ISLAMABAD: Pakistan is losing over Rs300 billion every year because of a broken tax system that has unintentionally fueled the rise of the illegal cigarette trade. This not only depletes tax revenues but also challenges the effectiveness of state control.
The alarming finding comes from a new report titled “Towards an Optimal Tax Regime for Pakistan’s Tobacco Sector,” authored by distinguished economist Sakib Sherani and presented by ACT Alliance Pakistan at a recent event in Islamabad.
ACT Alliance Pakistan, a civil society group founded in 2016 to address illegal economic activities, including tax evasion and smuggling, estimates that Pakistan suffers a $100 billion annual loss across various illicit sectors.
The report stresses the pressing need for robust policy reforms and enforcement to combat the rapid growth of the illicit cigarette market, which has now taken a dominant position. It highlights that the current tax policy has become counterproductive, with higher taxes now pushing consumers toward cheaper, untaxed cigarettes rather than boosting state revenue.
Pakistan’s legal cigarette market is seeing a sharp decline in sales, with a price elasticity of demand for cigarettes at -1.4. This indicates that significant price increases are leading to reduced legal purchases and driving consumers toward illegal alternatives.
Sakib Sherani, the report’s author, pointed out, “The current tax policy on cigarettes is flawed and ineffective. It has not only encouraged illegal trade but also caused major market distortions.”
For the first time in the country’s history, illegal cigarette sales have exceeded legal ones for two consecutive years, now making up 56% of the total market share. Despite frequent tax hikes on legitimate brands, these actions have failed to achieve their revenue goals, instead prompting consumers to seek out untaxed options.
Mubashir Akram, National Convenor of ACT Alliance Pakistan, warned, “The unchecked rise of the illegal cigarette trade is not merely about lost tax revenue; it is an economic crisis.” He added, “Illicit trade, across all sectors, breeds corruption, discourages investment, and impedes the government’s ability to provide essential services. The government must take immediate steps to enforce tax laws effectively.”
The report critiques Pakistan’s tobacco taxation system, which has led to an increase in illicit cigarette sales, significant revenue shortfalls, and rising public health concerns. It advocates for a more balanced tax system that both optimizes government revenue and minimizes the market distortions caused by excessive taxes.
Mubashir Akram also pointed out that the current approach has unfairly burdened legitimate businesses while allowing illegal operations to flourish. However, he believes that with the right reforms—such as rationalizing excise taxes and enforcing stricter measures against illegal enterprises—Pakistan can secure a more stable economic future.
The report includes several policy recommendations, including better enforcement against tax-evading cigarette brands, ensuring full compliance with Track and Trace systems, and halting excessive tax increases on legitimate businesses.
Sakib Sherani concluded, “The current tobacco tax policy is failing. It is pushing formal sector sales down, accelerating illicit trade, and leading to substantial revenue losses. A more balanced and effectively enforced tax regime is essential to generate sustainable revenue, reduce market distortions, and address public health risks.”
ACT Alliance Pakistan has called for coordinated efforts from the government, regulatory bodies, civil society, and the media to tackle illicit economic activities. “The cost of inaction is far too high. The nation’s financial stability, investor confidence, and economic sovereignty depend on dismantling the illegal economy and ensuring a fair, transparent system for all,” said Mubashir Akram.
