Malaysia is losing an estimated US$775 million (RM3.2 billion) annually in tax revenue to the illicit tobacco trade, with illegal products making up 55 percent of the national market, according to a policy paper released on September 16, by the Center for Market Education (CME).
The study, titled Illicit Tobacco Trade in Asia-Pacific: Taxation, Market Incentives, and Macroeconomic Costs, examines the macroeconomic impact of contraband cigarettes across 14 regional economies. The findings indicate that Malaysia’s illegal market share ties it with Pakistan as one of the most severe structural cases in the Asia-Pacific region.
Regional Fiscal Impact and Comparative Losses
Across the 14 economies examined in the CME study, governments collectively collect an estimated US$30.98 billion in tobacco taxes while losing US$14.85 billion to illicit trade. That equates to roughly US$48 in lost revenue for every US$100 collected legally.
The report states that these fiscal losses account for approximately 1.63 percent of total tax revenue, 4.27 percent of current health expenditure, and 7.71 percent of government education expenditure across the sample group.
Australia recorded the largest monetary loss at US$9.60 billion, driven by an estimated 60 percent illicit market share. Indonesia followed with a US$1.65 billion loss despite having a much lower illicit market share of 10.77 percent, a discrepancy the CME attributes to the immense overall size of its tobacco market. Pakistan’s illicit market share reached 54 percent, resulting in an estimated annual loss of US$999 million.
Why Malaysia’s Legal Tax Base is Eroding
In both Malaysia and Pakistan, the CME study found that the estimated revenue lost to contraband tobacco now exceeds the total amount the respective governments successfully collect from legal tobacco taxation. This dynamic points to a severe erosion of the legal tax base.
Dr. Carmelo Ferlito, CME chief executive officer and author of the study, argued in a media release that policymakers frequently make the mistake of assuming that statutory excise rate hikes automatically yield higher state revenues.
The policy paper asserts that illicit tobacco must be addressed as a fiscal and structural policy challenge rather than solely as a customs or criminal enforcement issue. When tax increases widen the price gap between legal products and illegal alternatives faster than enforcement agencies can respond, consumers migrate toward cheaper contraband.
Recommended Policy Adjustments
To stabilize tax collections, the CME recommends shifting government focus from statutory tax increases to actual revenue performance. For markets with high illicit penetration like Malaysia, the organization suggests temporary tax freezes or more moderate, predictable adjustments while authorities work to protect the legal market.
Additional recommendations from the study include:
- Strengthening cooperation among tax authorities, customs, police, and border agencies.
- Increasing enforcement operations targeting illegal production and distribution networks.
- Establishing independently verifiable monitoring systems to track illicit market penetration.
- Enhancing regional cooperation to dismantle cross-border illicit supply chains.
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