This article first appeared in The Edge Malaysia Weekly on November 9, 2020 - November 15, 2020

AFTER a long wait, Budget 2021 is one that the tobacco industry should be pleased with. It appears that the government is getting serious on cracking down on the smuggling of high-duty goods, in particular illegal cigarettes.

At the tabling of the budget, the finance minister announced that the Multi-Agency Task Force will be strengthened with the participation of the Malaysian Anti-Corruption Commission and the National Anti-Financial Crime Centre. He also outlined several measures that would help to reduce the number of illegal cigarettes in the country.

These include a freeze on the issuance of new import licences for cigarettes, tightening the renewal of import licences for cigarettes, limiting transshipment of cigarettes to dedicated ports, imposition of tax on the import of cigarettes with drawback facilities for re-export, disallowing transshipment of cigarettes and re-export of cigarettes by small boats, and making cigarettes and tobacco products taxable goods at all duty-free islands and any free trade zones that have been permitted retail sales of duty-free cigarettes.

British American Tobacco (M) Bhd (BAT) managing director Jonathan Reed says he is thankful to the government for acknowledging the severity of the tobacco black market and for taking bold steps towards addressing this issue. “High taxes on legitimate cigarettes have created a huge demand for cheap, illegal cigarettes. The tobacco black market not only causes the loss of billions of ringgit in uncollected tax, it also funds crime, fuels corruption and drives up the youth smoking rate.”

Notably, Malaysia ranks No 1 in the world for illegal cigarettes, which make up 65% of the total market. While illegal cigarettes have increased over the years, excise duty collection for tobacco products has declined from RM3.42 billion in 2014 to RM2.91 billion in 2018.

Japan Tobacco International Bhd managing director Cormac O’ Rourke comments that the company is pleased with the announcement that cigarette transshipment activities will be limited to certain ports only. “We have called for a ban on transshipment of tobacco products time and again as this loophole has been exploited for years. At a time when the country is grappling with high levels of illegal trading, strong and consistent implementation and effective enforcement is key. These are necessary measures to address a key smuggling channel for contraband cigarettes, which has resulted in massive losses for the country over the years,” he says.

However, the biggest win for the industry, some say, is the legalisation of electronic and non-electronic cigarettes, including vape. Beginning Jan 1, 2021, the government will impose an excise duty of 10% on all types of electronic and non-electronic cigarettes, including vape, while excise duty of 40 sen per milliliter will be imposed on the liquid used in electronic cigarettes.

“The legalisation of electronic and non-electronic cigarettes, including vape, is a win for BAT. It will now be able to enter the vape market,” says CGS-CIMB Research analyst Kamarul Anwar, who covers BAT.

Interestingly, neither company commented on the legalisation of the e-cigarette and vape market. Nevertheless, O’ Rourke points out that what is critical now is for the government to speed up proper enforcement laws and the implementation of various key anti-illicit tobacco measures to better address the situation.

Meanwhile, Reed believes that measures to enhance enforcement must be accompanied by excise reforms to really make an impact on the tobacco black market. “The price gap between legal and illegal products is currently far too wide, creating a situation that enforcement alone cannot address. Ultimately, we believe Malaysian consumers want to do the right thing. If given a viable opportunity to choose a legal alternative at a reasonable price, most would prefer not to put money in the hands of criminals,” he says.

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