Pakistan Loses Billions Due to Illicit Trade, Tax Evasion

A new report by Pakistan’s National University of Science and Technology (NUST) paints a concerning picture of the country’s tobacco sector. The research, titled “Illicit Cigarette Trade in Pakistan – Current Situation and Way Forward,” highlights significant tax revenue losses due to widespread tax evasion and a booming illicit cigarette market.

Key Findings:

  • Massive Tax Gap: Pakistan has the potential to generate a staggering Rs27,000 billion (approximately $160 billion) in annual tax revenue. However, the current system collects a mere fraction of this amount. The report estimates that the illicit cigarette trade alone costs the national exchequer Rs310 billion (approximately $1.8 billion) annually.
  • Dominant Legal Players, Minimal Contribution: The report reveals a disturbing disparity in tax contributions from different players in the cigarette industry. Two major manufacturers reportedly contribute Rs170 billion ($1 billion) in taxes, while all other manufacturers combined contribute a meager Rs2 billion ($12 million).
  • Allegations of Political Influence: Defence Minister Khawaja Asif, launching the report, made strong allegations. He claimed that counterfeit cigarette manufacturers hold seats in assemblies and leverage their positions to protect their illicit businesses. He further alleged that a former FBR chairman faced pressure from the National Assembly Speaker to avoid implementing stricter taxes on the cigarette industry.
  • Ineffective Track and Trace System: The report criticizes the government’s Track and Trace System (TTS), designed to curb illicit trade. It argues that despite implementation, the illicit market share has grown, potentially exceeding 63% of the total market in 2024.

Recommendations for Improvement:

The NUST report proposes a multi-pronged approach to tackle these challenges:

  • Excise Duty Reform: The report suggests revising the excise duty structure on cigarettes to make it more efficient and discourage tax evasion.
  • Price Threshold Adjustment: The report recommends adjusting the price threshold for cigarette taxation to address market realities.
  • Stricter Enforcement: The report emphasizes the need for stricter enforcement of existing laws against the sale of non-compliant cigarette brands.
  • Improved Track and Trace Implementation: The report calls for a more comprehensive and consistent implementation of the Track and Trace System to effectively track cigarette production and movement.
  • Enhanced Law Enforcement: The report suggests increased law enforcement, particularly in regions like Azad Jammu and Kashmir (AJK), to curb the infiltration of local, tax-evaded brands into the Pakistani market.

Looking Ahead:

The NUST report offers a critical analysis of Pakistan’s cigarette industry and its impact on tax revenue. By addressing the issues of tax evasion, illicit trade, and ineffective enforcement, the government can potentially generate significant additional revenue and create a fairer playing field for legitimate businesses in the sector.

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