Islamabad – Pakistan is facing an alarming economic challenge, losing approximately $100 billion annually due to illegal economic activities such as tax evasion, smuggling, and counterfeiting, according to a newly launched study.
The report, titled “Towards an Optimal Tax Regime for Pakistan’s Tobacco Sector,” was authored by renowned economist Sakib Sherani and released by ACT Alliance Pakistan.
Pakistan’s economy is severely impacted by an unsustainable tax regime that has inadvertently fueled the rise of illegal trade, particularly in the cigarette sector. This crisis not only results in massive tax revenue losses but also undermines the state’s authority. The study reveals that the country loses over Rs300 billion annually due to inefficiencies in the taxation system, which have encouraged the growth of illicit markets.
ACT Alliance Pakistan, a civil society network dedicated to combating illegal economic activities since 2016, estimates that Pakistan’s losses from illicit trade extend far beyond the tobacco industry, affecting various sectors and hampering economic growth. The report highlights the urgent need for policy interventions to counter the rapid expansion of illegal cigarette trade, which now dominates the market. It further explains that Pakistan’s government has exceeded the “optimal tax point,” where excessive tax hikes now decrease revenue instead of increasing it. The price elasticity of demand for cigarettes in Pakistan is -1.4, meaning that tax hikes on legal products only push consumers toward illicit alternatives.
“The current tax policy on cigarettes is failing on multiple fronts,” said Sakib Sherani. “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, accounting for 56% of the total market. Despite repeated tax increases on legally compliant brands, these measures have failed to meet revenue targets, instead driving consumers toward cheaper, tax-evading alternatives. “The unchecked growth of illegal cigarettes is not just about lost tax revenue; it is an economic emergency,” said Mubashir Akram, National Convenor of ACT Alliance Pakistan. “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 analyzes Pakistan’s tobacco taxation system, identifying inefficiencies that have contributed to the rise of illicit cigarette sales, revenue losses, and public health concerns. It calls for a balanced tax regime that maximizes government revenue while mitigating the negative impacts of excessive taxation.
Mubashir Akram stressed that maintaining the status quo places an undue burden on legal businesses while allowing illegal operators to flourish. However, with genuine reforms, rationalized excise duties, and strict enforcement against tax evasion, Pakistan can create a more stable economic environment. The report outlines key policy recommendations, including strengthening enforcement against tax-evading cigarette brands, ensuring full compliance with Track and Trace regulations, and preventing excessive tax hikes on legal businesses.
“Pakistan’s current tobacco taxation strategy is ineffective, leading to a shrinking formal sector, an increase in illicit trade, and substantial revenue losses. A more balanced and well-enforced tax regime is essential to ensuring sustainable revenue generation while addressing market distortions and public health risks,” concluded Sakib Sherani.
ACT Alliance Pakistan urged the government, regulatory authorities, civil society, and media to work together in combating illegal economic activities. “The cost of inaction is too high. Pakistan’s financial stability, investor confidence, and economic sovereignty depend on eliminating the illegal economy and ensuring a transparent and fair system for all,” Mubashir Akram emphasized.