By Pankaj Kumar

In a recent interview with a radio station, the Finance Minister, Senator Tengku Dato' Sri Zafrul Tengku Abdul Aziz, highlighted rightly that the government needs to address issues related to the shadow economy, singling out illegal cigarettes in particular.

Estimates put the Malaysian shadow economy or black market to be 21% of the formal economy or around RM300 billion.

The illegal cigarettes trade is likely the largest and most acute of all sectors impacted by the shadow economy. Latest studies have found that six out of 10 cigarettes sold in Malaysia today are illegal, which causes the government to lose more than RM5 billion annually in uncollected excise tax.

Multi-pronged approach

In order to disincentivise this endemic illegal cigarettes trade, the approach has to be multi-pronged including enhancing enforcement, excise reforms and public education.

When it comes to enforcement, the authorities must carry out periodic and consistent action at the retail level where actual distribution of illegal cigarettes takes place. The goods must be confiscated and these traders charged to the full extent of the law. In order to enable greater effectiveness and efficiencies by the authorities, the government must empower them with the required resources.

Nevertheless, the boom of the illegal cigarette trade in Malaysia over the recent years has clearly shown that enforcement is not enough to curtail this problem.

Price factor

We also need to address the issue of the price factor because, naturally, legal products lose out to illegal cigarettes at the price point alone. The price factor is an issue related to the income of the society as today the demographics of smokers are dominated by the lower income and blue-collar workers.

Our current Poverty Line Income (PLI) is at RM2,208 for 2019 and some 5.6% households fall into this category while our Relative PLI is at RM2,937.

Assuming that cigarette costs RM17.40 per pack of 20s, if one smokes 20 packs a month, that’s RM350 a month – or equivalent to 16% of PLI and 12% of Relative PLI. With such high concentration in expenditure, it is natural that consumers will demand a lower valued product from the market and what better way to buy them if they are cheaper or just one-third of the cost though illegal.

With Budget 2021 around the corner, the government should relook the high excise duty structure in Malaysia for the sector. The lost revenue to the government is just too huge, more so the socio-economic ills that come with the illegal cigarettes trade. Closing the price differential between legal and illegal products could trigger lower incidence of illegal cigarettes trade as margins will then be eroded for these perpetrators.

Educating the public

Last but not least, education is also critical to wiping out illegal cigarettes and the shadow economy.

We need to step up efforts to educate the public against buying contraband products or fake goods. In most cases, black market products may differ from genuine products, and this may even be detrimental to the health of the consumers.

In conclusion, the Finance Minister hit the nail on the head when he said that the objective should be to garner a larger tax base and revenue for the Malaysian government.

Effectively tackling the shadow economy is the step in the right direction. With that, the government would have greater flexibility in development spending, allowing it to further spur business activities, create more job opportunities and elevate Malaysia towards becoming a high-income nation.

-- BERNAMA

Pankaj Kumar is an economic and investment analyst.