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NST: Zafrul: Budget will tackle illicit cigarette threat

Repost of publication on New Straits Times on 4 November 2020.

KUALA LUMPUR: The government will soon announce stricter measures to combat the sale of illegal cigarettes in the country, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said.

He said altering the excise duty on cigarettes was not the way forward in addressing the illicit trade, which now makes up over 60 per cent of the market. Tighter enforcement, he added, was the answer.

"We will look at some measures, and we will announce something in the 2021 Budget this Friday. I am not able to elaborate on the details now but this is one of the top-priority issues that the government wants to resolve.

"I will address this issue in the budget. It is serious and we need to point it our correctly," Tengku Zafrul told the NSTP group in an interview here.

He said the government had also set a target for excise duty collection from the tobacco industry but did not elaborate.

However, he said the collection from excise duty on tobacco products had so far this year been higher than in 2019.

"But there is still this huge gap of what we are capable of collecting from the industry if it weren't for the illegal cigarettes.

"We are working closely with the Royal Malaysian Customs Department to have more stringent enforcement. We need to do a lot more," he said.

Meanwhile, industry observers said the tobacco business was in dire need of resolute enforcement of strong government policies to tackle the illegal cigarette trade, which is potentially costing Malaysia about RM5 billion in revenue loss annually. They urged the government to introduce more targeted measures to combat smuggling and purchases of illicit cigarettes, amid a severe economic downturn caused by the Covid-19 pandemic.

Malaysian Association of Tax Accountants president Datuk Abdul Aziz Abu Bakar said the government could upgrade scanning equipment at ports to improve efficiency and productivity. This would help Customs officers to expedite the verification process of a container without human error.

"Usually, they use a random sampling method to inspect a container for verification. Existing equipment cannot broadly detect illegal items smuggled into Malaysia," Aziz told the New Straits Times.

The department, he said, could also deploy officers to designated borders or ports to thoroughly inspect goods entering the country.

Aziz did not expect the current sales tax of 10 per cent and a 40-sen excise duty per stick for both imported and locally produced cigarettes to be raised in the budget.

He said the government had collected about RM3.02 billion in revenue last year from the tobacco industry; RM76 million came from the excise duty on locally manufactured cigarettes, RM344 million was from the sales tax on imported cigarettes, and RM2.6 billion was obtained from the excise duty on imported cigarettes.

"There is a huge difference in terms of pricing between legal tobacco and illicit tobacco. People usually opt for a cheaper alternative," he said.

Thannees Tax Consulting Services Sdn Bhd managing director Thanneermalai Somasundaram said increasing taxes in the tobacco sector would be counterproductive because it only promoted the inflow of illicit cigarettes into the country.

Thanneermalai said the Customs Department must tighten border control and its officers should handle controls at entry points to curb the smuggling of illicit tobacco products.

"We should be able to find out the culprit involved in distributing and stocking illegal cigarettes. This activity must be controlled by a certain group of people as it is well distributed and organised."

He suggested that severe punishment be imposed to stop the trade in illicit cigarettes.

Thanneermalai said while the illicit trade did not involve banks, it involved substantial cash in the ecosystem. Hence it would be tricky for the authorities to track down the main distributors.

"Eventually, the cash will flow into the banking system. Hence the Customs Department may need to work with Bank Negara Malaysia and the Inland Revenue Board to track the flow of money into the banking system and determine whether it can be attributed to the sale of illegal cigarettes," he said.

Tricor Malaysia chairman Dr Veerinderjeet Singh said the tobacco sector was normally seen as a heavily taxed industry but the rate should not increase as it would promote the inflow of illicit cigarettes.

He said a higher excise duty means a higher price for the consumers.

"This will lead to some consumers going for illicit products. The more prices go up, the consumer's tendency to opt for illegal products will be greater. Thus it will create demand for illicit products."

He said the Customs Department should look at enforcement alternatives to curb the inflow of illicit products.

"Leakages occur at the border, which is porous. There are so many routes immigrants can use to easily come in illegally. There must be more funds for enforcement. We need more Customs personnel to protect the borders from the inflow of illicit products."

Veerinderjeet said the tobacco industry had created employment for Malaysians and contributed to the country's tax revenue.

"The tobacco industry has a legit licence to operate. It runs legitimate businesses and the government needs these operators for tax revenue and job creation. Increasing excise duties and tax excessively will have a serious impact on the industry."

Veerinderjeet said Malaysia could face negative consequences if the government decided to increase the tax on cigarettes.

"This could lead to higher cigarette prices, and a possible fall in demand for legal cigarettes and lower profits or losses for manufacturers. Employment will be affected if operators decide to shut down their businesses.

"We need to protect legitimate businesses as part of the manufacturing sector. The tobacco industry is competing against the illegal inflow of tobacco products and higher taxes," he added.

According to Japan Tobacco International Bhd (JTI Malaysia), about 12 billion illegal cigarettes were sold in Malaysia annually. The majority were brought into the country through the abuse of transshipment routes via ports.

JTI Malaysia managing director Cormac O'Rourke said a tax hike at this stage would be senseless given the extremely high levels of illegal cigarettes sold in the country.

Illegal cigarettes now account for 65 per cent of all cigarettes sold and consumed, he added.

"We have already reached the point of diminishing returns where any increase in tax would only serve to drive illegal cigarette sales higher resulting in a net loss in tax revenue for the government.

"It should be remembered that it was an ill-conceived tax policy that brought us to this point when back in 2015 the Finance Ministry raised the excise duty on cigarettes by 40 per cent, leading to a doubling of the illegal cigarette market at the expense of government tax revenue and the legitimate industry."

O'Rourke estimated that the government was losing about RM5 billion in tax revenue annually owing to the illegal trading of cigarettes.

The government, he said, must focus on reducing the leakages to the black economy.

"What is needed now is a policy review and resolute enforcement. The re-establishment of the MATF (multi-agency task force) under the Finance Ministry should serve as the primary vehicle to tackle the problem.

"Policy measures such as the banning of transshipment of cigarettes, increased powers for enforcement agencies like the police and increased penalties for those involved in the smuggling of cigarettes are all required if the government is to make any significant inroads," O'Rourke said.