Illicit Tobacco Trade Costs Pakistan $1 Billion Annually, Report Finds

Pakistan is losing an estimated $1 billion in government revenue every year due to the illicit tobacco trade, with illegal cigarettes accounting for 54 percent of the country's total cigarette market, according to a report on the fiscal impact of illicit tobacco across the Asia-Pacific region.

The report, titled 'Illicit Tobacco Trade in Asia-Pacific: Taxation, Market Incentives, and Macroeconomic Costs,' estimates that illegal tobacco trade deprives the economies covered by the study of $14.85 billion in annual tax revenue. Pakistan is among the most affected markets, with foregone revenue equivalent to approximately 117.4 percent of the tobacco taxes collected.

Despite the significant losses, there are signs of improvement. Pakistan's legitimate cigarette market expanded from approximately 36.5 billion sticks to 41.5 billion sticks in FY2025-26, representing a shift of around 5 billion sticks toward tax-paying manufacturers. During the same period, tobacco tax revenue increased from approximately Rs. 284 billion to Rs. 329 billion, generating an additional Rs. 45 billion. The estimated share of illicit cigarettes in the market also declined from 54 percent to 48 percent.

The report's accompanying industry estimates indicate that established legitimate manufacturers contributed approximately 95 percent of the additional tax revenue, while other manufacturers accounted for the remaining 5 percent. Industry estimates suggest that every 1 billion cigarette sticks shifting into the legitimate market could generate approximately Rs. 7 billion in additional government revenue.

The improvement in legal cigarette sales and tax collection coincided with stronger enforcement and legislative measures during FY2025-26. These included electronic monitoring of green leaf threshing facilities, increased surveillance of tobacco movement from these facilities, deployment of law enforcement agencies, and expanded powers for provincial authorities to act against illicit cigarette sales.

Enforcement operations have resulted in the confiscation of large quantities of tobacco, cigarette paper, acetate tow, smuggled cigarettes, and duty-unpaid products. Authorities have also sealed 14 factories. Industry data recorded 675 tobacco-related raids in 2026, reflecting an intensification of enforcement efforts. However, the industry said none of these operations had resulted in convictions, highlighting a gap between enforcement actions and successful prosecutions.

Mohammad Ranjha, Senior Fiscal Engagement Manager at Pakistan Tobacco Company (PTC), said recent progress demonstrated the potential impact of coordinated action against illicit tobacco trade.