Treasury secretary-general Johan Mahmood Merican said the government is focusing on improving enforcement and compliance to plug revenue leakages, especially in sectors where illicit trade thrives.

“One example is cigarettes. We’re aware that there are illicit cigarettes in the market — cigarettes on which taxes had not been paid,” he said.

According to one estimate, Malaysia loses around RM5 billion annually in tobacco tax revenue — highlighting just one facet of a much larger shadow economy.

Poovarni Rajagopal, licensed tax agent at Invatex Consulting, told FMT that the RM5 billion going up in smoke annually has significant implications for Malaysia’s economic wellbeing.

“RM5 billion represents a substantial portion of potential government revenue. It’s roughly equivalent to or greater than the annual budgets of several ministries or major development allocations.”

Citing industry estimates, Johan noted that taxes had been levied on only half of all cigarettes sold in the country. “Taxes had not been paid for the rest,” he said.

Malaysians are generally in support of crackdowns on illicit goods.

According to a 2025 Merdeka Centre survey, 70% of Malaysians are concerned about the illicit tobacco trade. Meanwhile, 79% agreed that curbing illicit trade would stem criminal activity and increase tax revenue to fund essential public services.

Johan stressed that enforcement agencies are empowered and given the resources to act.

“We’re certainly investing more — in scanners at the ports, raising capabilities of our enforcement agencies.

“If we’re able to continue to reduce that level of illicit(trade), that obviously translates into higher revenues for the government,” he added.

But experts pointed out that Malaysia’s enforcement system, while on the right track, could still benefit from stronger border controls and advanced technological solutions.

Sharifa Ezat Wan Puteh, a professor at Universiti Kebangsaan Malaysia, stressed that enforcement must be financed in tandem with higher taxes.

“Additional revenues from raising taxes on tobacco products should be used to finance tobacco control programmes, including cessation of smoking and tighter enforcement,” she said.

“Enforcement in Malaysia is not at its strongest now, so it can be improved, especially so for border patrol.”

Poovarni agreed that higher taxes alone would not resolve matters, as “poor monitoring and weak collection systems enable tax evasion and leakages”.

In Budget 2026, the government announced the use of digital tax stamps with enhanced security features to curb counterfeiting and leakages.

Poovarni cautioned that while digital-only systems can be efficient, every technology has its pros and cons.

“Digital-only QR codes and barcodes can be highly vulnerable to cloning and manipulation,” she said, noting that packs with counterfeit or duplicated QR codes have already surfaced in Malaysia.

This problem is not unique to Malaysia. A KPMG study released this year noted that the European Union, which runs on a digital-only system, saw the highest rate of illicit tobacco consumption since 2015. That equals 38.9 billion sticks in 2024, or a 10.8% increase compared to the year 2023.

Some countries overcome this by using hybrid — or “phygital”, physical and digital combination — tax stamps. These stamps embed overt consumer-visible marks, covert material forensic elements for enforcement officers, and digital unique identifiers tied to secure databases.

Malaysia’s own phygital tax stamp system was first introduced in 2015.

This raises the barriers for counterfeiters: they must fake both the physical stamp and the encrypted data, leading to higher deterrence. Currently, most enforcement relies on seizures and fines which is insufficient to crack down on illicit trade.

“Without physical security features, enforcement officers also can’t visually confirm authenticity, especially in low-connectivity areas,” Poovarni added.

Sharifa noted that stronger enforcement is of the essence, for both fiscal and public health goals.

“Illicit tobacco is cheaper than the legitimate variety sold in shops. In cases of tobacco addiction, public awareness doesn’t deter smokers from consuming illicit tobacco,” she explained, highlighting the need for both abstinence and safer alternatives on top of tobacco control.