Tobacco players disappointed over tax hike

Tobacco sector players all expressed their disappointment over the government’s recent quantum of increase in excise tax on cigarettes, with all collectively agreeing that it would drive up the level of illicit trade.

In an echo of last year, the government raised the excise tax on cigarettes a few weeks before the tabling of Budget 2011 on Oct 15. However, the increase this year of three sen per stick was much steeper than last year’s milder one sen per stick increase.

As such, the excise tax on cigarettes now stands 16% higher at 22 sen per stick.

This translates into a possible increase of up to 70 sen on retail cigarette prices per pack.

British American Tobacco (M) Bhd was the first to adopt the new pricing, with its peers JT International Bhd, unlisted Philip Morris (M) Sdn Bhd and the smaller players expected to toe the line in the coming week.

According to BAT’s managing director William Toh, the sharp increase in tax will result in more headwinds for the industry already struggling with declining total industry volumes (TiV).

Toh: We will have a greater challenge in sustaining our legal volumes against the illicit cigarettes trade.

“The greater the price discrepancy between legal and illicit cigarettes, the more attractive illicit cigarettes will become and we have stressed this point many times before. Given this huge excise increase we know we will have a greater challenge in sustaining our legal volumes against the illicit cigarettes trade,” Toh said in a press statement.

Philip Morris’ director of corporate affairs Richard James noted that the 16% increase is eight times in excess of the current inflation rate.

“In fact, this decision is in stark contrast with the approach taken by other governments such as Singapore and Ireland, where tobacco excise has been frozen in order to get the issue of illicit cigarettes under control”, he told The Edge Financial Daily yesterday.

Although official figures place the level of illicit trade at 37%, most industry players say that the actual number is much higher. OSK Research opined that illicit trade could potentially go up to 45% and beyond.

According to a Global Tobacco Report in June 2010 by Goldman Sachs, Malaysia sits on the top position of having the highest level of illicit cigarettes trade incidence in the world in 2009.

“We have never been opposed to excise increases, but have always advocated for moderate and gradual taxation.

It is a marked disappointment that the industry’s concerns and the country’s issues over illicit cigarette trade have not been taken into due consideration,” chief executive of the Confederation of Malaysian Tobacco Manufacturers Shaik Abbas told The Edge Financial Daily yesterday.

Going forward, OSK said that it does not rule out an additional excise tax hike in the upcoming budget announcement.

“It is very likely for the TiV for tobacco to decline by 10% next year. Reviewing year 2008 versus 2009, which saw absolute prices for 20s packs go up by 80 sen year-on-year, resulted in 2009 TiV seeing a drastic decline of 11.2%,” said OSK.

BAT ended yesterday 90 sen, or 1.9%, lower at RM47.50 while JTI remained unchanged at RM5.68. Both AmResearch and RHB Research maintained their views on BAT and the tobacco sector pending further announcements in Budget 2011.
This article appeared in The Edge Financial Daily, October 5, 2010.