EU-ABC executive director Chris Humphrey said steep taxes often drive consumers towards illicit products in search of cheaper alternatives.
“The root cause of this illicit trade is tax. It’s the steep tax that drives up demand, which in turn creates the need to increase supply.
“Usually, a steep tax hike sends a shock to consumers. As a result, demand for these products rises, and people find ways to supply them,” he said at a media briefing on the Southeast Asia Study on Cigarettes & Alternative Nicotine Products: Use, Behaviour & Attitudes.
He also said that Malaysia’s cigarette market, where illicit products make up 55%, served as a cautionary example of the consequences of sudden increases in tax.
“In Malaysia, where there was a significant hike in excise duties on tobacco products, we saw a big spike in illicit trade.
“It also led to a loss of revenue for the government, so we need to think about this with a holistic approach,” he said.
According to a 2013 report by the Malay Mail, a 14% hike in tobacco excise duties led to a substantial rise in the sale of illegal cigarettes, with some sellers reporting up to a fivefold increase in demand for contraband products.
Humphrey recommended an excise policy with predictable and moderate tax increases to help reduce illicit trade while still achieving public health and fiscal goals.
He added that phasing in tax changes would allow the market, licensed retailers, and consumers time to adapt.
“When you think in terms of better, smarter regulation, that also means better, smarter tax approaches. This includes multi-year tax calendars with moderate increases – not sharp hikes that shock the market.
“Phased-in, well-articulated, and carefully considered regulation is definitely the way to go, and if you pair that with sensible multi-year tax regimes, it gives the market time to adjust and reduces opportunities for illicit sellers to profit,” he said.
Malaysia remains one of the countries with the highest rates of illicit cigarette consumption globally, largely due to high taxes and price disparities. In 2024, smuggled cigarettes accounted for approximately 55% of the market.
However, this was an improvement from previous years, which saw 55.6% recorded in 2023 and 63.8% in 2020.