Tobacco Tax Hikes Under Scrutiny As Illicit Cigarette Market Surges Past 50%
Experts warn that Malaysia’s booming illicit cigarette trade may be blunting the impact of higher tobacco taxes, with over half of consumption now outside the tax net.
- With over 57% of cigarettes in Malaysia being illicit, tax hikes alone may push smokers towards cheaper illegal alternatives rather than reducing consumption.
- Taxation and enforcement must work together, but tackling the deeply entrenched illicit market may need to take priority before further excise increases prove effective.
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S. Saravana Kumar, Partner at RDS Partnerships said that raising cigarette excise duties on its own may not be sufficient to reduce smoking rates among Malaysians, especially in light of current market dynamics.
Saravana, who is also the Head of SST & Customs at RDS Advocates & Solicitors said this amid renewed calls to raise tobacco excise duties by at least 5% annually, following a joint proposal by SERI and 59 supporting organisations, which maintain that higher cigarette prices remain one of the most effective tools to reduce smoking prevalence in Malaysia.
While tobacco taxation is widely recognised in public health policy as an effective deterrent, Saravana cautioned that its real-world impact depends heavily on how the market is structured and enforced on the ground.
Estimates suggest that around 57% of cigarettes consumed nationwide are illicit — meaning they are sold outside the tax system entirely. In Sabah and Sarawak, the figure is believed to be as high as 80%, effectively making the legal, taxed market a minority segment of overall consumption.
This creates a structural issue for policymakers: only legal cigarettes are affected by tax increases, while a large portion of consumers can still access significantly cheaper untaxed alternatives.
Legal cigarettes currently retail upwards of RM12, while illicit products are widely available for as low as RM4 to RM8.
“From a tax policy perspective, the intended behavioural and revenue outcomes of excise increases depend on consumers being faced with higher prices in the legal market,”
“Where illicit tobacco products are readily available at significantly lower prices, there is a risk that some consumers may switch to illegal products rather than reduce consumption altogether.”
He added that recent data shows illicit market share rising from 54.4% in November 2025 to 56.7% in January 2026, while counterfeit tax stamp cases have doubled from 8.7% in 2023 to 16% in early 2026.
At the same time, Malaysia is estimated to be losing between RM4 billion and RM5 billion annually in tax revenue due to illicit tobacco trade.
Saravana argues that this points to a broader policy dilemma: when more than half of consumption already sits outside the tax net, the marginal impact of further excise increases may be limited unless enforcement is strengthened in parallel.
He stresses that taxation and enforcement should not be treated as competing strategies, but as complementary ones. However, where illicit trade is already deeply entrenched, stronger enforcement may need to take priority in order to restore market balance.
Measures such as tighter border controls, improved supply chain tracking, and more aggressive disruption of illegal distribution networks are among the tools that could help rebuild the integrity of the legal market.
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“A large illicit market can undermine both public health and fiscal objectives,” he said, adding that illicit products operate outside regulatory oversight and evade duties and compliance requirements.
For Saravana, addressing illicit tobacco is not just about protecting revenue, but about ensuring that future tobacco control policies — including tax increases — actually work as intended.
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