Pakistan is grappling with a severe economic crisis, losing an estimated $100 billion each year due to illegal economic activities, such as tax evasion, smuggling, and counterfeiting. This staggering figure has been revealed in a new study titled “Towards an Optimal Tax Regime for Pakistan’s Tobacco Sector,” authored by renowned economist Sakib Sherani and released by ACT Alliance Pakistan. The findings highlight the damaging effects of illicit trade on the country’s economy and underscore the need for immediate policy reform.
The report points out that Pakistan’s tax system is currently unsustainable and has inadvertently fostered the growth of illegal trade, particularly within the tobacco sector. The inefficiencies within the taxation system have contributed to a rise in illicit markets, which not only result in significant losses in tax revenue but also erode the state’s authority. According to the study, the country is losing over Rs. 300 billion annually due to these systemic inefficiencies, exacerbating the challenges facing Pakistan’s economic growth and stability.
ACT Alliance Pakistan, a civil society network that has been combating illegal economic activities since 2016, further estimates that the losses from illicit trade extend well beyond the tobacco industry. The illegal economy is now a major hindrance to the country’s overall economic health, undermining critical sectors and stalling economic progress. The report also draws attention to the urgent need for policy interventions to curb the growth of illegal cigarette trade, which has now come to dominate the market.
One of the primary concerns raised in the report is the government’s taxation strategy, which has exceeded the “optimal tax point” for the tobacco sector. Excessive tax hikes on legal products have only pushed consumers toward illegal alternatives, rather than generating the anticipated revenue. The report explains that the price elasticity of demand for cigarettes in Pakistan is -1.4, meaning that when taxes on legal products increase, consumers are more likely to turn to illicit options, thereby diminishing the government’s revenue.
Sakib Sherani, the author of the report, commented on the state of the taxation system, stating, “The current tax policy on cigarettes is failing on multiple fronts. It has led to a surge in illegal trade, market distortions, and declining revenues. The formal sector, which contributes over 98% of tax revenue from the industry, is shrinking, while illegal operators continue to thrive unchecked.”
For the first time in Pakistan’s history, illegal cigarette sales have surpassed legitimate sales for two consecutive years, now accounting for 56% of the total market share. Despite repeated tax increases on legally compliant brands, these measures have failed to achieve the desired revenue targets and have instead driven consumers toward cheaper, tax-evading alternatives. This troubling trend is not just a matter of lost tax revenue; it has become an economic emergency. Mubashir Akram, National Convenor of ACT Alliance Pakistan, emphasized, “Illegal trade fuels corruption, discourages investment, and weakens Pakistan’s ability to provide essential public services. The government must now take decisive action to enforce tax laws across the country.”
The report meticulously analyzes Pakistan’s tobacco taxation system, pinpointing key inefficiencies that have allowed the illicit cigarette trade to flourish. It calls for a more balanced tax regime that maximizes government revenue while minimizing the adverse effects of excessive taxation. Akram further stressed the importance of genuine reforms to rationalize excise duties, tighten enforcement against tax evasion, and prevent excessive tax hikes that hurt legal businesses.
“Maintaining the status quo places an undue burden on legal businesses while allowing illegal operators to flourish. However, with rationalized tax policies, stricter enforcement, and a commitment to preventing tax evasion, Pakistan can foster a more stable and sustainable economic environment,” concluded Sherani.
ACT Alliance Pakistan is urging the government, regulatory bodies, civil society, and the media to collaborate in addressing the growing problem of illegal economic activities. The organization warns that the cost of inaction is too high and that Pakistan’s financial stability, investor confidence, and economic sovereignty depend on eliminating the illegal economy. According to Mubashir Akram, “A transparent and fair system for all is essential to ensuring Pakistan’s economic future.”
The report has sent a clear message: without serious intervention, Pakistan risks continuing to lose valuable economic resources, and the government must take immediate steps to combat the illegal economy to ensure a healthier financial future for the country.