Illicit Tobacco Trade Costs Pakistan $1bn a Year

Illicit tobacco trade costs Pakistan about $1 billion a year in lost tax revenue, according to a new study of the trade across Asia-Pacific.

The report, titled “Illicit Tobacco Trade in Asia-Pacific: Taxation, Market Incentives, and Macroeconomic Costs”, estimates that the illicit trade causes $14.85 billion in annual revenue losses across the economies it covers. Pakistan alone accounts for about $1 billion of that leakage, placing the country among the most affected markets in the study.

In Pakistan, the study puts the illicit market share at 54 per cent. The revenue forgone is equal to 117.4 per cent of the tobacco tax actually collected, which means the state loses more to the black market than it gains from legal tobacco tax.

Illicit tobacco trade still holds more than half the market

A 54 per cent illicit share means that more than half the cigarettes sold in Pakistan escape tax. These are smuggled cigarettes, counterfeit packs, and locally made cigarettes sold without duty. They sell at far lower prices than legal brands, which keeps buyers away from the taxed market.

The loss is not only fiscal. Legal manufacturers pay tax, follow health warnings and face regulation. Illicit sellers pay nothing and follow no rules. The price gap then rewards the illegal trade and punishes the legal one.

The study’s finding that forgone revenue equals 117.4 per cent of tobacco tax collected shows the scale of the gap. For every Rs100 the state collects in tobacco tax, about Rs117 more slips away through the illicit market.

Legal market recovers some ground

Recent figures give some reason for hope. In 2025-26, the legitimate cigarette market grew from 36.5 billion sticks to 41.5 billion sticks, a shift of about five billion sticks towards the legal market. Over the same period, tax revenues rose from Rs284 billion to Rs329 billion.

The improvement in legal volumes, tax revenue and the fall in illicit market share came with stronger enforcement and legislative action. Industry estimates suggest that every billion sticks moving into the legitimate sector brings about Rs7 billion in potential government revenue. On that basis, the five-billion-stick shift is worth about Rs35 billion.

The direction of travel is positive, but the base is still weak. Even after the recovery, the illicit trade holds more than half the market, and the annual leakage stays near $1 billion.

Why the trade is hard to stop

Tobacco is one of the most smuggled goods in the world, because it is light, valuable and easy to hide. High taxes widen the price gap between legal and illegal cigarettes, which gives smugglers their margin. Weak border checks and local production of untaxed cigarettes add to the problem.

Pakistan has moved against the trade before. The government deregulated tobacco through the Economic Coordination Committee, and a Federal Board of Revenue team seized cigarette cartons in Bahawalpur. Enforcement drives can shift volumes, as the latest figures show, but they need to be sustained to hold the gains.

The tax authority is also widening its net in other areas. The FBR has begun computerised checks of income tax returns, and it has been ordered to explain huge tax waivers in the former tribal areas. Tobacco is one part of a broader effort to raise revenue without raising rates.

What happens next

The study’s numbers set a clear target. Cutting the illicit share by even a few points would bring in billions of rupees. The tools are known: tighter border checks, tracking of production, action against sellers of untaxed cigarettes, and steady enforcement rather than short drives.

For smokers, the price gap will stay the main draw of the black market. For the state, the choice is between accepting a $1 billion annual loss or paying the cost of enforcement that keeps the legal market growing.

Frequently asked questions

How much does illicit tobacco trade cost Pakistan?

The study estimates Pakistan loses about $1 billion a year in tax revenue to illicit tobacco trade, out of $14.85 billion lost across the Asia-Pacific economies covered.

What share of Pakistan’s cigarette market is illicit?

The study puts the illicit market share at 54 per cent. Forgone revenue equals 117.4 per cent of the tobacco tax actually collected.

Has the legal cigarette market improved?

Yes. In 2025-26, the legitimate market grew from 36.5 billion sticks to 41.5 billion sticks, and tax revenue rose from Rs284 billion to Rs329 billion.

How much is each billion sticks worth in tax?

Industry estimates suggest every billion sticks moving into the legitimate sector brings about Rs7 billion in potential government revenue.

Why is illicit tobacco trade hard to stop?

Cigarettes are light, valuable and easy to hide. High taxes widen the price gap between legal and illegal products, and weak border checks plus local untaxed production keep the trade going.