By Staff Reporter
A surge in smuggled and tax-evaded cigarettes is draining Pakistan’s national exchequer of an estimated Rs324 billion annually, according to a new survey, exposing critical gaps in enforcement and unintended consequences of aggressive tax hikes on legitimate tobacco products.
The findings, from a nationwide field survey by Islamabad-based research group Public Opinion Research (IPOR), reveal that 93 percent of cigarette brands sold in Pakistan’s domestic market flout tax and regulatory laws, undermining government revenue and public health policies. The trend has intensified following a 200 percent increase in federal excise duties on cigarettes over recent years, which critics argue has created a lucrative black market for tax-evaded alternatives.
Pakistan’s push to boost revenue and discourage smoking through steep tax increases has backfired, the report suggests, by driving consumers toward cheaper, non-compliant products. Of the 264 cigarette brands surveyed across 720 retail outlets in 11 cities in Punjab and Sindh, 245 (93 percent) violated tax or regulatory requirements. These include locally manufactured “Duty Not Paid” (DNP) brands (65 percent of non-compliant products) and smuggled imports (35 percent), which avoid taxes, undercut prices, and often ignore health warning mandates.
Non-compliant brands now command 58 percent of the total cigarette market, the survey found, with only 19 brands fully adhering to the Track and Trace System (TTS) stamps—a federal measure introduced to curb counterfeiting and tax evasion. The widespread non-compliance points to systemic enforcement failures, with 63 percent of retailers reporting no obstacles to selling illicit products.
“The fiscal incentive for smuggling and local tax evasion has grown manifold,” the IPOR report stated, linking the crisis directly to the 200 percent excise duty hike. “Consumption has not decreased; instead, it has shifted en masse from tax-compliant to tax-evaded brands.”
Price violations exacerbate the problem: 197 non-compliant brands were sold below the government’s Minimum Legal Price (MLP), making them up to 50 percent cheaper than compliant products. Even 48 brands priced above the MLP skirted tax or regulatory rules, such as omitting health warnings or TTS stamps.
Smuggled brands, totaling 166, dominated the illicit trade: 135 were sold below the MLP, while 31 priced higher still evaded taxes. Legitimate brands, by contrast, face shrinking market share despite higher pricing, with only 19 fully compliant brands identified.
The IPOR estimates 80 billion cigarette sticks are sold annually in Pakistan, with the government losing Rs7.18 in taxes per stick on illicit sales. This places the annual revenue loss at Rs324 billion—a figure exceeding the combined federal health and education budgets.
The survey highlights lax enforcement at retail outlets as a key enabler of the illicit trade. Most retailers faced no penalties for selling non-compliant products, with smuggled and DNP cigarettes readily available in 18 major markets surveyed.
“The lack of point-of-sale enforcement allows this parallel economy to thrive,” the report noted, urging authorities to prioritize crackdowns on retailers and distributors.
To stem losses, the IPOR calls for: Strengthened enforcement at retail and distribution levels, including frequent inspections and penalties for violations. Higher fines for manufacturers, importers, and sellers of non-compliant products. Public awareness campaigns to deter consumers from purchasing tax-evaded cigarettes. Review of tax policies to balance revenue goals with market realities, preventing excessive hikes that incentivize smuggling.
The crisis underscores a wider challenge for Pakistan: balancing fiscal austerity with effective governance. While high tobacco taxes align with global health objectives, weak enforcement mechanisms have allowed illicit trade to flourish, eroding revenue and perpetuating health risks. Non-compliant brands often bypass graphic health warnings, undermining anti-smoking efforts.
The Federal Board of Revenue (FBR) has previously acknowledged struggles in curbing cigarette smuggling, particularly via Iran and Afghanistan borders. The TTS system, launched in 2023 to monitor production, has seen limited success, with counterfeit stamps proliferating.
Analysts warn that unchecked illicit trade could further destabilise Pakistan’s formal sector, where legitimate manufacturers face declining sales and reduced capacity to contribute taxes.
The IPOR report shows an urgent need to overhaul the country’s tobacco taxation and enforcement strategies. With the IMF urging broader tax reforms to address fiscal deficit, cracking down on the Rs324 billion illicit cigarette trade could offer a critical revenue lifeline—if paired with pragmatic policy adjustments.
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