Illicit cigarette market overtakes formal sector, surges to 58%

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ISLAMABAD: The share of duty pad cigarettes in Pakistan has decreased sharply in the last 13 years. In 2013, 67 billion sticks have been reduced to 34 billion in 2025-while there is a dramatic increase in non-digestive and smuggled cigarettes.

Compared to taxpayers only, Pakistan has an average of 15 illegal cigarettes selling in Pakistan. Due to this contradiction, the national exchequer only suffered a surprising loss of Rs 325 billion ($ 1.1 billion) in the outgoing financial year. The lack of increasing revenue is intact, even as the government is struggling to meet the IMF situation to maintain the basic surplus under the strict supervision of the fund.

Referring to the official data of the Pakistan Bureau of Statistics (PBS), executives from the Pakistan Tobacco Company (PTC) told a press briefing on Wednesday that multinational corporations are expected to promote economic activity, generate profit and provide jobs. However, if profit is reduced, such companies can get out of the market – as seen in Malaysia, where British US tobacco (BAT) stops operations after an 80 % increase in the illegal cigarette market. PTC warned that Pakistan could go this direction.

The company also strongly opposed the proposed ban of the Punjab cabinet on electronic cigarettes, and argued that their imports were legally allowed under the designated HS code. “How can they be banned suddenly?” A PTC official asked.

Director Legal and Corporate and Regulatory Affairs in PTC Asad Shah said that illegal cigarette trade has now surpassed the legitimate sector, which includes 58 % of the total market. He warned that this trend threatened the process of formal industry and that the government was deprived of taxes.

Pakistan’s total annual cigarette consumption is estimated at 80 billion sticks. Although tax revenue in this sector has the capacity to generate Rs 570 billion, only Rs 292 billion was deposited during the financial year 2023-24. For the current financial year, only Rs 247 billion is likely to be collected, which has recorded Rs 230 billion in the first 11 months. PTC has warned that if reform tax reforms and implementation measures are not implemented, the collection may be more Rs 235 billion in fiscal year 2025-26.

In FY 2013, the government collected taxes on 67 billion cigarette sticks. This year, it is expected that the figure will highlight the increasing dominance of illicit products after a 254 % increase in the federal excise duty (feed) half a year ago.

Despite having only 42 % of the market, the formal sector pays 98 % of the total tax revenue from cigarettes. Shah emphasized that full industry documents are important for dealing with tax evasion.

Currently, the minimum retail price of the government is Rs 162.25 per pack, but without paying any tax – about 18 billion cigarettes are being sold for 150 or less. Shah made it clear that the matter is not in low tax, but in the least illegal sale than the minimum legal cost. To a dangerous extent, such violations have not yet been fined. “Without a strict and neutral implementation, no policy can be effective.”

He also noted that the track and trace system (TTS) lost its desired effect, which causes a burden on compliance manufacturers while failing to reduce the spread of illegal and smuggled brands. An estimated 10 billion sticks are sold in smuggling and annually in Pakistan.

To deal with this, he suggested reducing adjustable excise duty on Acetate Two – a major raw material in cigarette production – from Rs 44,000 per kg to Rs 4,000. The current rate has encouraged smuggling, he said. He added that more than 450 metric tons of illegal acetate two have already been seized during the current financial year.