KUALA LUMPUR: Malaysia’s black market in cigarettes and alcohol poses a serious challenge to legitimate businesses and government revenues.
Yet, the demand to increase cigarette and liquor excise duties in Budget 2026 risks worsening the problem rather than solving it.
According to Advokasi Perusahaan dan Industri (API), the issue is not taxation but the size and persistence of the illegal cigarette and alcohol market.
This is especially true for cigarettes.
According to Nielsen’s Illicit Cigarette Study (ICS) conducted in July 2025, illicit cigarettes still account for more than half of the total cigarette consumption across the country, at 54%.
Still, there is increasing pressure on the legal industry to downsize.
“It is important for us to clearly understand the real problem,” said API managing director Datuk Fazli Nordin.
“The purpose of a pro-health tax is to protect the public by discouraging harmful lifestyle choices.
“However, rising prices of alcohol and cigarettes without proper market research run the risk of fueling an illicit market, especially when consumers are more price conscious than ever.
“This will only push more consumers towards illicit cigarettes and alcohol,” he said in a statement.
Fazli said that despite ongoing enforcement campaigns, the illegal cigarette market was causing revenue leakage of about RM5 billion every year, depriving the government of funds that could otherwise support public services.
“Every time the price of legal cigarettes or alcohol rises, the illicit market becomes more attractive to consumers. Consumers who are addicted to smoking or drinking alcohol will not stop overnight. It’s simple economics: higher taxes mean higher incentives for smugglers.
“This would be contrary to the government’s fiscal objectives of increasing tax revenues, while also requiring more resources to combat illicit trade,” he said.
The solution lies in continued enforcement to reduce illegal activities rather than imposing additional tax burden.
For example, in 2024, countries such as New Zealand have seen a steady increase in illicit tobacco trade over the past six years, largely due to increases in excise taxes.
The operation of tobacco smuggling has become increasingly sophisticated. In fact, since 2017, annual seizures of illegal cigarettes have nearly tripled, and the amount of loose tobacco seized has nearly quadrupled.
“We are not against regulations or enforcement. But increasing taxes when the illegal market is still thriving will only strengthen the grip of the black market.
“The government should prioritize stability and enforcement outcomes rather than creating new fiscal shocks.” Fazli said.
