Why Pakistan’s Anti-Smoking Policies Are Facing a Tough Test

Pakistan’s tobacco industry is grappling with a serious challenge as the illegal cigarette trade continues to grow, impacting both government revenue collection and public health initiatives.

Recent observations from British American Tobacco (BAT) indicate that Pakistan now leads the world in illicit cigarette consumption, with illegal products making up more than half of the total market. This trend has raised concerns about the effectiveness of current tax policies and enforcement mechanisms.

Illicit Cigarette Market Reaches 55%

Rising Concerns Highlighted by BAT

Pakistan has the biggest market of illicit cigarettes in the world, according to Simon Trussler, British American Tobacco (BAT) Group's Head of International Trade and Fiscal Affair. He said that the share of illicit cigarettes in Pakistan has reached 55 per cent, reflecting Pakistan is a leading country where domestic taxes are evaded to such an extent, reports Business Recorder.

This data suggests a notable change in purchasing patterns, with many consumers shifting towards cheaper, untaxed cigarette options.

Government Efforts and Ongoing Challenges

Role of Revenue Authorities

The Federal Board of Revenue (FBR) is aware of the scale of the issue and has been working to address it, but the problem remains significant, Trussler noted.

Despite enforcement efforts, the persistence of illegal trade points to deeper structural issues such as inadequate monitoring systems, supply chain loopholes, and the presence of unregulated producers.

Tax Policy Under Scrutiny

Insights from Economic Studies

A recent study by Oxford Economics found that Pakistan’s cigarette taxation strategy has not delivered the expected results, either in boosting tax revenues or reducing overall consumption levels.

Stable Consumption Levels

Trussler said higher cigarette taxes have not been successful in reducing the total number of cigarettes consumed in Pakistan.

He pointed out that cigarette consumption has remained largely unchanged at around 80 billion sticks since 2012. However, there has been a clear shift in the market toward illicit brands following significant tax increases.

This indicates that while legal sales may decline, overall demand continues to be met through the illegal segment.

Key Drivers of Illicit Trade Growth

Demand and Supply Factors

The rapid rise in illegal cigarette consumption has been influenced by both demand-side and supply-side pressures.

On the demand side:

• Consumers are increasingly choosing lower-cost alternatives
• Rising prices of legal cigarettes are reducing affordability

On the supply side:

• Unregulated manufacturers are exploiting gaps in taxation
• Weak enforcement is enabling distribution of illegal products

Impact of Price Disparity

The surge in illicit cigarette usage has largely been driven by declining affordability of legally taxed products.

Trussler noted that repeated tax increases have widened the price difference between legal and illegal cigarettes. More than 80 percent of cigarette price increases in Pakistan have been attributable to tax hikes.

Industry Concerns Ahead of Budget 2026-27

Appeal Against Further Tax Increases

Trussler further said that the company has strongly proposed the government to avoid increase in Federal Excise Duty (FED) on cigarettes in budget (2026-27) as consumers are unable to aboard excise shocks.

Industry stakeholders argue that further tax hikes may unintentionally strengthen the illegal market instead of reducing tobacco consumption.

Global Perspective and WHO Data

Pakistan’s Pricing Position

According to the World Health Organization (WHO), in 2024, Pakistan ranked among the countries with the lowest pre-tax cigarette prices globally, placing 173rd and remaining below 20 percent of the global average.

Encouraging Illicit Production

This pricing environment creates strong incentives for local manufacturers to operate outside the legal framework, avoiding taxes while maximizing profits.

The combination of low base prices and high taxes on legal products has distorted the market, encouraging illegal production and distribution.

Economic and Public Health Impact

Revenue and Regulatory Concerns

The expansion of illicit cigarette trade has several economic consequences:

• Significant loss of government tax revenue
• Decline in the formal tobacco industry
• Increased challenges in enforcing regulations

Health Risks

Illicit cigarettes often bypass regulatory checks, potentially making them more harmful. Additionally, their lower cost increases accessibility, which may weaken anti-smoking initiatives and public health campaigns.

Conclusion

Pakistan’s position as the largest illicit cigarette market globally highlights the complex relationship between taxation, affordability, and enforcement. While higher taxes are typically introduced to curb smoking, the current situation suggests that without effective monitoring and balanced policies, such measures can produce unintended outcomes. Addressing the issue will require a coordinated strategy that combines stricter enforcement, improved regulation, and pricing policies that minimize the incentive for illegal trade while still supporting public health goals.