Malaysia loses US$775mil a year to illicit tobacco trade

Malaysia is losing nearly US$775 million each year due to illicit tobacco trade, according to a study by the Centre for Market Education (CME). The illegal products make up 55 percent of tobacco consumption in the country. The study, titled "Illicit Tobacco Trade in Asia-Pacific: Taxation, Market Incentives, and Macroeconomic Costs," examines the fiscal and policy challenges posed by illicit tobacco trade across 14 Asia-Pacific economies.

The research indicates that tobacco tax collections worldwide total approximately US$30.98 billion, while the estimated loss to illicit trade is US$14.85 billion. For every US$100 collected through tobacco taxation, about US$48 is lost due to consumption occurring outside the legal and taxable market, equating to roughly 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 countries.

While developing economies are not immune to the issue, large tax-driven price differences can create incentives for illegal supply even in countries with strong enforcement institutions. Malaysia and Pakistan have the highest estimated illicit-market shares at 55 percent and 54 percent, respectively, resulting in annual losses of US$775 million and US$999 million, respectively.

Thailand also faces significant illicit-market pressure, with an estimated 28.1 percent share and fiscal losses of around US$567 million. The study emphasizes that higher tobacco excise rates do not necessarily lead to higher government revenue. If tax increases widen the price gap between legal and illegal products faster than enforcement capacity can respond, consumers may be more inclined to choose cheaper illegal alternatives.

The report suggests that governments should focus on effective revenue collection and protecting the legal taxable market, particularly in countries with high illicit penetration.