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Cutting taxes not a solution

The Star Newspaper Malaysia, EUGENE MAHALINGAM

1st February, 2010

CONSUMER associations, non-governmental organisations (NGOs) and health experts have all slammed the argument by industry players that tax hikes lead to an automatic increase in smuggling.

In a previous report, the Malaysia Council for Tobacco Control (MCTC) president Koris Atan argued that price hikes deterred youths from taking up smoking, and in some cases, even encouraged habitual smokers to kick the habit.

“International research has shown that a 10% increase in cigarette prices can reduce cigarette consumption by 4%–8%. This translates to saving about 16 million lives worldwide by 2020,” he was quoted as saying.

The Federation of Malaysian Consumer Associations secretary-general Muhammad Shaani Abdullah reportedly said the argument of tobacco players was more akin to a “ransom weapon”, to deter the Government from increasing tobacco taxes, while the Malaysian Medical Association had called it a “laughable” excuse.

Royal Malaysian Customs Department enforcement and compliance deputy director-general Datuk Mohamed Khalid Yusuf said when there were tax hikes, there was “increased potential” for smuggling. “If tax increases, it attracts more interest. If it were zero tax, who would want to smuggle?”

However, he added that there were situations where smuggling was still a problem even without taxes being an issue. “Drugs are non-taxable but we still have a smuggling problem,” he said.

In 2000, an article in the British Medical Journal entitled “How can cigarette smuggling be reduced,” authors Luk Joossens and Martin Raw claimed that the correlation between high prices and high levels of smuggling claimed by the tobacco industry simply did not exist.

They claimed that factors such as corruption, public tolerance, informal distribution networks, widespread street-selling, and the presence of organised crime were more prevalent in elevating tobacco smuggling.

The report cited countries like Canada, which were unsuccessful in curbing their smuggling problems even after reducing their excise duties.

When Canada reduced its taxes in 1994, the real price of its cigarettes fell by a third. However, the prevalence of smoking increased in teenagers from 16% to 20% and also increased in the population as a whole.

Federal tax revenues meanwhile fell by C$1.2bil, more than twice the amount originally predicted.

The article also cited Spain as one of the few countries in the world to tackle its smuggling problem successfully without the need to reduce tobacco taxes.

Despite being among the cheapest in the European Union (EU), Spanish smuggled cigarettes had a market share of 15% in 1995.

It was established that Andorra (a small country in south western Europe) was one of the sources of smuggled cigarettes into Spain and the EU.

In 1997, there was a concerted effort at both national and European levels undertaken to reduce the supply of contraband cigarettes.

Close ties were forged between the authorities in Spain, France, Britain, Ireland, and Andorra and the European Anti Fraud Office to curb the supply of smuggled cigarettes from Andorra.

Actions included sealing the Andorran border, civil guard brigades patrolling valleys and hills to make smuggling more difficult and political pressure on the Andorran government by the EU and its member states, forcing it to enact new legislation making it illegal to smuggle tobacco into neighbouring countries.

As a result, contraband cigarettes, which had accounted for 12% of the Spanish market in early 1997, held only 5% by mid-1999. Sales of legal cigarettes increased 12% from 1997 to 1998 while tax revenues rose 25% during the same period.

According to the Spanish customs authorities, their success was not due to controlling distribution at street level (which was almost impossible) but by reducing the supply into the country at “container level” through intelligence, customs activity and cooperation, and technology.

Tobacco smuggling has become a huge global health concern – as it brings tobacco into markets cheaply, making it affordable to purchase and thus promote consumption.

It is also a circumvention of taxes and customs duties, causing government treasuries to lose billions in revenue each year.

Industry players argue that tobacco smuggling is caused by market forces owing to the price differences between countries, causing cigarettes to get smuggled from cheaper countries to more expensive ones.

JT International Bhd (JTI) corporate affairs director Shareen Rahmat said Malaysia’s cigarette prices were currently the second highest after Singapore in the Asean region.

“The retail price of a 20s pack category in Malaysia is higher by approximately RM5.80 per pack than that of a similar category in Indonesia,” she said.

Currently, a pack of 20 costs RM9.30, with the same in Singapore costing over RM27.

Industry players have urged the Government to curb the smuggling problem by reducing taxes, which will also, they say, help restore revenue.

“With prices of duty-paid cigarettes being much higher in Malaysia, there is great demand for cheaper and unregulated illicit cigarettes in the country.

“Due to unpaid taxes, illicit cigarettes can be bought for as low as RM2.50 for a pack of 20 sticks,” said Shareen.

Philip Morris (M) Sdn Bhd managing director Richard Morgan said Malaysia had one of the highest levels of illicit cigarettes in the world.

“The prevalence of illicit cigarettes in Malaysia was at a low level of 14.4% in 2004. However, it has steadily grown over the years and reached an all-time high of 38.7% in 2009,” he said.

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