Pakistan loses Rs750bn tax revenue to illicit trade, smuggling yearly: report

ISLAMABAD: Pakistan loses Rs 750 billion in tax revenue per annum due to illicit trade and smuggling, reflecting that smuggling and illicit manufacturing expanding across key sectors including tobacco and petroleum products.

Policy Research Institute of Market Economy (PRIME) and the Transnational Alliance to Combat Illicit Trade (TRACIT) jointly launched TRACIT’s report “Pakistan’s Battle Against Illicit Trade: An Analysis of Challenges and Pathways to Resilience”.

From smuggled petroleum and counterfeit pharmaceuticals to non-tax-paid cigarettes and under-invoiced consumer goods, illicit trade has entrenched itself across key sectors. The gravity of this issue is manifested by an estimated annual tax revenue loss of Rs. 3.4 trillion on account of an estimate of $123 billion informal economy, the report added.

Weak enforcement: Illicit cigarette trade causing huge losses

Two other reports were released— TRACIT’S 2025 Global Illicit Trade Index and PRIME’s Combating Illicit Trade in Pakistan: A Structural and Policy Analysis. These reports provide analysis of how policy weaknesses, enforcement gaps, and structural economic distortions have allowed illicit markets to flourish. They underline the urgent need for coordinated action across taxation policy, regulatory governance, border management, and consumer protection.

Jeffrey P. Hardy, Director General of TRACIT, highlighted that Pakistan’s concerning low ranking on the illicit trade indicates that “effective enforcement of policy is needed on all fronts. The most important step would be the appointment of a National Illicit Trade Coordinator for effective monitoring and enforcement.”

The Illicit Trade Index 2025 ranks Pakistan 101st out of 158 countries, a position well below the global average. In contrast, regional peers such as India (52nd), Bangladesh (95th), and Sri Lanka (73rd) have performed notably better. Pakistan’s composite score of 44.5 reflects serious vulnerabilities, particularly in areas related to taxation, regulatory enforcement, and supply chain security. While the country records relatively stronger performance in Trade, Customs, and Border management (scoring 75.4), its low scores in managing sectoral illicit trade (29.3) and supply chain intermediaries (25.9) highlight persistent internal challenges that demand urgent attention.

To address these risks, the reports call for a comprehensive and structured reform program. At the forefront is the need to reform Pakistan’s taxation policy. The reports recommend rationalizing excise duties and customs tariffs in line with economic realities to curb incentives for smuggling and tax evasion. Excessive taxation without consideration of compliance behavior has led to declining formal market shares, especially in sectors such as tobacco and petroleum.

Strengthening enforcement mechanisms is another pillar of reform. While Pakistan has made strides in improving border controls, enforcement within the domestic market remains weak.

Expanding the Inland Revenue Enforcement Network (IREN), enhancing market inspections, increasing spending on FBR’s enforcement operations are crucial steps towards deterring illicit trade and recovering tax revenue losses at the retail and distribution levels.

The reports also emphasized the urgent need to modernize the Track and Trace System across excisable products. Current low compliance, especially in the tobacco sector, demonstrates the system’s underutilization. Strengthening technological robustness, ensuring regular audits, and introducing serious penalties for non-compliance are critical to restoring the credibility of this tool.

In addition, improving inter-agency coordination is critical. The absence of systematic collaboration between Customs, the FBR, excise departments, and border forces has weakened Pakistan’s enforcement landscape. TRACIT recommends establishing dedicated coordination platforms, fostering intelligence-sharing mechanisms, and conducting joint operations to disrupt illicit supply chains.

By adopting these reforms, Pakistan can significantly curb illicit trade, restore fair market competition, strengthen government revenues, and rebuild investor confidence. A serious commitment to institutional reform and enforcement modernization is not only critical for addressing the economic threat of illicit trade but also for ensuring long-term, sustainable economic growth, it added.

Copyright Business Recorder, 2025