Pakistan Cracks Down on Illegal Cigarette Trade

The Government of Pakistan has initiated a nationwide enforcement drive targeting the illicit cigarette trade, in response to substantial revenue leakages estimated between Rs200 billion and Rs343 billion annually, based on official data and independent analysis.

Bilal Azhar Kayani, Minister of State for Finance, stated that estimates from the Federal Board of Revenue (FBR) place annual losses from illegal cigarette sales at approximately Rs200 billion, while an assessment conducted by Oxford Economics suggests a higher range between Rs274 billion and Rs343 billion.

Addressing the launch event of the Oxford Economics report, the minister indicated that provincial administrations would enhance enforcement actions to eliminate the distribution and sale of non-duty-paid cigarette brands. He further noted that several illicit manufacturing facilities have already been dismantled, with ongoing enforcement operations targeting retail outlets.

The minister emphasized that curbing illicit trade has become imperative due to its adverse impact on the national exchequer, the formal economy, and compliant taxpayers.

According to the report, illicit cigarettes constitute more than 50% of the domestic tobacco market, with approximately 43.5 billion illicit sticks consumed annually out of a total estimated consumption of 80 billion units.

The analysis identified increased excise taxation as a contributing factor, noting that real tax rates rose by 107% between early 2022 and mid-2023. This has widened the price differential, rendering illicit cigarette products approximately 36% more affordable than their tax-compliant counterparts.

The report further highlighted that approximately 64% of illicit cigarettes are manufactured domestically, primarily within Azad Jammu and Kashmir and Khyber Pakhtunkhwa, while the remaining 36% are smuggled via routes connected to Afghanistan, often involving brands linked to the United Arab Emirates and South Korea.

Authorities have indicated that enforcement measures will be intensified across the supply chain, including stricter monitoring of production facilities, expanded implementation of track-and-trace systems, and enhanced customs oversight.

The government has also integrated enforcement-driven revenue targets for the FBR within FY2025–26, with officials noting that international financial institutions have acknowledged the authority’s capacity to augment revenues through strengthened enforcement mechanisms.

Despite existing regulatory interventions, the report observed limited effectiveness, with only 22 out of 477 cigarette brands achieving full compliance with the track-and-trace system, and a continued increase in the proportion of illicit trade following its introduction.

The report concludes that meaningful reduction in illicit trade will require sustained, coordinated policy action, including rationalised taxation frameworks and robust enforcement across borders, supply chains, and retail distribution networks.