Malaysia loses US$775m a year to illicit tobacco trade as market share hits 55pc, study finds

KUALA LUMPUR, Sept 16 — Malaysia is estimated to be losing approximately US$775 million (RM3.2 billion) in tax revenue each year to illicit tobacco, with illegal products comprising over half of the market, according to a new regional study. The Center for Market Education (CME) found Malaysia's illicit tobacco market share at 55 percent, positioning it among the most severe cases among 14 Asia-Pacific economies analyzed in their latest policy paper.

Pakistan similarly recorded a high illicit share of 54 percent, while Australia was estimated at 60 percent. CME reported that the estimated revenue loss to illicit tobacco in both Malaysia and Pakistan now surpasses the amount governments collect from tobacco taxation, indicating a significant erosion of the legal tax base. Across the sample countries, governments collected about US$30.98 billion in tobacco taxes while losing another US$14.85 billion to illicit trade, resulting in an estimated revenue loss of nearly US$48 for every US$100 collected in tobacco taxes.

Malaysia's loss was estimated at US$775 million, followed by Australia at US$9.60 billion and Indonesia at US$1.65 billion. The study estimates the losses equate to around 1.63 percent of total tax revenue, 4.27 percent of current health expenditure, and 7.71 percent of government education expenditure across the sample. CME emphasized that illicit tobacco should be seen as a fiscal and tax-policy issue, not just a customs or law-enforcement matter.

They cautioned against assuming higher tobacco excise rates would automatically lead to greater government revenue, asserting that taxation is effective only when a sufficient amount of consumption remains within the legal and taxable market. CME's CEO and study author, Dr. Carmelo Ferlito, argued policymakers should focus on how much revenue governments actually collect, not just the statutory tax rates.

He stated, "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 report recommends gradual and predictable excise changes, assessments of countries' enforcement capacity, temporary tax freezes in markets with high illicit penetration, and stronger enforcement against illegal production and distribution networks. CME also called for closer regional cooperation to address cross-border illicit supply chains.