Increasing Tobacco Taxation: The Next Step in Tobacco Control

Prepared by  Muhammad Daniel Kittu 10 February 2025 Increasing Tobacco Taxation: The Next Step in Tobacco Control Smoking continues to pose a major public health challenge in Malaysia, with significant health and economic consequences (1). The illicit cigarette trade is a major obstacle to reducing smoking rates as it makes cheaper cigarettes accessible. This has resulted in substantial revenue loss amounting to RM15 billion (2). As these challenges persist, the need for more effective tobacco control measures, including addressing illicit trade, becomes increasingly urgent. Strengthening tobacco taxation represents a critical opportunity within Malaysia's broader tobacco control strategy, particularly when combined with robust enforcement mechanisms. To fully appreciate the importance of tobacco taxation as a tobacco control measure, a deep dive into the benefits of increasing the tax and how it fits within existing measures is needed. Progress in Tobacco Control Since becoming a signatory of the World Health Organisation (WHO) Framework Convention on Tobacco Control on 23 September 2003, Malaysia has implemented various tobacco control measures to curb the consumption of harmful tobacco products. Key initiatives have included (3),(4): Restricting tobacco advertising, promotion, and sponsorship in 2004 to reduce exposure to tobacco marketing Mandating pictorial health warnings on cigarette packs in 2009 to raise awareness of smoking's health risks Increasing tobacco excise duties by 42.8% in 2015 Most recently, the Control of Smoking Product for Public Health Act 2024 introduced comprehensive regulations on not just tobacco products but also alternative smoking products (4). However, with the stalling of the generational end game (GEG) policy which would have banned those born in 2007 and onwards from smoking or purchasing smoking products (5), critical gaps remain. While this might be a setback in the pursuit of greater tobacco control, there is an opportunity to explore other measures such as taxation and enforcement against the illicit trade of tobacco products. Lawmakers have also expressed an interest in increasing tobacco tax in the past (6) which warrants assessing its potential impact and challenges in the pursuit of greater tobacco control. Challenges in Tobacco Control A key concern is stagnant tobacco taxation. Since the last excise hike in 2015, tobacco products have become more affordable, weakening efforts to reduce consumption (8). Opponents argue that higher tobacco taxes fuel illicit trade as consumers purchase from illegal markets, negating tax revenue gains - a narrative often pushed by the industry (9),(10). Another concern is the tobacco industry's effective influence on policymakers through lobbying efforts. For example, the tobacco industry successfully campaigned in 2021 against a tobacco tax increase and instead tackled illicit trade, which led to the Ministry of Finance not increasing taxes in the 2022 and 2023 budgets (11). Such outcomes highlight the contested narrative around the relationship between taxation and illicit trade, emphasising the need for policymakers to rely on evidence-based strategies. While Malaysia does face a significant issue with high levels of the illicit trade of tobacco products (12), the underlying factors contributing to this phenomenon need further scrutiny. Growing evidence indicates that weak enforcement and institutional corruption are more effective in fuelling illicit trade rather than tax increases. The Case for Increasing Tobacco Taxation It is argued that tobacco taxation is an effective policy tool for reducing tobacco consumption and raising government revenue. The WHO technical document on the economic and health benefits of tobacco taxation highlights that higher tobacco taxes can result in reduced tobacco consumption, including in low-income countries and the tax revenue raised can be used to finance health care as evidenced by success stories in countries such as Costa Rica, Finland, France, Mauritius, Mexico, New Zealand, the Philippines, Turkey and Uruguay (13). Yet, how might tobacco taxation impact the illicit trade of cigarettes in Malaysia? Various studies have explored the relationship between tobacco taxes and illicit trade. A study using excise tax gap analysis in Malaysia compares the actual excise duty paid to the expected tax liability, expresses this in percentages (12) and reveals that the tax gap in 2019 amounted to 72% and had been on an upward trajectory since 2012 as shown in the figure below. Figure 1. Cigarette Tax Gap in Malaysia Notably, this rise predates the last tax hike in 2015 which suggests that other variables such as regulatory weakness and systemic corruption may be contributing towards the rise in the illicit trade of tobacco products. Researchers from Universiti Putra Malaysia and Tunku Abdul Rahman University College examined the relationship between the legal retail price of cigarettes, income level, and institutional quality (i.e. the extent a country is free from corruption) 14. It was found that the legal retail price of cigarettes was not one of the determinants of illicit cigarette trade, but rather institutional quality was the most significant determinant. This suggests that illicit trade would persist irrespective of changes in taxation. Approaches to Combating Illicit Cigarette Trade To reduce the risks of illicit trade, it is important to consider technical policies to maximise tax revenues from tobacco products. These technical policy solutions can include licensing, product markers, national recordkeeping, track-and-trace systems, enforcement, export tax, tax harmonisation, promoting public awareness and agency coordination, some of which have been implemented in Malaysia (15). Consequently, it is key to consider the effectiveness of these policies and what gaps can be filled by new policies. Policymakers should view tobacco taxation as an essential tool for tobacco control, complemented by efforts to enhance institutional integrity, curb corruption, and enforce regulations effectively. Moreover, the successful efforts by Malaysian authorities in the past month to seize illegal cigarettes (16-18) give grounds for analysing the latest trends in illicit trade and how timely an increase in tobacco taxation is. While the evidence indicates tobacco taxation does not inherently drive illicit trade, both globally (19),(20) and within Malaysia, it is imperative to understand other potential factors in ensuring the implementation of a tobacco tax has the desired effect in the Malaysian context. This includes the tax’s potential impact on low-income groups, policy solutions to address illicit trade to maximise tax revenue and the coordination of local tobacco control communities to counter the influence of the tobacco industry to ensure the success of Malaysia’s tobacco control measures. SERI’s Commitment to Tobacco Control Advocacy In response, Social and Economic Research Initiative (SERI) is embarking on a research project to address gaps in tobacco control, particularly in taxation and enforcement against illicit trade. The project will explore the current scale and trends of illicit trade and the state of enforcement. The recommended policy and technical solutions to increase tobacco taxation and address the illicit trade problem are aimed at reducing smoking rates and maximising tax revenue. The evidence is clear that tobacco taxation is an important tool in reducing smoking rates and promoting public health. While challenges such as illicit trade remain, these can be mitigated through strong enforcement and institutional reforms. SERI’s research initiative seeks to provide actionable insights for policymakers, ensuring tobacco taxation achieves its full potential. Muhammad Daniel Kittu is a researcher at Social and Economic Research Initiative (SERI). SERI is a non-partisan think-tank dedicated to the promotion of evidence-based policies that address issues of inequality. Visit www.seri.my  or email hello@seri.my  for more information. Tan, Q. Y., Zomer, E., Owen, A. J., Chin, K. L. & Liew, D. Impact of tobacco use on health and work productivity in Malaysia. 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