Illicit cigarettes causing loss of Rs300bn annually: report

ISLAMABAD: Pakistan’s revenue potential from the tobacco sector has been estimated at Rs587 billion but the FBR could only fetch Rs277 billion in the last fiscal year, causing annual revenue losses of over Rs300 billion or $1.1 billion.

It was also disclosed that the FBR was estimated to face revenue shortfall of Rs1,200 billion in the current fiscal year out of which Rs300 billion or one/ fourth was caused by the tobacco sector alone.

The illicit and smuggled cigarettes constitute a staggering 56 percent share in the domestic market, while the share of legitimate and tax paying cigarettes has shrunk to just 44 percent in the aftermath of August 2022 phenomenal surge in the Federal Excise Duty (FED) by 200 percent on three different occasions. These disclosures were made by former Economic Adviser to Ministry of Finance and renowned economist Sakib Sherani in a report titled “Towards an Optimal Tax Regime for Pakistan’s Tobacco Sector,” launched by ACT Alliance Pakistan here on Wednesday.

The economy is losing over a staggering Rs300 billion annually due to an unsustainable tax regime, which has inadvertently incentivised illegal cigarette trade. ACT Alliance Pakistan, a civil society network working since 2016 to address illegal economy, tax evasion, smuggling, and counterfeiting, estimates that Pakistan loses close to $100 billion annually due to various illegal economic activities.

The report argues that the government has crossed the “optimal tax point”, where increasing tax rates now reduces revenue instead of raising it. The price elasticity of cigarette demand is -1.4, meaning that higher prices significantly reduce legal sales while boosting illicit trade. “The current tax policy on cigarettes is failing on multiple fronts,” explained Sakib Sherani. “Not only has it encouraged an expansion in illegal trade, but it has also created severe distortions in the market. The formal sector, which contributes over 98pc of tax revenue collected from the industry, is shrinking, while illegal operators continue to thrive without any accountability.” For the first time in Pakistan’s history, illegal cigarette volumes have surpassed legitimate sales for two consecutive years, making up 56pc of the total market. Despite continuous tax increases on legally compliant brands, these measures have failed to achieve the intended revenue targets. Instead, higher prices on legal brands have driven consumers toward cheaper, tax-evading alternatives, depriving the government of much-needed revenue.

“The unchecked growth of illegal cigarettes is not just about lost tax revenue; it is an economic emergency,” said Mubashir Akram, National Convenor of ACT Alliance Pakistan. “Illegal trade in every sector, including cigarettes, fuels corruption, discourages investment, and cripples Pakistan’s ability to provide essential public services.

The government must now ensure implementation and enforcement of tax laws across the country.”