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Malaysia & Indonesia – industry lobby, no tax increase

11 November 2018:

The Malaysian government recently announced the budget for 2019 and there was no tax increase for tobacco. BAT Malaysia responded immediately expressing its appreciation to the government for not increasing tax. The tobacco industry has been running a campaign to discourage the government from increasing tax. When the tobacco industry endorses a measure, you know it is not good for tobacco control and health.

The Malaysian Minister of Finance in his Budget speech said the Customs Department would step up enforcement against cigarette smuggling, highlighting the problems of cheaper contraband alternatives and illicit products packaged with fake customs duty labels. While strengthening enforcement of anti-smuggling measures is vital, it is not mutually exclusive to tax increase.

Following the removal of the GST in Malaysia and the re-introduction of SST (sales and service tax) the price range between the most expensive cigarettes and the cheapest is RM17.40 (US$4.15) and RM11.90 (US$2.84). With tax and price increase most smokers will shift to the cheaper brands.

Two research institutions, a local think tank (Institute for Democracy and Economic Affairs, IDEAS) and a UK based institute (Oxford Economics), have both been funded by the tobacco industry to push its position to discourage the government from increasing tobacco tax.

Tobacco companies typically blame increased tobacco smuggling squarely on tax increases, as BAT Malaysia did by pointing to the Malaysia’s a tax increase in 2015. These are typical industry arguments used in other countries and repeated in Malaysia. The industry in Malaysia also blamed the ban on kiddie packs, a tobacco control measure required in the international treaty the WHO FCTC, as contributing to the smuggling problem.

In recent years, IDEAS which previously was not involved in tobacco control is actively opposing stringent tobacco control measures such as tax increase and plain packaging of tobacco. A closer look reveals its keen interest in tobacco control commenced when it started receiving funds from Philip Morris International (PMI) and Japan Tobacco International (JTI), (Table 1) and its position matches that of the industry. IDEAS has used the smuggling argument to oppose tax increase in Malaysia with its research.

Table 1: Tobacco Industry Funding to IDEAS

2015 2016 2017
Philip Morris (Singapore) Pte Ltd RM115,594
Philip Morris (Malaysia) Sdn Bhd   RM32,629
Japan Tobacco International RM65,686

Ref: 20152016  2017

Consistent with industry position, IDEAS also recommended  the government should not increase excise duties on tobacco, but formalise cooperation with the private sector and consider a review of the current tax regime because previous multiple tax increases on cigarettes have led to “stark increases in the illicit trade in tobacco”.

Obligations under the WHO FCTC calls for governments to protect their public health measures from the vested interest of commercial entities such as the tobacco industry. This means the government cannot partner or collaborate with the tobacco industry, contrary to IDEAS’ recommendations. Since the industry cannot partner with the government, it gets a research think tank to lobby for “cooperation with the private sector.”

Oxford Economics (OE) declares its research on illicit trade is funded by the PMI. Its research has been quoted by tobacco companies saying Malaysia still has a “stubbornly high illicit trade issue” which continued to increase in 2017and hence opposed tax increase.

Previously, OE collaborated with International Tax and Investment Center (ITIC) also funded by PMI, released pro-industry annual research on illicit trade, but their research was criticised and exposed for its flawed methodology. The ITIC in 2016 adopted a policy to cut ties with the tobacco industry while OE continues with these PMI funded reports.

In neighbouring Indonesia, over the years cigarettes have become more affordable with miniscule tax increases applied to a complicated multi-tiered tax system. Last week (2 November) the Indonesian government announced there will be no increase in cigarette excise for 2019 and postponed the plan to simplify the tax structure for cigarette excise rates.

An industry group, the National Kretek Preservation Committee (KNPK) welcomed the government’s move for “accommodating” the aspirations of stakeholders in the tobacco industry. The Indonesian Tobacco Farmers Association (APTI) had written to the Cabinet Secretary, Minister of Agriculture, and the district governments requesting not to increase the excise tariff in 2019 and delay the implementation of simplification of excise rates. Health advocates, consumer groups and academics criticised this decision as being regressive which will have a horrible impact on health.

The industry’s skewed logic of tax increase equals increased smuggling does not apply in Singapore’s experience. Singapore has the highest tobacco tax in the ASEAN region at 70% of the retail price, but it has a low smuggling problem. In February 2018, the government further increased the tax by 10% across all tobacco products.

Tax increase is the single most effective win-win tobacco control measure – win for the people through reduced tobacco use and lives saved, and win for the government through increased revenue.