Illegal cigarettes cost country Rs310b

Tax evasion resulting from the illegal cigarette trade alone causes an immense loss of over Rs310 billion to the national exchequer each year, according to market sources. These sources are urgently calling for immediate actions against illicit trade to meet the country’s tax goals instead of further burdening common citizens. The government must take immediate and decisive measures against illicit trade to enhance revenue collection and reduce the tax burden on the populace, they stressed.

“It’s been almost six weeks since the budget was announced, and there are still heaps of illicit items in the market,” said Fawad Khan, Spokesperson for Mustehkam Pakistan, an advocacy firm dedicated to curbing illicit trade and tax evasion in the country.

While expressing concern over the pressing issue of illegal trade and its detrimental impact on the country’s economy and marginalised communities, Khan warned that without expanding the tax base and implementing a comprehensive track and trace (T&T) system alongside effective curbing policies, the government will find it challenging to increase the tax-to-GDP ratio to its target of 13%.

A recent report from a foreign research institute reveals that approximately Rs1 trillion is evaded annually in Pakistan across major sectors, including real estate, pharmaceuticals, tyres and lubricants, tea, and cigarettes. “Tax evasion due to the illegal cigarette trade alone results in an annual loss of over Rs310 billion to the national exchequer, a figure expected to rise this year,” Khan noted.

He cautioned that if all cigarette brands are not brought under digital monitoring, the volume of illegal trade could reach 65% this year, further complicating matters for both the legitimate industry and the government. Around 50-60% of cigarettes in the country are being sold illegally, causing billions of rupees in losses to the economy. Billions of rupees are openly stolen due to the sale of illicit cigarettes in the country, and government authorities are too weak to collect taxes from these illegal cigarette manufacturers.

If the government fails to implement the track and trace system effectively this time, it will be exceedingly difficult to achieve the tax target for the financial year 2024-25. This shortfall in tax revenue will likely force the government to resort to more borrowing, leading to further economic imbalance and an increased debt burden.

According to market sources, it is not a tall order to apprehend those involved in this illegal trade. One kilogram of tobacco makes 1,000 cigarettes, and growers cannot sell tobacco without adhering to rules and regulations. Once a factory purchases tobacco, it can be debriefed about the end-product of cigarettes to carry out a crackdown against tax dodgers and collect proper excise duty, as at least 60% tax is imposed on a single packet of cigarettes.

Two multinational companies (MNCs)—Philip Morris Pakistan Limited and Pakistan Tobacco Company Limited—contribute 99% of revenue while holding the major market share of around 60%. In contrast, there are over two dozen local tobacco companies, which retain only a 40% market share, mostly located in Khyber-Pakhtunkhwa (K-P) and Punjab.