In the financial year 2018-19, the illegal sale of cigarettes caused a loss of Rs 50.9 billion to the national exchequer however, during the financial year 2020-21, this loss of revenue has reached Rs 77.8 billion. In a recent review of the tobacco industry in Pakistan, Oxford Economics said that illicit trade in cigarettes poses major threats to the economic contribution of legitimate industries and the government’s economic agenda. The report highlighted that illegal cigarettes account for 38% of total consumption in Pakistan. This is significantly higher than the already high market share of illicit cigarettes, which was 32% in 2018-19. The vast majority of illegal cigarettes (90%) were locally produced.
According to the estimates of Oxford Economics, the total amount of tax evaded by illegal cigarettes in Pakistan in 2021 was Rs77.8 billion. This is equivalent to 58% of the total tax revenues collected from legitimate sales in the previous financial year. To place this in context, it is equivalent to more than double the Government’s development expenditure spent on education in 2020-21. As per the findings of Oxford Economics, the rise in the illicit cigarette market share in recent years has coincided with a sharp rise in the excise rates. Excise rates on most legal cigarettes have nearly doubled with the September 2018 supplementary budget followed by another June 2019 Federal Budget. Tier 2 excise rates—which represent 92% of the total industry volume were increased from Rs854 per thousand to Rs. 1,650 per thousand.
Due to the instability of revenues and growing illicit share, excise rates were not changed in 2020-21. There was therefore no change in the price differential between duty non-paid (illicit) and legitimate brands, as had occurred with recent rises. According to reports, both excise and sales taxes, illicit cigarettes are more affordable than legal, tax-paid alternatives. As such, the illicit cigarette trade is depriving the Pakistani government of much-needed revenues. The report says that due to the tax gap between legal and illegal cigarettes, consumers are shifting to cheaper illegal brands, which is increasing the loss of revenue.
According to experts, the report of a foreign research institute proves that the increase in taxes and excise rates on cigarettes is a key reason for the increase in the illicit trade of cigarettes.
Increasing the tax rate on cigarettes without bringing the illegally sold cigarettes under the purview of the law will increase the cost of the legal industry but it will also reduce the revenue of the government.