It's illicit trade, not tax rates: API

KUALA LUMPUR: Calls for excise duties hike on cigarettes and alcohol could backfire by further fuelling the black market, Advokasi Perusahaan dan Industri (API) said.

API said taxation is not the core issue - it's the size and persistence of the illicit trade that continues to undermine legitimate businesses and public health goals.

"We must be clear about the real problem. The pro-health tax aims to protect the public by discouraging harmful lifestyle choices.

"However, increasing prices on alcohol and cigarettes without proper research into market demands risk fuelling the illicit market, especially as consumers are more price conscious than ever.

"It will only push more consumers towards illegal cigarettes and alcohol," said API managing director Datuk Fazli Nordin.

Despite ongoing enforcement operations, Fazli said the illegal cigarette market continues to cause revenue leakages of around RM5 billion each year.

Every time the price of legal cigarettes or alcohol goes up, the illegal market becomes more attractive to consumers, he said, adding that consumers who are accustomed to smoking or drinking will not simply stop overnight.

"It's simple economics, higher taxes mean higher incentives for smugglers. This would then become contrary to the government's fiscal objectives of increasing tax revenue, while also requiring more resources to combat the illicit trade," he added.

He said the solution lies in continued enforcement to bring illicit down, and not additional tax burdens.

Countries like New Zealand, he said, had experienced a steady rise in illicit tobacco trade over the past six years, largely driven by excise hikes.

"Tobacco smuggling operations have become increasingly sophisticated. In fact, since 2017, annual seizures of illegal cigarettes have nearly tripled, and the volume of loose tobacco confiscated has almost quadrupled.

"We are not against regulations or enforcement. But raising taxes when the illegal market is still thriving will only strengthen the black market's grip. The government must prioritise stability and enforcement outcomes instead of new fiscal shocks," he said.