Raise tobacco taxes now, fund a healthier Malaysia

TOBACCO taxes in Malaysia have remained stagnant since the last tax hike 10 years ago, making tobacco products, particularly cigarettes, more affordable as inflation and GDP per capita have increased since then. The Social and Economic Research Initiative (Seri) urges the government to press forward with tobacco tax increases in Budget 2026.

Critics of the government’s plans to raise tobacco taxes, particularly cigarette excise duties, often repeat the claim that higher taxes will only fuel the illicit market. This argument, however, is misleading and ignores both local evidence and international experience.

The main driver of the illicit trade of cigarettes is weak enforcement, not taxation levels. Many studies have already proven this fact. Research by Universiti Putra Malaysia has shown that higher tobacco taxation is a proven tool for reducing smoking rates without significantly fuelling illicit trade while also raising government revenue.

This is not unique to Malaysia. Vietnam’s experience is telling: a 2019 study found that the share of illicit cigarettes fell from 20.7% in 2012 to 13.7% in 2017, despite tax increases. In the Philippines, a 2020 study published by the Ateneo School of Government reported that the illicit share in 2018 was similar to its 1998 level of 16% of the market, despite tax hikes under the Sin Tax Law since 2013.

Addressing the illicit trade is, of course, vital. But critics such as the Malaysia/Indonesia think tank Centre for Market Education (CME) overlook the progress Malaysia has already made, including the establishment of the Malaysian Border Control and Protection Agency, which streamlines border enforcement and strengthens internal cooperation.

Crucially, revenue from higher tobacco taxes can themselves provide an additional source of funding for the government to strengthen enforcement where needed. A RM5 tax increase for a pack of cigarettes would generate an additional RM1.2bil, according to the cost recovery and revenue estimator of the Tobacco Atlas.

The choice is not either enforcement or taxation; both are necessary and complementary. A multipronged approach is needed in policymaking, including in tobacco control.

Strengthening enforcement itself requires resources, and higher tobacco taxes can provide that funding.

Delaying a tax hike on cigarettes to achieve an abstract ideal level of enforcement is illogical, as reforms are a continuous process that requires progress on several fronts. If we were to wait for this to be achieved, the government would never be able to raise taxes, making it next to impossible to fund public services.

Another argument frequently raised is that tobacco taxes are regressive, disproportionately burdening the poor. This view fails to account for behavioural changes. As prices rise, lower-income smokers are the most likely to cut back or quit due to having less disposable income. Therefore, they are the biggest beneficiaries of better health outcomes.

This is evidenced by World Health Organisation (WHO) studies that show the poorest 20% of households consistently experience the largest declines in smoking after tax increases. Far from being regressive, tobacco taxation is both pro-health and pro-poor.

Opponents often point to experiences abroad to argue against tax increases. However, it is important to scrutinise these arguments to determine which aspects are truly applicable to the Malaysian context.

For example, Australia’s struggle with a growing illicit tobacco market is often cited but misrepresented. What really drove the surge was weak enforcement: no comprehensive track-and-trace system, softer penalties for cigarette smuggling compared with drugs, and patchy crackdowns on retailers selling illicit cigarettes. Organised crime took advantage of this.

Furthermore, the amount of illicit cigarettes remained low in Australia during the series of tobacco tax increases from 2013 to 2020. They only increased substantially between 2019 and 2023, further proving that gaps in enforcement are the problem, not higher taxes.

Indonesia is another poor comparison. The CME report highlights that cigarette consumption barely fell despite a 12.5% tax hike. What it overlooks is that Indonesia has a complicated tiered tobacco tax structure, leading to a diverse range of tobacco products at various prices, giving consumers options that are more affordable to them.

This is contrary to Malaysia’s excise tax structure on cigarettes, which is simple and is already aligned with the WHO’s recommendations in terms of tax structure. While Malaysia can learn from other countries’ experiences, greater care must be taken to assess what is applicable.

What Malaysia needs to do now is ensure a meaningful increase in tobacco taxes in Budget 2026 and have regular increases taking inflation and income growth into account, per the recommendations in the WHO Framework Convention on Tobacco Control.

Malaysian Prime Minister Datuk Seri Anwar Ibrahim has already stated the government intends to expand pro-health taxes, including on tobacco, and with the phased banning of vapes announced by Health Minister Datuk Seri Dr Dzulkefly Ahmad, adequate funding for enforcement is more important than ever before.

Malaysia cannot afford to delay. More than 27,200 deaths occur annually due to tobacco use in Malaysia. Every year without tax action means more deaths, more young people taking up smoking, forgone revenue, and a greater burden imposed on the healthcare system and the wider economy.

The case is clear: raise tobacco taxes now, strengthen enforcement in parallel, and fund a healthier Malaysia.

MUHAMMAD DANIEL KITTU

Senior researcher

Social and Economic Research Initiative (Seri)

Seri is a non-partisan think-tank that promotes evidence-based policies addressing issues of inequality.