Illicit tobacco trade: Pakistan suffers USD1bn revenue loss

ISLAMABAD: Pakistan has suffered huge revenue loss of around USD 1 billion as a result of illicit tobacco trade, depriving governments of billions of dollars in potential revenue and weakening legitimate, tax-paying markets.

According to the report “Illicit Tobacco Trade in Asia-Pacific: Taxation, Market Incentives, and Macroeconomic Costs,” launched on Wednesday, the illicit tobacco trade is estimated to result in USD 14.85 billion in annual revenue losses across the economies covered by the study. Pakistan alone accounts for approximately USD 1 billion in estimated annual fiscal leakage, placing the country among the most significantly impacted markets examined. In Pakistan, the study estimates an illicit market share of 54 percent, with foregone revenue equivalent to approximately 117.4 percent of tobacco tax collected.

Recent fiscal outcomes, however, provide grounds for cautious optimism. In FY2025–26, the legitimate cigarette market increased from approximately 36.5 billion to 41.5 billion sticks, representing an estimated 5 billion-stick shift towards the legal market. As per reports, over the same period, tax revenues increased from approximately Rs 284 billion to Rs 329 billion.

Importantly, 95 percent of the additional tax contribution from legitimate manufacturers came from the two established legitimate manufacturers, with the remaining approximately 5 percent coming from other manufacturers in the market. This has resulted in an increase of Rs 45 billion, while the illicit share is estimated to have declined from 54 percent to 48 percent.

The improvement in legal volumes, tax revenue, and illicit market share coincided with stronger enforcement and legislative interventions. Based on industry estimates, every billion sticks moving into the legitimate sector represents approximately Rs 7 billion in potential government revenue.

The legitimate industry acknowledges the Government of Pakistan’s sustained focus during 2025–26 on combating illicit tobacco through legislative, regulatory, and enforcement interventions. These include electronic monitoring of green leaf threshing, increased monitoring of tobacco movement from GLT facilities, deployment of law-enforcement agencies, and enhanced powers for provincial authorities to act against illicit cigarettes.

Enforcement actions have resulted in sizeable confiscations of tobacco, cigarette paper, acetate tow, smuggled and duty-not-paid cigarettes, alongside the sealing of 14 factories. The intensity of law enforcement is encouraging, with industry data recording 675 tobacco-related raids in 2026. However, a critical gap remains, as none of these actions have resulted in convictions. While these actions demonstrate strong intent to tackle the illicit tobacco trade, a critical gap remains in translating enforcement into lasting legal consequences.

“The progress achieved demonstrates what coordinated action against illicit tobacco can deliver. The next critical step is to ensure that successful raids translate into effective prosecutions and timely legal outcomes,” said Mohammad Ranjha, Senior Fiscal Engagement Manager, PTC.

The PTC commends the government’s focus on enforcement and calls for this momentum to be matched by effective prosecution and timely adjudication. Strengthening coordination between enforcement agencies, prosecution authorities, and the judicial system, alongside deterrent penalties for offenders, will help protect government revenue as well as safeguard legitimate businesses.

With approximately USD 1 billion in estimated annual revenue at stake in Pakistan, effective and consistent enforcement, coupled with balanced and predictable fiscal policies, is critical to combating illicit trade, protecting government revenues, and creating a fair and competitive environment for compliant businesses.

Copyright Business Recorder, 2026