Source CME

KUALA LUMPUR, Malaysia: The Center for Market Education (CME) has warned that Southeast Asia’s troubles in enforcing income tax collection and heavy reliance on indirect taxes – accompanied by the lack of a coherent regulatory approach – are undermining legitimate businesses, suppressing innovation and fuelling illicit trade.

The warning came at the launch of CME’s new report, Indirect Taxation and Innovation: An ASEAN Framework, which calls for urgent reforms to taxation systems across the region. The event also featured a panel of experts offering regional and international perspectives on taxation.

Unveiled at a policy forum in Kuala Lumpur, the report argues that opaque and unpredictable tax regimes have created fertile ground for smuggling syndicates and regressive tax burdens on lower-income households as well as lost tax revenues for governments.

However, experts speaking at the forum called for urgent attention by governments to seize the opportunity to reform so that these lost tax revenues can be stemmed and ploughed into useful fiscal spending.

Drawing on case studies from Malaysia and the Philippines, among other regional countries, it highlights how poorly designed excise systems reduce fiscal predictability, weaken institutional trust, and erode governments’ ability to encourage innovation-led growth.

CME’s CEO and lead author Carmelo Ferlito described the findings as a “wake-up call” for policymakers to seize the opportunity for reform.

“Tax policy should not punish consumers and embolden criminals. It should create stability, predictability, and confidence for businesses to invest and innovate,” said Ferlito. 

“When excise duties rise sharply and without warning, the results are not healthier societies but thriving black markets and weaker institutions. However, there is still an opportunity for reform that can help arrest these trends and, with careful and responsible fiscal policymaking, restore confidence, innovation and tax revenues.”

Malaysia as an Opportunity for Reform

The report also highlights Malaysia as a telling example. A steep hike in tobacco excise in 2015 led to a 41.7 percent surge in illicit cigarette sales within just one year, and by 2020 the black market had expanded by 72.9 percent.

Ferlito noted as an example that, in August this year, enforcement agencies uncovered syndicates linked to RM250 million in lost revenues from smuggling tobacco and liquor between 2020 and 2024.

However, there is a window for reform now, Ferlito added. Malaysia has recently seen illicit cigarette volumes fall following a moratorium on further tax hikes and strengthened enforcement.

This, CME argues, is an opportunity to pursue reforms to provide businesses with predictability, such as moderate excise increases using a tax calendar, or the cycle of damage will repeat once the moratorium phases out.

The country’s tax-to-GDP ratio of 12.2 percent – far below the OECD’s 34 percent average – underscores both the difficulty of enforcing income taxes and the risks of leaning too heavily on excise duties.

Panel of Experts Calls for Regional Action

Speaking on the panel, Veerinderjeet Singh, a tax policy adviser and board director, argued that Malaysia and its ASEAN peers need to embrace more transparent, rules-based tax systems to restore investor confidence.

According to Singh, “The VAT system is a well-tested system that is in operation in many nations… ASEAN nations should work together to ensure that the VAT or GST or Sales or Service Taxes are integrated and aligned so that arbitrage opportunities are curtailed.”

The severity of inaction goes beyond economic costs as the consequent illicit trade networks mushroom to greater societal detriment.

Illustrating this on the panel, Theo Foukkare, CEO of the Australian Association of Convenience Stores, shared lessons from Australia, where illicit tobacco networks are often linked to violent organised crime, including money laundering, arson, and extortion.

‘’In Australia, we have a clear example of the negative impact resulting from ill-conceived tax policies. Escalating excise taxes on legal tobacco have driven consumers to the black market, which is now dominated by international criminal groups. Small legitimate business owners are now exposed to both violence and economic risk, as criminals are increasingly targeting retailers through fire bombings and intimidation,” said Foukkare.

Together, the panellists underscored that ASEAN needs stronger cross-border enforcement and more coherent excise frameworks to prevent regulatory arbitrage and ensure fiscal stability. They endorsed CME’s proposals for multi-tier VAT systems, tax calendars to guide excise revisions, and regional coordination mechanisms to combat smuggling.

A Framework for Reform

CME’s proposed reform agenda is built on stability, simplicity, and fairness. It calls for the adoption of a rationalized VAT as a fundamental revenue tool to support savings and investments, accompanied by moderate, predictable and transparent excise systems, and tax calendars that allow businesses to anticipate and adapt to changes. 

Such measures, CME argues, will help shift the tax mix away from the current distortionary indirect tax system and toward a more predictable regime that fosters savings, investment, and innovation.

“Excise taxation should not be a guessing game for businesses. Predictability is not just good for planning—it is a public good that helps governments and companies alike,” Ferlito said.

Singh added “Governments should issue a 5 to 10 year fiscal consolidation roadmap, outlining timelines and milestones to broaden revenue and control expenditure. This then allows better engagement with relevant business players and civil groups that can lead to positive contributions and assist in refining the roadmap.”