This article first appeared in The Edge Malaysia Weekly on October 1, 2018 - October 7, 2018

THE Ministry of Health’s (MoH) handling of recent changes in the consumption tax on cigarettes and its failure to promptly recommend a minimum level of increase in retail selling prices have left consumers confused and tobacco companies in a legal quagmire.

Cigarette prices were raised earlier this month but were rolled back three weeks later in the absence of price guidance from the ministry.

Earlier last month, the Big Three tobacco manufacturers had filed for approval from the MoH to increase the retail price of cigarettes in response to the nationwide shift to the Sales and Service Tax (SST) on Sept 1.

As an immediate measure, British American Tobacco (Malaysia) Bhd (BAT Malaysia) and JT International Bhd (JTI Malaysia) raised prices by 50 sen a pack while Philip Morris (Malaysia) Sdn Bhd (PMM) adjusted prices upwards by 20 sen.

However, their divergent positions triggered a price war.

And the competition has intensified with BAT Malaysia and JTI Malaysia rolling back the price of their products to what they were before to better compete with PMM. BAT Malaysia adjusted its cigarette prices to pre-SST levels on Sept 21, with JTI Malaysia following suit last Wednesday.

With the latest price change, a 20-stick pack of Dunhill (BAT Malaysia) or Mevius (JTI Malaysia) cigarettes now retails for RM17 — 50 sen lower than earlier this month, and cheaper than a Marlboro pack, which is still selling for RM17.20.

It is not surprising that the price changes have left many consumers — and cigarette vendors — confused.

BAT Malaysia managing director Erik Stoel explains that the rollback was due in part to not knowing when the MoH would finalise its decision or provide clarity and price guidance.

“In doing so, we considered the situation as potentially impacting market share. With our consequent decision and following competitors’ actions recently, we feel it has stabilised for now. However, once we receive clarity from MoH, and if we pass on [the sales tax increase], we do expect the illegal trade to gain,” he tells The Edge.

According to JTI Malaysia managing director Cormac O’Rourke, the reason for the rollback was to “protect our business interests following similar pricing rollbacks of competitors in the market place, along with a lack of clear and proper direction from the MoH that administers tobacco price approvals under the Control of Tobacco Products Regulation 2004 (CTPR)”.

“We had earlier called for swift intervention from the MoH to decide on a price point for compliance by all companies as per the requirements set out in the CTPR. Notwithstanding, there has been a complete absence of guidance from the MoH since the SST came into effect on Sept 1,” he says.

As of last Friday, the three tobacco companies had not received any approval from the MoH, leaving BAT Malaysia and JTI Malaysia staring at a legal conundrum as any tobacco tax hikes must be fully passed on to consumers under the CTPR.

MoH did not reply to requests from The Edge for comment.

“MoH’s inaction has resulted in the whole industry ending up in a legal quagmire. The law is clear that tax must be passed on to the end consumer yet the industry must sell only at a price approved by the MoH, which has brought us to this impasse,” says O’Rourke.

“The MoH urgently needs to step in and determine the appropriate quantum of increase and notify all manufacturers so as to be in compliance with the CTPR,” he adds.

However, BAT Malaysia’s Stoel believes the question of the legality of the company’s pricing in the market following the rollback does not come into play as the prices are the only MoH-approved prices it has in hand.

“In fact, with the implementation of the 10% SST, we were quick to comply with our initial 50 sen increase based on our considered approach on the computation of tax due to SST. However, we saw varied interpretations to the amount of tax due to SST,” he explains.

“As a result, the market is in a state of confusion with price discrepancies. After three weeks of following up with the MoH, we have yet to receive any clarity or guidance on the correct approach and quantum of tax that needs to be passed on due to the 10% SST.

“In the absence of price guidance, we have no means of knowing whether any cigarette pricing that is effected in the market will be interpreted as legal or illegal by the MoH. As soon as we receive clarity and guidance, we will revise prices to be in compliance accordingly,” he says.

The absence of guidance from the government seems to suggest a level of “free market”, albeit temporarily. However, tobacco players are not rejoicing.

“The current situation is an undesirable cigarette price war which we would have preferred to avoid. It is disruptive to business to have to change prices. As it is, the market today is already disrupted by the huge illegal cigarette trade and does not need more disruption. Hence, we would like to see a timely resolution to the SST issue,” says Stoel.

JTI Malaysia’s O’Rourke concurs, noting that continued inaction and delay by the regulator only serves to create confusion and frustration for consumers and retailers as they grapple with frequent price changes.

“We believe a competitive market place is a good thing, especially for consumers. Given a situation where 60% of the cigarettes sold in Malaysia are illegal due to excessive tax increases and lax enforcement, it is never welcome to see further tax lead price increases levied on consumers buying tobacco products legally.

“However, in this instance, MoH’s inaction has only served to create confusion and frustration for both consumers and retailers as they grapple with, what is now nearly, daily price changes,” says O’Rourke, stressing the importance of ensuring stability in the legal market and focus on what it sees as the more pressing issue of contraband products.

On its part, JTI Malaysia has sought clarification from, and provided all necessary information to, the MoH in an effort to quickly seek a resolution to this issue.

When contacted, PMM director of corporate affairs Sekar Menon reiterates that the 20-sen price hike is in line with its pricing methodology and cost structure, which allows the company to fully pass on the difference between the Goods and Services Tax and the 10% sales tax to consumers as required by local regulations.

“But there is confusion among retailers due to many price changes,” he adds. “As we do not want to add to the confusion, we are not going to make any further changes (to our prices) until otherwise advised by the regulator.”

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