KUALA LUMPUR: Malaysia’s cigarette and alcohol black market continues to pose a serious challenge to legitimate businesses and government revenue.
Yet, calls to increase cigarette and alcohol excise duties in Budget 2026 risk 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 particularly true for cigarettes.
According to Nielsen’s Illicit Cigarette Study (ICS) conducted in July 2025, illicit cigarettes still account for more than half of total cigarette consumption nationwide, standing at 54%.
Yet, pressure continues to mount on the legal industry to downsize the business.
API managing director Datuk Fazli Nordin stated, “It is important for us to clearly understand the real problem.”
“The pro-health tax aims to protect the public by discouraging harmful lifestyle choices.
“However, increasing prices on alcohol and cigarettes without proper research into market demands risks fuelling the illicit market, especially as consumers are more price conscious than ever.
“It will only push more consumers towards illegal cigarettes and alcohol,” he said in a statement.
Fazli noted that despite ongoing enforcement operations, the illegal cigarette market continues to cause revenue leakages of around RM5 billion each year, depriving the government of funds that could otherwise support public services.
“Every time the price of legal cigarettes or alcohol goes up, the illegal market becomes more attractive to consumers. Consumers who are accustomed to smoking or drinking will not simply stop overnight. It’s simple economics: higher taxes mean higher incentives for smugglers.
“This would then become contrary to the government’s fiscal objectives of increasing tax revenue, while also requiring more resources to combat the illicit trade,” he added.
The solution lies in continued enforcement to reduce illicit activities, rather than imposing additional tax burdens.
For example, in 2024, countries like New Zealand have experienced a steady rise in illicit tobacco trade over the past six years, largely driven by excise hikes.
Tobacco smuggling operations have become increasingly sophisticated. In fact, since 2017, annual seizures of illegal cigarettes have nearly tripled, and the volume of loose tobacco confiscated has almost quadrupled.
“We are not against regulations or enforcement. But raising taxes when the illegal market is still thriving will only strengthen the black market’s grip.
“The government must prioritise stability and enforcement outcomes instead of creating new fiscal shocks.” Fazli said.