Measuring Malaysia's Illicit Tobacco Trade: An Excise Tax Gap Analysis. Issue 1 (28th September 2022)

• Record Type: Journal Article
• Authors: Koya, Ridzuan Kunji; Branston, J. Robert; Gallagher, Allen W. A.
• Is Part Of: Journal of illicit economies and development. Volume 4:Issue 1(2022)
• Page Start: 58
• Page End: 70
• Publication Date: 2022-09-28
• Subjects: tax gap -- illicit tobacco trade -- tobacco industry; Informal sector (Economics) -- Periodicals; Black market -- Periodicals; Corruption -- Periodicals; Economic development -- Periodicals; 338.9
• DOI: 10.31389/jied.151
• Languages: English
• ISSNs: 2516-7227

Abstract

There is a lack of independent data regarding the illicit tobacco trade in Malaysia. Tobacco Industry (TI) commissioned data has previously been criticised for overestimating the illicit tobacco trade and for a lack of methodological transparency. The aim of this study is to present an independent overview of Malaysia's illicit tobacco market by measuring the country's factory-made cigarette excise tax gap. Using data sourced from Malaysian government publications we calculate the excise tax gap between 2011 and 2019 based on existing approaches whereby the excise tax actually paid is compared with that theoretically due based on estimates of total tobacco consumption. For sensitivity analysis, we established 4 different scenarios of tobacco consumption levels. Our central estimate is that the tax gap increased from 49% (2012) to 65% (2017), indicating that about two-thirds of cigarettes consumed were illicit, untaxed cigarettes. Increases in the tax gap occurred when taxes increased (e.g., 2014) and when they did not (e.g., 2017), and a slight decline was also evident when taxes were unchanged (e.g., 2012). The size of the tax gap was sensitive to the consumption estimates, where a 10% increase in consumption was generally associated with 3–5 percentage point increase in the tax gap. This study, to our knowledge, is the first independent estimate of Malaysia's tax gap/rate of the illicit tobacco trade. We suggest the Malaysian government maintain its tax policies whilst strengthening its anti-illicit tobacco trade measures, including ratifying the Protocol to Eliminate Illicit Trade in Tobacco Products. Highlights: An independent view of the illicit tobacco trade in Malaysia by measuring the country's tobacco excise tax gap. Insights into the accuracy of TI estimates on Malaysia's tobacco trade. Suggestions for actions that should be taken by the Malaysian government to combat the illicit tobacco trade. Government Survey data is used to measure consumption which isn't available each year, so yearly consumption estimates are produced via linear interpolation between survey waves. Consumption estimates cover those aged 15 or above.