Pakistan Faces Crisis as Illicit Cigarettes Dominate Market, Tax Evasion Reaches 55% Share

Pakistan Faces Crisis as Illicit Cigarettes Dominate Market, Tax Evasion Reaches 55% Share​

In a major blow to fiscal revenue, Pakistan has been identified as hosting the world's largest market for illicit cigarettes. According to British American Tobacco (BAT) Group's Head of International Trade and Fiscal Affair, Simon Trussler, the share of illicit cigarettes has reached a staggering 55 per cent. This figure highlights the extent of tax evasion occurring within the country's tobacco sector.

While the Federal Board of Revenue (FBR) is actively working to resolve the challenge, Trussler noted that the problem remains highly significant. The finding underscores a systemic issue where domestic taxes are being widely bypassed by the tobacco market.

Failure of Current Fiscal Policies​

A recent analysis by Oxford Economics suggests that Pakistan's current cigarette fiscal policy is failing to meet its stated objectives. The report indicates that these policies are not successfully achieving goals either from a tax revenue perspective or in terms of reducing overall cigarette consumption.

Trussler specifically stated that increasing cigarette taxes has proven ineffective in reducing the total volume of cigarettes consumed nationally. While overall consumption has remained broadly flat at 80 billion sticks since 2012, the market has seen a drastic shift toward illicit brands following large tax increases.

Price Gap Widening Drives Illicit Demand​

The massive surge in illicit cigarettes is attributed to a complex interaction of demand and supply factors. Crucially, the rapid increase in consuming tax-evaded brands stems largely from the declining affordability of legal, tax-paid brands.

Tax hikes have created a widening price gap between legally sold and illicitly traded cigarettes. More than 80 percent of cigarette price increases observed in Pakistan can be attributed directly to these tax hikes.

Market Incentives for Tax Evasion​

This situation creates substantial incentives for domestic manufacturers to operate illicitly. The report points out that the pre-tax price of cigarettes in 2024 was among the lowest globally, facilitating local tax evasion.

This low pre-tax price level allows manufacturers to operate outside local taxes and achieve higher margins. The combined effect of these low global prices and high domestic tax burdens fuels the illicit trade.

Recommendations for Future Tax Policy​

Given the volatile market dynamics, BAT strongly advised the government to avoid further increases in the Federal Excise Duty (FED) on cigarettes in the upcoming budget (2026-27). The expert noted that consumers are currently unable to bear additional excise shocks to the market.

The overarching message from the industry experts is that sustained and aggressive tax increases are not translating into the intended public health or revenue outcomes, requiring a nuanced policy approach to stabilize the legitimate market.

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