Malaysia: No ''Smoking Hot'' Tax Increase, Please

Source from:  The Sun Daily  09/03/2013

As Budget 2014 looms, tobacco manufacturers are again hoping that the government will not make sudden large increases in excise duty on cigarettes that would shock consumers and prompt them to turn to illicit cigarettes which cost half the price of legal cigarettes.

This time there is reason for tobacco manufacturers to worry about as the government takes steps to trim the country's fiscal deficit to 4% of gross domestic product this year from 4.5% in 2012, and increasing sin taxes, specifically excise taxes on alcoholic beverages and cigarettes, is much to be preferred.

In fact, tobacco analysts are expecting a hike in excise duty on cigarettes in Budget 2014 given a reprieve from one in the past two years' budget announcements.

JT International Bhd (JTI) managing director Robert Stanworth (pix) said calls for as high as a fourfold increase in tobacco tax have been made, but he warned against such a big increase which would deal a serious blow to sales of cigarettes as well as the war on illicit cigarettes.

"What we know from experience in Malaysia and all other markets around the world is that sudden large excise increases can shock consumers of all price classes to seek out cheap smuggled alternatives," he told SunBiz in his first interview with the media since taking on his current role in January this year.

"The resulting decline in the legitimate market volume does indeed affects the industry, but often also leads to lower total tax receipts for the government. As smuggled cigarettes sit outside all laws and regulations, government health policy is completely flouted as well," he added.

Stanworth said tobacco manufacturers are aware of the government's right to regulate tobacco products and set excise duty rates at levels they consider appropriate.

"This is something that we fully accept. We just want to make sure that the dialogue and the evaluation of these decisions are fact based... that in some people's rush to demonise the tobacco industry, they don't do more damage to the broader social climate and health agenda indirectly," he added.

Stanworth, 39, hails from the UK and has served markets in Romania, Austria and Hungary. Prior to assuming his current role in Malaysia, he was the general manager and managing director of JTI Germany.

Stanworth noted that tobacco regulation varies from country to country but always around common themes.

"All of the markets I have worked in have many similarities in terms of the challenges posed by tough competitors, the regulatory environment and the illegal cigarette trade resulting from tobacco smuggling. What tends to vary more is consumer tastes and trends, which can be very country and culture specific," said Stanworth.

"In my last market Germany, for example, around one-third of all cigarettes smoked were either hand rolled, or "make your own" where the smoker would purchase pre-made cigarette filter tubes and cut tobacco separately and use a little machine to fill the tube with tobacco to make the finished cigarette. This is a tobacco category that does not exist in Malaysia," he added.

Still, what concerns Stanworth most in Malaysia is that there appear to be ideologically driven people who believe that acting against smuggled cigarette trade only implies support to the legitimate tobacco industry.

These quarters seek to deny the scale of the smuggled cigarette problem and hinder the industry in its attempts to engage in productive dialogue and initiatives with government.

"Worse still, they propose regulatory and tax measures that will only cause the problem to grow further.

"I want to be very clear and say that the smuggled cigarette trade does damage the tobacco industry, however the damage to the public health agenda, law and order and the economy is by far more profound," he said.

To illustrate his point, he said about 35% of all cigarettes smoked in Malaysia are illegal, freely available to everyone including children and sold at a fraction of the legally mandated minimum price of RM7 per pack of 20 sticks cigarettes.

"They are also manufactured to unknown quality standards and completely circumvent domestic health policy, while at the same time removing some RM2 billion of tax revenue from the legitimate economy.

"Is all of this considered to be acceptable collateral damage in the battle against the tobacco industry? I hardly think so," he added.

But what can be done? Stanworth believes there is a need for a more mature and fact based discussion on tobacco control. As it is, tobacco manufacturers are not party to any discussion with the government.

On enforcement, he believes that the Royal Malaysian Customs is doing its best to tackle the sale of illegal tobacco.

"Their challenge is the sheer scale of the smuggled cigarette problem that has developed in Malaysia over the last several years, at 35% of consumption, places a significant strain on their capabilities.

"I think for this reason, this problem will only be tackled by fresh thinking and the engagement of all government agencies working together," he added.

Malaysia's tobacco industry volumes have in recent years been on a decline, with first-half 2013 (1H13) total industry volume falling by 2.7% year-on-year.

Looking at the remainder of the year, Stanworth said much will depend on the size of any excise tax increase the government might be considering in the October budget.

"If it is moderate and able to be digested by the consumer then overall the market is likely to meet expectations. A large excise tax increase might be another story," he said.

Nevertheless, on JTI's part, it saw its market share rose slightly to 19.7% in 1H13 from 19.5% a year ago, largely driven by its premium brand, Mevius (previously known as Mild Seven).

According to Stanworth, the transition to Mevius has gone "exceptionally well" as it did in other markets like Japan and Singapore. Mevius saw a 0.1 percentage point increase in market share to 4.4% in 1H13 compared with 4.3% a year ago.

"We are very optimistic about the renewed potential of this brand over the mid to long term," he said.

But one of Stanworth's first major tasks is to lead the group to capture market share from its competitors amid a declining total industry volume.

"The legitimate market (for tobacco) is still there. It has been on a decline over the years mainly as a result of the illicit trade, but nonetheless we have a market share right now of 19.7% which means there is another 80.3% left of that which we can challenge our competitors for.

"And if you consider that illicit tobacco trade grows, it implies that people continue to smoke," he said. Enditem