Question

Article : BAT to close down factory in Petaling Jaya
British American Tobacco (M) Bhd (BAT) will shut down its factory in Petaling Jaya and axe about 230 workers due to “high excise environment in Malaysia” and a sharp rise of illegal cigarettes. The country’s largest cigarette manufacturer told Bursa Malaysia yesterday the winding up of the plant in Petaling Jaya is part of the company’s plan to restrict its operations in Malaysia. Following the closure of the facility, BAT said it will source tobacco products for the domestic market from other BAT Group factories regionally. The company through its unit, Tobacco Importers and Manufacturers Sdn Bhd (TIM), currently manufactures tobacco products and semi-finished goods such as processed tobacco at the facility.It said employees that become redundant due to the shutdown, will be provided a benefits package as well as the option to undergo a career-transition programme. BAT said TIM will wind down its factory operations at the facility in stages and is targeted to complete by the 
second-half of 2017. It said the board of directors sees the restructuring is in the best interest of the company. BAT said the restructuring is in line with the company’s efforts towards realising a new and more sustainable business model, amid an increasingly challenging business environment. The company said the high excise environment in Malaysia has ultimately “led to the sharp rise in illegal cigarettes” and significantly lowered legal sales volumes, subsequently driving up cigarette production costs. BAT said this increasingly challenging environment requires it to restructure and transform its business, which apart from the winding down of factory operations, includes the sharpening of its commercial capabilities, while optimising the supply chain and transactional activities to ensure that BAT remains a competitive consumer-focused market leader. The restructuring exercise is expected to have a positive financial impact on the BAT Group, it said.

Question :

Using the concept of elasticity, explain how do the excise duty (a form of indirect tax) affects the sales of tobacco firm like BAT and the peoples’ consumption? From whom do government collect more revenue? Use some illustrations to explain this answer.

Answer 1

Demand for cigarettee is inelastic becaue its a addictive product .once a consumer us addictive towards cigarette than demand of cigarette not going to change inspite of changing the price of the product .Due to increase in excise duty price of products  will definately increase ; increased proce of cigarette will pass on to consumer. Consumer being inelastic will not affect with the rise price of cigarette and will buy it instead of increase in price.

Because demand for cigarette is inelastic thats why BAT will not affect that much if it adopt possitve approach and being competitively update itself while focusing to reduce cost of cigarette and become more affordable to customers .

Goverment collect more revenue from taxes that is a most important  source of govermment's revenue .Goverment intentionally put more taxes to those goods those demands are inelastic those goods demand does not going to change with increase in price for instance liquor,cigarettes.