Crackdown to begin against illicit cigarette market

In a decisive move to curb the booming illicit tobacco market, the federal government, in coordination with provincial authorities, has announced a nationwide crackdown on the sale of illegal cigarettes.

Speaking at the launching ceremony of a research report prepared by Oxford Economics on illicit cigarette trade in Pakistan, Minister of State for Finance Bilal Azhar Kayani said that provincial governments would intensify enforcement operations to eliminate the widespread availability of untaxed cigarette brands. He stressed that controlling the illegal cigarette trade had become "unavoidable" and warned that their unchecked sale was inflicting heavy losses to the national exchequer, undermining the documented economy and discouraging honest taxpayers.

The state minister added that several illegal cigarette manufacturing units had already been shut down while raids against the retailers involved in the sale of illicit products were continuing.

According to the Oxford Economics' report, titled "An Economic Assessment of the Illicit Cigarette Market in Pakistan", illicit cigarettes now account for more than half of Pakistan's tobacco market. The study underscored the scale of illegal trade and its impact on public revenues and the economy.

It revealed that illicit sale in the country amounted to 43.5 billion cigarettes, placing Pakistan amongst the biggest illicit tobacco markets globally. While total cigarette consumption has remained broadly stable at around 80 billion sticks annually over the past decade, legal sales have been steadily displaced by illicit products.

The report identifies sharp excise duty increases as a key driver of this shift. Between Q1 2022 and Q2 2023, real excise taxes rose 107%, significantly widening the price gap between legal and illegal cigarettes. Illicit cigarettes remained approximately 36% cheaper on average, encouraging widespread down trading.

"The evidence highlights the risks associated with sharp and unpredictable tax increases," said Andrew Logan, Director of Industry Consulting at Oxford Economics, while speaking at the report launch. "Pakistan's experience shows how quickly consumption shifts when affordability and enforcement gaps widen."

On the supply side, the illicit market is primarily domestic. Within the illegal cigarette segment, around 64% of tax-evaded cigarettes are produced within Pakistan, primarily in Azad Jammu and Kashmir and Khyber-Pakhtunkhwa.

Smuggling accounts for the remaining 36%, largely via routes through Afghanistan with cigarette brands linked to the UAE and South Korea. Illicit trade is exacerbated by porous borders, organised criminal networks and weak enforcement. "These findings underline the need for sustained, coordinated enforcement across the entire supply chain," added Logan. "Without policy predictability and consistent enforcement, illicit operators will continue to undermine revenue collection and legitimate businesses."