Tobacco revenue can increase by bringing illicit trade into tax net

KARACHI: The country’s annual revenue from the tobacco industry could more than double from the current Rs 270 billion, if the government succeeds in bringing the illicit cigarette trade into the tax net. This potential windfall is driving renewed calls for stricter enforcement against tax evasion and illegal tobacco sales.

Industry sources said that despite holding only 46 percent of the market share, the tax-paying segment of the tobacco industry contributes a staggering 98 percent of the total revenue collected from the sector. This imbalance has raised serious concerns about the effectiveness of the current tax policy.

Federal Board of Revenue (FBR) Chairman Rashid Mahmood Langrial has recently disclosed that tax evasion in the tobacco and poultry sectors has soared to nearly Rs 400 billion, highlighting serious flaws and enforcement gaps in Pakistan’s tax collection system.

Speaking during a meeting of the National Assembly’s Standing Committee on Finance, Langrial, Chairman FBR also highlighted that despite efforts to combat illicit trade, the tax machinery faces severe manpower limitations. The chairman disclosed that only one out of every 10 trucks carrying smuggled cigarettes is confiscated, with most evasion going unchecked due to the insufficient capacity of the current enforcement system.

Therefore, with the illicit cigarette trade now dominating more than half of Pakistan’s tobacco market, experts are calling for a shift in government policy-away from repeated tax hikes and toward curbing tax evasion by non-compliant tobacco companies.

As per estimates, Pakistan is currently losing an estimated Rs 415 billion annually due to tax evasion in the tobacco sector. Industry experts believed that by bringing the illicit trade into the tax net, revenue from the tobacco industry could surge from Rs 270 billion to around Rs 700 billion annually.

Industry sources said that higher taxes on legal tobacco products are inadvertently benefiting illegal players.

“Every time the government raises taxes, non-compliant illicit companies exploit the situation, expanding their market share while legitimate businesses bear the brunt. Instead of repeatedly increasing tax rates, the government should prioritize bringing the illicit trade within the tax net,” they suggested.

The illegal market’s unchecked rise is eroding tax revenues and endangering public health, as unregulated products flood the market without control. As Pakistan continues its battle against tobacco use, the industry sources stresses that meaningful progress will require a crackdown on the shadow economy undermining both fiscal and health outcomes.

Copyright Business Recorder, 2025