven out of 10 youths are buying illegal products, according to the Health Ministry.

“The impression that smokers will quit when cigarettes are too expensive ignores the fact that there are cheaper alternatives in the market,” the Confederation of Malaysian Tobacco Manufacturers (CMTM) said.

According to the Health Ministry’s Global Adult Tobacco Survey 2011, the number of smokers in Malaysia was 4.75 million.

Subsequently, the ministry’s National Health and Morbidity Survey (NHMS) 2015 – Reports on Smoking Status among Malaysian Adults reported that the number of smokers increased to five million.

However, cigarette prices during the same period increased by an average of more than 30 per cent. If cigarette price increases really do have a correlation with smoking cessation, the percentage of smokers would have dropped.

“In the current economic environment where consumer sentiment remains low, another round of cigarette price increases will only produce a detrimental situation for both the government and the legitimate industry as consumers will switch to cheap illegal alternatives selling as low as RM3 per pack,” CMTM said.

The confederation has been quite vocal lately after Deputy Health Minister Datuk Seri Dr Hilmi Yahaya said the government planned to increase prices of cigarettes from RM17 to RM21.50 per pack in the near future as a means to deter people from smoking.

CMTM then made a representation to the Finance Ministry. Second Finance Minister Datuk Seri Johari Abdul Ghani said the government has no immediate plans to hike cigarette tax but will focus more on cracking down on the illicit business.

The government also loses Goods and Services Tax revenue due to the illicit trade.

The influx of cheap, illicit cigarettes into Malaysia has taken a heavy toll on the country’s cigarette makers.

British American Tobacco (M) Bhd (BAT) will cease manufacturing operations in the country by this June.

The tobacco firm — whose products include Dunhill, Peter Stuyvesant, Pall Mall and Benson & Hedges — said its manufacturing unit in Petaling Jaya would be shut down, resulting in job losses.

“The high excise environment has ultimately led to the sharp rise in illegal cigarettes and significantly lower legal sales volumes, resulting in rising cigarette production costs,” it said.

The only tobacco maker in the country is JT International Bhd. Philip Morris now fully imports its products from Indonesia.

The perennial issue is the lax enforcement. The authorities should be more serious in going after the distributors and retailers of illicit cigarettes.

The legitimate industry should also help wage a campaign in educating smokers against smoking illicit cigarettes.

For sure, cheap illegal cigarettes do not comply with any Health Ministry regulations, including on minimum price, tar and nicotine limits and graphic health warnings.

Putting a ban on smoking in more places may be a good move but this alone will not deter the illicit business.



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