The Pakistani government’s decision to drastically increase the Federal Excise Duty (FED) on taxpaying cigarette brands has resulted in unintended consequences. Smuggled cigarettes are flooding the market, posing a significant challenge to legitimate businesses and causing revenue losses for the country. The higher taxes have made taxpaying brands unaffordable for many smokers, leading them to switch to cheaper smuggled foreign brands.
Reports indicate that cigarette smuggling in Pakistan has increased by 200% in recent months, with a significant influx of new brands into the market. The price difference between taxpaying brands and smuggled cigarettes has made smuggling more lucrative than ever, attracting an influx of foreign brands into the country. This surge in smuggling has led to a decline in sales for Pakistani cigarette companies, resulting in substantial losses for the government in terms of tax revenue.
Pakistan’s tobacco market is primarily dominated by two major players, the Pakistan Tobacco Company and Philip Morris Pakistan, which contribute the majority of the government’s revenue from the sector. Other domestic players make up only a small fraction of tax contributions.
The increasing prevalence of three types of illicit cigarettes—Duty Not Paid (DNP), counterfeit, and smuggled—has contributed to the losses suffered by the national exchequer. Smuggled cigarettes, in particular, have become a growing problem due to their lower prices compared to taxpaid brands. These smuggled cigarettes evade duty and taxes, lack health warnings, and do not display tax stamps, resulting in zero contributions to the national treasury.
Prime Minister Shehbaz Sharif has recently announced plans to take strong action against the rising smuggling trend, emphasizing the need for vigilance and enforcement at borders and entry points to curb the inflow of smuggled cigarettes. The government has imposed significant duties and taxes on the tobacco sector in an attempt to increase revenue, but the surge in smuggling has undermined their efforts.
The Federal Board of Revenue (FBR) aims to collect over Rs200 billion in taxes following the FED increase. However, the projected tax collection for the current fiscal year is lower than anticipated due to the challenges posed by smuggling.
To address the issue, the government must strengthen law enforcement agencies in border areas, increase the workforce of anti-smuggling squads, and enhance coordination with other law enforcement agencies. The FBR argues that smuggled cigarettes are not transported in bulk but rather carried in smaller quantities, making enforcement more challenging. Customs authorities have conducted raids and interceptions, resulting in smuggled cigarettes and related goods being seized. However, the availability of smuggled cigarettes across the country indicates that more substantial efforts are needed to effectively deter smuggling activities.
The Pakistani government’s decision to raise taxes on taxpaying cigarette brands has led to a surge in cigarette smuggling, causing significant revenue losses and challenges for legitimate businesses. Efforts to curb smuggling must be intensified through increased enforcement and punitive actions to deter smugglers and traders of smuggled cigarettes.
