Economists: Putrajaya going wrong way to stub out smoking habit

Despite the increase in taxes as a deterrent step, it was reported that, as of 2015, some five million or 23 per cent of Malaysians aged above 15 were still smokers. — AFP pic
Despite the increase in taxes as a deterrent step, it was reported that, as of 2015, some five million or 23 per cent of Malaysians aged above 15 were still smokers. — AFP pic

KUALA LUMPUR, May 17 — The imminent closure of another major cigarette production facility exposes the flawed priorities in the government efforts to lower smoking rates, according to economists.

They also said Putrajaya’s focus on the sin tax as well as possibly raising the smoking age to 21 would be thwarted by the high prevalence of contraband that, by some estimates, account for more than one in every two cigarettes sold locally.

Citing the recent announcement by JTI International Bhd (JTI Malaysia) that it will close its plant in Shah Alam by year’s end due to “challenging business environment”, the economists said it was evident that tackling the smoking rate with taxes alone was ineffective.

JTI’s announcement came after rival manufacturer British American Tobacco (M) said it will close its factory in Petaling Jaya and retrench 230 workers by the second half of this year.

Attempting to discourage smoking without tackling contraband would only result in smokers opting for smuggled alternatives, which would hurt government collections and diminish smoking cessation efforts, they said.

“The negative effects of high (cigarette) prices such as the rising penetration of contraband cigarettes and low quality, health-endangering substitutes may become more even pronounced should prices be raised further,” economics professor Yeah Kim Leng of Sunway University said.

“In addition, by driving smokers to substitute with illegal imports, there will be further loss of tax revenue that could have been channeled towards more effective means of curbing smoking such as funding educational, awareness programmes and promotion of healthy activities such as sports, social and recreational activities among the younger generation,” he added.

Yeah said the current price of cigarette has, to a certain degree, hit the limits of some smokers’ willingness to purchase a pack of cigarette.

A pack of 20 cigarettes costs RM15.50 and RM17 currently, with the Health Ministry previously proposing to raise this to possibly RM21.50.

Comparatively, a packet of illicit cigarette that is easily obtainable is sold at about RM3 in the black market, almost six times cheaper than the pack of taxed cigarette.

A study revealed that the illicit cigarette trade increased from 36.9 per cent in 2015 to 57.1 per cent of the market last December.

The government last increased the excise duty by 36 per cent in November, 2015 just a year after the industry endured a 12-per cent hike.

Despite the increase in taxes as a deterrent step, it was reported that, as of 2015, some five million or 23 per cent of Malaysians aged above 15 were still smokers.

According to Institute for Democracy and Economic Affairs (Ideas) research director Ali Salman, the best way to discourage the bad habit was through education as this respects both individuals and industry players.

“One of every two cigarettes sold in Malaysia is illicit. It is certainly bad for business, as the firms are closing down; it is bad for consumers as they are forced to choose bad quality cigarettes thus causing greater harm,” he said when contacted.

Like Yeah, Ali said imposing higher taxes on cigarette without addressing contraband will only drive smokers to switch to potentially more harmful illicit cigarette to satisfy their addictions.

He also said the proposal to increase the taxation from the current 49 per cent to 60 per cent of the retail price would likely hurt the government, in the form of lower tax collections from cigarette sales.

“Increasing taxes to discourage tobacco is bad for consumers, bad for business and bad for the government,” he said.

Tax expert Dr Veerinderjeet Singh of Axcelasia also concurred with the other two economists on the matter.

“There have been many comments as well as reports that the illicit cigarette sector is on the uptrend due to the way the tobacco players are regulated.

“So this needs to be reset and looked at holistically by the authorities together with the stakeholders,” he said in an email reply to Malay Mail Online.

Although there were talks of increasing the price cigarette from RM17 to RM21.50, Second Finance Minister Datuk Seri Johari Abdul Ghani reportedly said this will not occur in the near future.

JTI Malaysia managing director Guilherme Silva, in a statement, lauded Johari’s announcement about not increasing the cigarette taxes.

“We believe this is a step in the right direction as maintaining current tax rates and intensifying efforts of all enforcement authorities will help to bring down the level of illegal cigarette trade in Malaysia,” he said.

Silva also asserted that there was no benefit from increasing cigarette prices through excise duties or proposing new regulations such as raising smoking age and plain packaging.

Branding ban forbids cigarette companies from using trademarks, logos, colour and brands. Such ban has been enacted and enforced in countries like Australia, France and the UK.

“When more than half of the total cigarette market is made up of the cheap, non-compliant and tax-evaded illegal cigarette brands, there is no reason for such a step,” he said.

The impending closures of JTI Malaysia and BAT Malaysia would leave only Philip Morris (M) Sdn Bhd with an operational production facility here.

Three main tobacco manufacturing companies have repeatedly complained that increasing excise duties coupled with easily accessible illicit cigarettes in the country were making it hard for them to stay afloat in the industry.

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