PETALING JAYA: Malaysia’s fight against the illicit cigarettes trade is evolving, as policymakers and industry stakeholders assess enforcement effectiveness amid a persistent affordability-driven demand, according to Japan Tobacco International (JTI) Malaysia.
Corporate affairs and communications director of JTI Malaysia, Mohammad Nazli Abdul Aziz, said enforcement efforts in Malaysia are broadly in line with other countries, but the key difference lies in the measures themselves.
Attention has, therefore, shifted to whether upcoming tools such as digital tax stamps and stronger deterrence frameworks can meaningfully shift the balance.
The tobacco company shared its latest assessment of the illicit cigarette market, warning that increasingly sophisticated smuggling networks are making it harder for Malaysian enforcement to keep pace.
Notably, the company raised concern over the growing sophistication of illicit supply chains and the emergence of counterfeit tax stamps. The share of cigarettes bearing counterfeit tax stamps has nearly doubled from 8.7% in 2023 to 16% in January 2026, marking the highest level recorded to date, it said.
“A recent enforcement operation in the Philippines uncovered a large-scale illegal cigarette manufacturing facility, where counterfeit Malaysian tax stamps worth almost RM90mil were found on products intended for Malaysia,” it highlighted.
Managing director of JTI Malaysia, Didier Ellena said this case is particularly concerning because it shows that counterfeit Malaysian tax stamps are being produced and used outside our borders, in large volumes.
“Illicit operators are no longer just bypassing the system, they are attempting to replicate it,” he said.
“It highlights that illicit trade is not only organised and large-scale, but increasingly cross-border, with Malaysia being specifically targeted as a destination market,” Ellena added in a statement.
In retrospect, JTI Malaysia pointed out three key realities the economy currently faced such as the illicit trade remaining highly sensitive to affordability and policy changes, consumers prioritising affordability, and illicit supply chains becoming increasingly structured and cross-border.
As a result, Nazli highlighted that the economy has incurred a fiscal loss driven by an estimated 56.7% illicit cigarette incidence rate, translating into approximately RM4bil in foregone government revenue.
Subsequently, Ellena commented that the industry is witnessing mounting pressure across the supply chain due to the Middle East conflict. He noted that if the current geopolitical uncertainties persist, it is likely to drive inflationary pressures for both consumers and businesses.
“The overall cost of doing business is rising, and at some point, we may need to pass part of these costs on to consumers to sustain our operations, investments, and commitments to employees, suppliers, and trade partners.
“That said, any pricing decision will likely be balanced. We do not intend to fully pass on the cost increases, but some degree of price adjustment may be necessary.
“The concern is that if these pressures are compounded by an excise tax hike, it could result in a sharp price increase similar to what we saw in 2014, an outcome that historically contributed to a surge in the illicit trade,” Ellena stressed.
In terms of cost drivers, he said that logistics was a key pressure point. “For example, products shipped from the Philippines are now taking longer routes, increasing transportation costs. In some cases, we have had to rely on air freight to avoid stock shortages, which has significantly raised costs,” he highlighted.
He also pointed out that non-tobacco materials, particularly those linked to natural resources, are also seeing price increases. “In short, the pressure is broad-based, spanning logistics, raw materials, and supplier costs, all of which are contributing to a higher cost environment.”
Additionally, reductions in illicit trade are not translating into a return to the legal cigarette market, he said.
Ellena highlighted the shift in consumption patterns toward alternative nicotine products such as vapes, which currently benefit from lower taxation.
“Differences in taxation across product categories can create unintended shifts in consumer behaviour,” Ellena said.
He explained that a more consistent and balanced tax policy framework is needed to counter this shift.
“Based on current consumption trends, aligning vape taxation with heated tobacco products could generate an estimated RM1.75bil in additional government revenue annually, which showcases both the scale of consumption and a significant fiscal opportunity,” he pointed out.
Looking ahead, JTI Malaysia noted that global economic uncertainty and rising cost pressures are expected to further increase consumer sensitivity to price, which reinforces the need for a calibrated, stable and well-sequenced policy approach.
“What we are advocating for is not a blanket alignment with cigarette taxes, but rather a more balanced and appropriate tax structure across different product segments. At present, the tax framework is not levelled, and this lack of parity creates market distortions.
“If we look at cigarettes alone, past tax increases have clearly triggered a rise in illicit trade, as supported by our research.” Ellena said.
Regardless of consumers’ preferences between cigarettes or vapes, Ellena reiterated that JTI Malaysia is focused on ensuring a fair and consistent tax approach that reflects the nature of each product category. “We are advocating for tax parity with heated tobacco products or HTS, not cigarettes, at a level of roughly 50% of cigarette taxation,” he said.
Adding to Malaysian enforcement productivity levels, Nazli said effectiveness is influenced by factors such as geography and demand dynamics.
“In markets where consumers are more aware of the risks associated with illicit cigarettes, demand tends to be lower, making enforcement more effective.
“However, Malaysia is largely an affordability-driven market, and so when price sensitivity is high, consumer behaviour is strongly influenced by the significant price gap between legal and illicit products.
“That is why affordability remains a central issue, and any widening price differential will shift consumption patterns toward illicit products,” he added.
Another key structural gap lies in relatively low penalties, which Nazli regarded may weaken deterrence. Digital tax stamps, for instance, are expected to enhance end-to-end visibility by enabling full track-and-trace across the supply chain, unlike physical stamps which only allow verification at specific points, according to Nazli.
“This would allow authorities to monitor product movement, verify authenticity in real time, and detect diversion, thereby strengthening enforcement and reducing risks,” he explained.
