“There will be avoidance through illegal activities,” said Geoffrey Williams of Malaysia University of Science and Technology (MUST).
“The criminal activities associated with this will burden the police and can be more socially harmful with illicit alcohol or cheap, low quality cigarettes in the market.”
Speaking to FMT, Williams said the government should in fact avoid tax hikes in trying to raise revenue.
“It should instead focus on economic recovery, which will raise income and increase spending and activities in general,” he said. “These will boost government revenue.”
He urged Putrajaya to cut leakages, stop wasteful spending, increase procurement and address the shadow economy and incentives for tax avoidance.
He also called for long-term tax reform covering goods and services taxes as well as income and company taxes.
Sin taxes are often thought of as duty on alcohol or tobacco, but Williams said they could be taxes imposed on “anything that is harmful to society or individuals”, such as sugar, fatty foods, cooking oil and low-quality processed foods, petrol or environmental pollution as well as waste.
He noted that the two main arguments for imposing sin tax were to discourage harmful activities and to raise revenue.
“These conflict with each other,” he said. “If the government is successful in reducing the demand for sin products, then it will earn less tax revenue.”
He also noted that income from sin taxes in Malaysia was low, representing only 4% to 5% of total government revenue.
Another economist, Barjoyai Bardai of Universiti Tun Abdul Razak, said it was time for Putrajaya to tax capital owners and their shareholders instead of finding an easy way out by raising sin taxes.
He said that in the US, companies and shareholders would pay capital gains tax after receiving dividends or selling shares.
He agreed with Williams that an increase in sin taxes would be a regressive step in the effort to curb trade in contraband.
“The tax hike will only lead to more illegal cigarettes and liquor being smuggled in, resulting in a drop in government revenue.”