Illicit cigarette market overtakes formal sector, surges to 58%

ISLAMABAD: The share of duty-paid cigarettes in Pakistan has dropped sharply over the past 13 years -- from 67 billion sticks in 2013 to just 34 billion in 2025 -- while untaxed and smuggled cigarettes see a dramatic surge.

On average, 15 illicit cigarettes are sold per day in Pakistan, compared to only 11 that are tax-paid. This discrepancy has caused a staggering loss of Rs325 billion ($1.1 billion) to the national exchequer in the outgoing fiscal year alone. The mounting revenue shortfall persists even as the government struggles to meet IMF conditions for maintaining a primary surplus under the Fund’s stringent oversight.

Citing official data from the Pakistan Bureau of Statistics (PBS), executives of Pakistan Tobacco Company (PTC) told a press briefing on Wednesday that multinational corporations are expected to promote economic activity, generate profits and provide employment. However, if profitability is undermined, such companies may exit the market -- as seen in Malaysia, where British American Tobacco (BAT) shut down operations after the illicit cigarette market grew to 80 per cent. PTC warned that Pakistan could be heading in the same direction.

The company also strongly opposed the Punjab cabinet’s proposed ban on electronic cigarettes, arguing that their import is legally permitted under designated HS codes. “How can they be abruptly banned?” a PTC official asked.

Director Legal and Corporate and Regulatory Affairs at PTC Asad Shah said that the illicit cigarette trade has now overtaken the legitimate sector, comprising 58 per cent of the total market. He warned that this trend threatens the viability of the formal industry and deprives the government of substantial revenue.

Pakistan’s total annual cigarette consumption is estimated at 80 billion sticks. While the sector has the potential to generate Rs570 billion in tax revenue, only Rs292 billion was collected during FY2023-24. For the current fiscal year, only Rs247 billion is projected to be collected, with Rs230 billion recorded in the first 11 months. The PTC warned that if corrective tax reforms and enforcement measures are not implemented, collections could fall further to Rs235 billion in FY2025-26.

In FY2013, the government collected taxes on 67 billion cigarette sticks. This year, that figure is expected to halve to 34 billion, highlighting the growing dominance of illicit products following a 254 per cent increase in the Federal Excise Duty (FED) introduced two and a half years ago.

Despite holding only 42 per cent of the market, the formal sector contributes 98 per cent of the total tax revenue from cigarettes. Shah stressed that full documentation of the industry is critical to tackling tax evasion.

Currently, the government’s minimum retail price is Rs162.25 per pack, but around 18 billion cigarettes are being sold at Rs150 or less -- without any tax being paid. Shah clarified that the issue lies not in low taxes, but in illegal sales below the minimum legal price. Alarmingly, no penalties have been imposed so far for such violations.“Without strict and impartial enforcement, no policy can be effective,” he asserted.

He also noted that the Track and Trace System (TTS) had lost its intended impact, burdening compliant manufacturers while failing to curtail the spread of illicit and smuggled brands. An estimated 10 billion sticks are smuggled and sold annually in Pakistan.

To combat this, he proposed reducing the adjustable excise duty on acetate tow -- a key raw material in cigarette production -- from Rs44,000 per kilogramme to Rs4,000. The current rate, he argued, has incentivised smuggling. Over 450 metric tonnes of illicit acetate tow have already been seized during the ongoing fiscal year, he added.