Special Report: MoH explains position on illegal tobacco trade

This article first appeared in The Edge Malaysia Weekly, on December 2, 2019 - December 08, 2019.
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WHILE it has been criticised by tobacco companies for turning a deaf ear to their pleas to crack down on the illicit cigarette business, which has seriously affected the legal trade, the Ministry of Health (MoH) is standing firm on its position to discourage smoking.

In 2017, tobacco firms such as British American Tobacco (M) Bhd (BAT) and JT International Bhd (JTI) shuttered their manufacturing plants here amid market declines, and more recently, they announced lay-offs for the second time in two years.

The companies have issued warnings that the country will lose billions in tax revenue each year as more smokers switch to illegal products.

In an interview with The Edge, Deputy Health Minister Dr Lee Boon Chye acknowledges tobacco firms’ concerns and problems. He also explains the ministry’s perceived lack of empathy for their plight for not cooperating in the fight against the illicit tobacco trade.

“It is unfortunate [that the two tobacco companies have announced lay-offs] but I look at it this way — for us, health comes first. We know that smoking cigarettes is harmful and that exposure to second-hand smoke is also harmful,” he says.

“This is in line with our objective and the World Health Organization’s to reduce cigarette consumption and the number of smokers. I do not think there is any government in the world that would say it should promote smoking to stimulate the economy.”

Looking at whether reducing cigarette smoking has a positive or negative impact on the economy, Lee says studies have shown that the government spends about RM7 billion to RM8 billion a year to treat smoking-related illnesses such as lung cancer and heart problems.

“The private sector spends another RM7 billion to RM8 billion, bringing the total cost to about RM16 billion a year,” he says, adding that the RM5.1 billion in lost excise duty and sales tax revenue last year, as reported by an Oxford Economics study this year, pales in comparison with the cost of treating patients with smoking-related illnesses.

“I sympathise with those who have been laid off, but I would say to them that they should plan ahead, knowing government policies throughout the world that this is not the way to go. Tobacco is a sunset industry.”

And while tobacco companies have reported a decline in sales, Lee points out that they are still profitable and raking in billions in revenue.

“This downward trend is essentially a reflection of the global trend, which will continue to be negative going forward as far as cigarette sales are concerned. Already, some companies are saying they will phase out sales of conventional cigarettes several years from now, shifting completely to vaping products,” he says. “Health-wise, if you do not [reduce cigarette consumption] now, later on, the health burden will be heavier. If you allow things to progress, you will pay a higher price [later]. In the short term, economically, there will be winners and losers. Of course tobacco companies and retailers will lose through less business.

“But if you talk about the overall economy, why should it have an impact? At the end of the day, a lot of smokers are from the low-income group. So, why not help them quit smoking so they can spend their money on other things such as milk powder, books and shoes for their children? Currently, for every ringgit we collect in tobacco tax, we pay RM3 to RM4 to treat illnesses. It does not work.”

On claims by tobacco companies that MoH is reluctant to take action against the inflow of cheap contraband cigarettes, Lee says only the Customs Department under the Ministry of Finance and the Ministry of Domestic Trade and Consumer Affairs can provide law enforcement against the illicit tobacco trade.

With its mandate on health, MoH can only impact the legal cigarette trade and consumption, commercial advertising, graphic images and packaging. “Enforcement against the illicit trade is not within MoH’s jurisdiction, but that of the Customs Department and the Ministry of Domestic Trade and Consumer Affairs. In fact, they have been actively clamping down on the illicit tobacco trade,” says Lee.

He points to the Customs Department increasing the minimum fine to RM100,000 or a minimum jail term of six months or both for selling or smuggling contraband cigarettes from January this year. Previously, those found guilty were subject to a minimum of a day’s jail and/or a RM1,000 fine.

He also points to Finance Minister Lim Guan Eng’s Budget 2020 speech in October, on the government’s allocation of RM235 million to purchase 20 additional cargo scanners to be placed at strategic ports of entry.

Differing perspectives on Malaysia’s illicit trade figures While tobacco companies have decried the high level of the illegal cigarette trade in Malaysia — which stood at 65% of total cigarette consumption based on the latest Illicit Cigarettes Study conducted by Nielsen — MoH is seemingly unperturbed. This can be partially attributed to disputed numbers.

According to Lee, a joint study by MoH and Universiti Putra Malaysia in 2015 found the level of illicit cigarette trade to be around 27%. The estimate was based on the total cigarette consumption in the country compared to the sales figures as reported by tobacco companies.

“The figure quoted by tobacco companies is about 60%. We have looked at how they do their studies — through the collection of empty cigarette packs on the ground and how many of them are from illegal and legal sources,” he says.

“The results depend on the sample area. For example, if I were to go to the kampung and do the sampling, the incidence of illegal cigarettes would probably be about 70% to 90%. And if I were to go to Pavilion Kuala Lumpur or KL International Airport, the incidence of illegal cigarettes would probably be only 10% to 20%.

“As such, even though industry players maintain that the level of illicit cigarette trade is about 60%, they need to be more transparent about their methodology — how they arrive at that figure.”

Nevertheless, Lee concedes that MoH’s public health agenda to reduce tobacco consumption through increases in tobacco taxes has so far failed due to a lack of effective enforcement. “The idea of a hike [in tobacco taxes] is to reduce the number of smokers. Studies have shown that we need to have a certain price level, based on gross domestic product per capita income, for cigarettes to be inhibitory to reduce smoking. But it did not work because of illicit trade. That is why you need to strengthen enforcement.”

He is of the view that the current price of a 20-stick cigarette pack of RM17.40 is inhibitory enough, but there is still a lot of leakage because of the illicit trade.

A Centre for Public Policy Studies report in September last year revealed that there has been an upward trend in excise tax rates for cigarettes from 1990 until 2015. The government last hiked the excise duty on cigarettes in November 2015, by 42.8% to 40 sen per stick.

“When the price of cigarettes was raised, the number of smokers actually increased while revenue from tobacco taxes went down, that means a lot of smokers shifted to illicit cigarettes. So, when you hike the price, there must be effective enforcement. So far, it has not been effective but we are improving. The Customs Department is working very hard to strengthen enforcement and has increased the penalty for illicit trade,” says Lee.

He declines to comment on reports that there are plans to increase the minimum cigarette price from RM10 to RM15 (pack of 20), except to point out that the government has not raised tobacco excise duty and the minimum cigarette price since 2015, taking into consideration that a further hike in price may not achieve the desired results without taking better measures to curb the sale of illicit cigarettes first.

“In general, a price hike should go hand in hand with effective enforcement against the illicit trade. If enforcement is not effective, then the price hike will cause more smokers to shift to illicit products,” Lee says.

On BAT’s recent lawsuit against MoH over its unexpected U-turn — re-categorising and revoking the approval of the Dunhill HTL-Cigarillo granted on July 12 last year, as a non-cigarette tobacco product — Lee says, “Let the lawyers sort it out. [I have] no comment on the issue because this is a matter of interpretation. It is their right to sue and we will defend.”

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