KUALA LUMPUR: Adopting a predictable, multi-year tax schedule for industries like alcohol and tobacco could provide crucial financial stability and help reduce illicit trade, said SCS Global Consulting tax partner and Malaysia Chartered Tax Institute council member Harvindar Singh.
He said sudden tax hikes disrupt long-term financial planning for businesses, often leading to strained profitability and driving consumers to the black market.
He pointed out that sudden increases in excise duties create significant challenges for “sin-taxed” industries, which rely on predictable conditions for managing cash flow, cost structuring, and profitability.
“When the government imposes sudden tax increases, businesses in these sectors face severe operational challenges,” he said in an exclusive interview with SunBiz.
He explained that higher prices resulting from tax hikes often lead consumers to reduce their purchases or turn to illicit markets where products are cheaper.
This shift undermines the formal tax base and ultimately reduces government revenue, which could otherwise be used to fund public services.
“Illicit trade is a significant consequence of sudden tax hikes. It not only undermines legitimate businesses but also deprives the government of valuable revenue that could be invested in public services,” said Harvindar.
Under Malaysia’s current approach, businesses are frequently forced to implement cost-saving measures with inadequate lead time.
To address this issue, he proposed a multi-year tax schedule where tax increases are phased in gradually over several years.
“A multi-year tax plan would give industries the opportunity to plan ahead. With ample notice, companies can manage their supply chains more efficiently, source competitively priced materials, and develop strategies to maintain consumer affordability even as taxes rise,” he said.
He then cited Romania as an example of a successful multi-year tax approach.
Excessive tax hikes in Romania in 2008 led to a surge in illicit tobacco trade, with illegal sales doubling to 28% of total consumption by 2010.
However, when the Romanian government adopted a moderate excise policy with a
multi-year framework, both illicit trade and the negative impact on businesses were significantly reduced.
“Romania’s example demonstrates that a gradual and predictable tax regime not only helps reduce illicit trade but also increases government revenue in a sustainable way,” said Harvindar.
Romania saw a 9.5% compound annual growth rate in tax collections following the implementation of this approach.
Harvindar also discussed how a multi-year tax schedule could help curb illicit trade in Malaysia.
“When consumers are faced with sudden price hikes, they often turn to cheaper, illegal products. But with moderate and predictable increases, the price gap between legal and illegal products is less pronounced, reducing the incentive for consumers to switch to illicit markets.”
By stabilising the market with a
well-structured tax regime, he said legitimate businesses would benefit from a more level playing field, and the government would enjoy a more reliable stream of revenue from regulated sales.
For the government, a multi-year tax schedule offers not only stability but also improved fiscal planning.
“With a clearer understanding of future revenue projections, the government can allocate resources more effectively to public welfare initiatives and infrastructure projects,” said Harvindar.
He said that industries benefit from better long-term financial management, as the shock factor of sudden tax hikes is eliminated, allowing businesses to implement cost-efficient strategies without scrambling to respond to abrupt policy changes.
Harvindar also suggested that a multi-year tax plan could foster a more collaborative relationship between the government and the private sector.
“When industries know what is coming, they can work with the government more proactively to ensure compliance and maintain consumer trust.”
He commented that as Malaysia evaluates its fiscal strategies, adopting a predictable, multi-year tax schedule could be crucial for stabilising revenue and reducing illicit trade.
“A multi-year tax schedule is a win-win solution for both the government and businesses. It not only supports the financial health of industries but also helps reduce the shadow economy, ensuring that both the public and private sectors thrive in the long run.”
