Business Recorder
ISLAMABAD: Simon Trussler, British American Tobacco (BAT) Group Head of International Trade and Fiscal Affair has stated that Pakistan has the biggest market of illicit cigarettes in the world, but the Federal Board of Revenue’s (FBR) recent enforcement actions and continued excise stability has started showing positive results. During an interactive session on Friday, Trussler stated 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. He said the continued excise stability has started showing positive results in the form of increase in volumes. Therefore, it is necessary to avoid large, sudden excise shocks; prioritise stability and predictability. The post-2022-23 experience confirmed that steep increases can shift consumption into untaxed channels without delivering proportional real revenue gains. He said that the share of illicit cigarettes in Pakistan has reached 55 percent reflecting Pakistan is a leading country where domestic taxes are evaded to such an extent. The FBR fully understands the problem and trying to resolve the issue, but the problem is still very big. Trussler stated that Pakistan’s tobacco tax shock has fuelled a domestic illicit surge and the revenue loss is now measurable Independent analysis finds that illicit cigarettes now make up the majority of consumption in Pakistan. In 2023-24, 58 percent of cigarettes consumed were illicit, and 85 percent of illicit cigarettes consumed were produced domestically. It points to a policy failure that is fixable, but only if tax policy and enforcement are treated as a single system, not separate debates. However, a new report by Oxford Economics shows that Pakistan’s cigarette fiscal policy has not achieved its intended policy objectives – either from a tax revenue perspective, or in terms of reducing overall cigarette consumption. Higher tax rates have not delivered the additional – and much needed – tax revenues the country has been looking for, he said. He said that higher cigarette taxes have not been successful in reducing the total number of cigarettes consumed in Pakistan. Overall cigarette consumption has remained broadly flat at ~80 billion sticks (since 2012), while the market has tilted sharply toward illicit brands after large tax hikes. The massive increase in illicit cigarettes has been driven by a combination of demand- and supply-side factors. He regretted that the rapid increase in the consumption of illicit cigarettes has been, in large part, the consequence of a sudden deterioration in the affordability of legal, tax-paid, brands. International experience shows that sudden very large tax hikes (as has been seen in countries like Brazil and Malaysia), as well as sustained tax increases well in excess of inflation (as in Australia and the UK, for example) have resulted in rapid growth in illicit trade, he explained. After the massive increase in cigarette taxes between Q1 2022 and Q2 2023, of more than 100 percent above general inflation levels, many cash strapped consumers found that they simply could not afford to continue buying legal cigarettes. But that does not mean they stopped buying cigarettes entirely. He observed that the tax hikes resulted in a widening price gap between legal and illicit cigarettes: in 2023/24, illicit cigarettes were estimated to be 47% of the average price of duty-paid cigarettes, creating a strong consumer pull toward untaxed products. “Although the WHO and other NGOs continue to claim that higher taxes and prices play no role in encouraging illicit cigarette consumption, the facts tell a very different story”, Trussler said. Globally, there is an 80-90 percent correlation between cigarette affordability (itself predominantly driven by changing tax levels) and illicit trade. More than 80 percent of cigarette price increases in Pakistan have been attributable to tax hikes. The emergence of a huge illicit trade problem in Pakistan is also down to some key supply side factors. WHO data show that in 2024, the pre-tax price of cigarettes (that is, what is left after taxes have been paid for manufacturers, wholesalers and retailers to cover their costs and make a reasonable margin) was the 173rd lowest in the world (out of 184 countries recorded by the WHO) and less than 20 percent of the global average. In other words, current market conditions mean margins are wafer thin, making it extremely difficult for legitimate manufacturers to operate a viable business in Pakistan. This creates a substantial incentive for domestic manufacturers to operate illicitly, evading local taxes and earning a higher margin. About the Track & trace, he said that it is a useful tool, but not a standalone solution. The system is most credible when it is accompanied by compliance checks and enforcement at points of sale, without repeated cost increases that disadvantage compliant manufacturers. He stated that it is important to acknowledge that enforcement intensity has increased and the scale of seizures demonstrates the state’s intent to protect the tax base. 2025 seizures including 480 metric tons of acetate tow, 2.5 billion sticks of smuggled cigarettes, 1.7 billion sticks of duty-not-paid cigarettes, and 10 illicit factories sealed. Sustain enforcement momentum across the full supply chain. Enforcement actions matter, but scale requires continuity: upstream inputs, manufacturing visibility, distribution, and retail-level compliance all need coverage, he added. Copyright Business Recorder, 2026
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