Commentary:1

Title of the article: ” High tax on e-cigarettes will stimulate illegal market, says RTBA
Malaysia”.

Source of the article: https://www.nst.com.my/business/2021/11/744647/high-tax-e-

cigarettes-will-stimulate-illegal-market-says-rtba-malaysia

Date the article was published: 11 November 2021

Date the commentary was written: 28 February 2022

Word count of the commentary: 801 words

Unit of the syllabus to which it relates to: Microeconomics

Key Concept being used : Intervention

 ARTICLE

High tax on e-cigarettes will stimulate illegal market, says RTBA Malaysia

November 11, 2021 @ 9:06pm

The tax rate proposed for vape products in Budget 2022 will result in an extreme price surge for vape
products and this will allow large-scale criminal organisations to increase supply to fulfil black
market demand, says RTBA Malaysia.
BylineNST Business

KUALA LUMPUR: The government should examine the long-term consequences of the
excise tax on vaping items which was just announced in Budget 2022.

Retail and Trade Brands Advocacy Malaysia Chapter (RTBA Malaysia) managing director
Datuk Fazli Nordin said while it is a significant step toward controlling Malaysia's booming
vape industry, it is necessary to examine the impact of the high tax rate on vape items.

"The recent Budget 2022 tabling saw the government announcing a tax of RM1.20 for each
millilitre of vape liquid, for both nicotine and non-nicotine liquids, effective 1 January 2022. 

The tax rate proposed will result in an extreme price surge for vape products. 

"Reports have indicated that the excise rate for vape products alone would be higher than the
current retail price of these products," he said in a statement today.

According to Fazli, a bottle of 30ml liquids, for example, will be taxed at RM36, which is
about the same as its current retail price.
Retail prices, therefore, will undoubtedly rise, prompting consumers to seek out cheaper,
untaxed goods.

Thus, this will allow large-scale criminal organisations to increase supply to fulfil black
market demand.

"Our local vape industry has grown significantly over the few years and is in prime position
to develop further. 

"We already have the ideal landscape, such as the access to markets, opportunities for local
small and medium enterprises (SME), macroeconomic stability, skilled and responsive labour
markets, as well as a well-developed infrastructure. 

"The implementation of high tax rates may overturn the progress made by the industry and in
the long-term, can cause significant losses to local SMEs," Fazli said.

RTBA Malaysia is a non-governmental organisation advocating effective regulatory,

financial and taxation policies affecting retailers and brands.

According to RTBA Malaysia, there has been a case of a high tax rate resulting in the
creation of a black market.

"We have seen Italy's vape industry experiencing significant constraints from high tax rates. 

"According to studies, the tax rate on vape e-liquids reached a high of €0.385 (RM1.85) per
millilitre at one time, and Italy's Department of Finance collected significantly less revenue
than expected as consumers shifted to tax-free alternatives.

"Ultimately, the Italian government reduced the vape tax, recognising that the excessive rates
had fostered a black market and drove users to unregulated products," Fazli said.

He said this proves that a balanced taxation framework is vital for the sustainability of any
industry. 

"We believe that tax policies need to be evidence-based and thoughtfully designed to avoid
unintended consequences," Fazli said .
 COMMENTARY

The article talks about the long term consequences of a higher excise duty imposed
primarily on vaping products a tax of RM 1.20 per millilitre of vape liquid for both
nicotine and non -nicotine products., announced in Budget 2022 by the Malaysian
Government. The Government aims at imposing strict measures in order to curb the
consumption of e-cigarettes by the public . The second objective here is to maximize the
revenue as vaping liquids have a highly inelastic demand . The imposition of tax on
vaping products causes the high surge in retail prices making such items unaffordable
for the consumers and they shift to buying alternative and cheaper vaping liquids
leading to the creation of a black market.

Quantity Of Vaping Liquids

The concept of intervention has been effectively used by the government as they have
imposed a higher excise duty on vaping products which are demerit goods . The Malaysian
government has imposed a tax of RM 1.20 on vaping liquids resulting in a high surge of retail
prices where the price rises from Popt , the previous price of these liquids to Pm , the new
retail price charged while the quantity of e-cigarettes demanded falls from Qopt , the original
quantity purchased to Qm1 as consumers belonging to lower income groups are unable to
afford it or those who are unwilling to purchase e-cigarettes at the new set retail price. Since
e-cigarettes have a highly inelastic demand , they are taxed highly by the government for two
main reasons, first is to reduce the consumption of vaping products by the consumers as they
are injurious to health and may have severe consequences in the long run. While the second
reason is to maximize the revenue as e-cigarettes, tobacco and alcohol are demerit goods.

The consumption vaping liquids(Both nicotine and non-nicotine) are an example of Negative
Consumption Externalities as when one person consumes e-cigarettes , he suffers from
problems like lung cancer but the people surrounding him (passive smokers) leading to high
healthcare costs. New tax rate imposed is equivalent to the previous price at which vaping
liquids were purchased , Popt. Hence at Pm , consumers are unable to purchase the product ,
as they are unable to afford it therefore leading them to opt for cheaper and untaxed vape
liquids eventually leading to the creation of a black market. Large scale criminal
organisations purchase e-cigarettes in bulk and store it. They sell these products at a lower
price as compared to set retail price Popt. Due to the new set retail price , consumers opt for
cheaper untaxed vaping liquids , further inducing black market demand.
The government can curb the consumption of such goods by imposing legislations like
imposing a law where the age limit of smoking is above 18 years thereby reducing the
number of teenagers opting to smoke . The Malaysian government can ban smoking in public
places or ban consuming cigarettes while driving. Educating the citizens about the
consequences of smoking via showcasing disturbing advertisements in theatres and malls in
order to dissuade people from smoking. This is a nudge as the government aims to persuade
the public to ban smoking through the use of advertisements. Other methods are the use of
posters and banners to ban smoking in district roads , highways. This can be effective in order
to reduce the high costs of healthcare services.

There are limitations for each of these methods. Firstly teenagers may not abide with the
legislation imposed and may start smoking at an earlier age. Smoking addicts may not
necessarily follow the rule in public places like hotels and restaurants. The large amount of
revenue spent by the Malaysian government in advertisements may not be so effective as the
audience may not pay heed to the advertisements shown . The use of posters and banners is
indeed ineffective as people ignore the caution regarding smoking proving the failure of this
approach. Thus the correction of these negative externalities caused by consuming vape
liquids is never achieved. Also the high tax rates on vape liquids can cause losses to the
SME’s as e-cigarettes happen to be their main source of revenue ultimately leading these
businesses to exit the market due to the high costs of production and losses. Hence it is
important that the Malaysian government reduce the tax rate in order to achieve its aim of
curbing the consumption of vape liquids so that the consumers purchase them at a particular
price thereby avoiding the creation of a black market. Secondly the government can utilise
their revenue in major development projects. A reduced tax rate can help SME’s
to recover their losses and achieve normal profits in the long run. Thereby the negative
externality is corrected and the quantity purchased remains at Qopt while the price shifts
above Popt.