Business

Thursday October 8, 2009

BAT: Higher cigarette tax will encourage illicit trade

By EUGENE MAHALINGAM


It will further hamper the earnings of legitimate cigarette companies

PETALING JAYA: Future increases in tobacco excise duty will only encourage the trade of illicit cigarettes and hamper the earnings of legitimate cigarette companies further, according to British American Tobacco Malaysia Bhd (BAT).

The company said it was hopeful that the Government would not increase excise duties further at Budget 2010, to be tabled later this month, as the illicit cigarette trade was increasing at an alarming rate.

“Illicit operators do not pay any taxes and their prices will always be very low, making it extremely affordable to those who wish to continue smoking but cannot afford to pay for legal cigarettes.

Steve Rush ... ‘Price increases are always dependent on various factors.’

“This will impact us in terms of lost sales, the Government in terms of loss of revenue and the society in terms of increased crime,” finance director Steve Rush told StarBiz in an e-mail yesterday.

He said the Government should increase enforcement, impose stringent non-financial penalties and heighten awareness of criminal involvement in illicit cigarettes in order to curb the rise in illicit trade.

The Government had increased excise duty on tobacco by 1 sen, or 5.6% per stick, effective last Thursday. Earlier this week, BAT increased the price of its 20-stick packs by 30 sen and its 14-stick packs by 20 sen.

BAT produces cigarette brands such as Dunhill, Pall Mall, Lucky Strike and Kent. The company commands some 70% of the legal cigarette market in Malaysia.

On why the company’s price hike was higher than the excise duty increase, Rush said it also had to consider other factors such as trade margins, royalties and inflation.

“The 30 sen increase on 20-stick packs is made up of 20 sen excise, 1 sen sales tax and 9 sen of other components while the 20 sen increase on 14-stick packs comprises 14 sen excise, 0.7 sen sales tax and 5.3 sen of other components.

“The 9 sen per 20 sticks and 5.3 sen per 14-sticks increase, above excise and sales tax and after deducting royalties and trade margins, will not cover the cost of inflation, such as higher leaf prices, wrapping materials, salaries and fuel,” he said.

Rush added that there would usually be a small price increase to compensate for lower volumes and profits for shareholders.

“We believe that this lower manufacturer’s price increase and greater enforcement and penalties will help reduce the incidence of illicit trade,” he said.

Rush said it was still too early to determine the impact of the current excise hike on future earnings, adding that it had no immediate plans to increase cigarette prices further.

“Price increases are always dependent on various factors including excise increases, regulatory compliance and manufacturing costs increases, so if these factors are not present, then there is likely not to be further price increases,” he said.


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