Increase tax on cigarettes

  • Business
  • Saturday, 12 Sep 2009

Despite the rise in sales of smuggled cigarettes, taxes must.

“An increase in the specific excise tax of RMB1 on a pack of cigarettes would increase government revenue by RMB64.9 billion (US$7.9 million), save 3.4 million lives, reduce medical costs by RMB2.68 billion (US$325 million) and generate a productivity gain of RMB9.92 billion (US$1.2 billion) for the Chinese economy,” Tobacco Taxation and its Potential Impact in China, a 2008 paper produced by four US and Chinese researchers and academics.

When cigarette companies express their concern about the sale of smuggled cigarettes and the loss of revenue to the Government, one can’t help but wonder what is the source of their concern.

Even if it is smuggled tobacco that is sold, this will reflect the broad smoking patterns of current smokers which means the same brands that are the market leaders will be the ones that are sold as contraband, goods on which taxes have not been paid.

For the multinational giants who sell cigarettes around the world and who have targeted developing countries because of stringent conditions and high taxes in developed markets for the sale of tobacco, there is no net loss in sales.

In fact, reports in the past have linked major multinationals to smuggling activities which account for an estimated US$40bil in tax losses to governments across the world. See this link for one report That is one way by which tobacco companies can keep their sales up despite attempts by governments to cut smoking by their citizens though increased prices.

So why are the tobacco firms so concerned about keeping prices low when they will make money anyway through the contraband sales of their own products? The answer is simple: Because low prices will ensure high smoking rates in future.

While it has been accepted all over the world and by health authorities that increasing duties on cigarettes to make them expensive discourages smoking – the number one preventable cause of death and disease – cigarette companies predictably ask the government not to.

This and other newspapers carried a report quoting Jack Bowles, outgoing managing director of British American Tobacco (Malaysia), the country’s largest producer with a market share of as much as 70%, that raising excise duties sharply would increase the trade in contraband or sales of smuggled cigarettes.

He cited statistics that about a third of cigarette sales were contraband, without stating the source, but added that fortunately there were no counterfeit cigarettes in the local market. Does that mean that many of the contraband cigarettes are his own company brands? Just one of BAT’s brands, Dunhill, accounts for nearly half of Malaysia’s market.

If so, perhaps Bowles should offer to work with the authorities to reduce the ways and means by which BAT’s own brands reach the hands of smugglers.

That will achieve some key things simultaneously. Prices of cigarettes can be increased rapidly, discouraging the young from taking up cigarettes. The Government will get more in revenue and Bowles will be assuaged that the Government gets tax revenues.

Smoking is a very serious problem in Malaysia. Comparative statistics (we extracted these for Malaysia, Singapore, Thailand, Indonesia, China, India, the US and the UK) from the World Lung Foundation for 2007 or later show over half of male Malaysians – 51.1% – smoked.

Among the countries surveyed, only Indonesia (62.1%) and China (59.5%) were higher. In Indonesia, the price of cigarettes was less than half that in Malaysia while in China, it was 13% lower. In Singapore, where the price of cigarettes is over three times that in Malaysia, the incidence of smoking among males was just about a quarter – 25.5%. (A pack of 20 Marlboro cigarettes costs US$2.34 in Malaysia). That indicates correlation between price and smoking.

In Malaysia, too, more than a third – 36.3% – of 13 to 15-year-old males smoked, by far the highest among the surveyed group of countries. The next highest was Indonesia with less than a quarter (23.3%). That makes Malaysia a rather attractive market – there is a large pool of potential smokers. Is that why BAT wants slower price increases here?

On its website, BAT (Malaysia) says: “We continue to be open to working with the Government to support relevant youth smoking prevention programmes.”

The best way BAT can do that is to agree to sharper increases in cigarette taxes and work with the authorities to reduce the sale of contraband. That would be worth more to society than any corporate social responsibility measures that it plans to undertake.

● Managing editor P. Gunasegaram notes that things can’t be that bad for BAT (Malaysia) as it consistently outperforms almost all Malaysian listed companies on return measures. That shows cigarettes are an extremely lucrative business in Malaysia.

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