Jun 01, 2026
ISLAMABAD: The World Health Organisation’s (WHO) recently released policy brief reviewing that Federal Excise Duty (FED) revenue collection from cigarettes in FY2025-26 has triggered fresh debate on Pakistan’s tobacco taxation regime, with policy experts arguing that the report does not adequately reflect the country’s growing illegal cigarette market and its implications for tax revenues. Responding to the issued brief, Mubashar Akram, Country Director of ACT Alliance Pakistan, said Pakistan’s tobacco taxation debate must be based on actual market dynamics rather than assumptions that treat the entire cigarette market as tax-compliant. “The key challenge facing Pakistan is not simply the level of taxation. The real issue is the shrinking tax-paid market caused by the rapid expansion of illegal cigarette trade, which continues to erode the government’s revenue base,” Akram said. According to Akram, WHO’s argument that the absence of inflation-adjusted FED increases has reduced the real value of cigarette taxes fails to account for the structural composition of Pakistan’s cigarette market. Citing findings from the Pakistan Cigarette Market Assessment conducted by Ipsos, he said illegal cigarettes now account for approximately 54 percent of total cigarette consumption in Pakistan. Complementary estimates based on Oxford Economics analysis indicate that over 40 billion illegal cigarette sticks are consumed annually in a market estimated at around 80 billion sticks. “These figures suggest that more than half of cigarette consumption is occurring outside the tax net. Under such circumstances, any increase in statutory tax rates applies only to the compliant segment of the market, limiting its overall impact on revenue collection,” he stated. Akram argued that available evidence points to a strong correlation between higher legal cigarette prices and the growth of illegal trade. “When the price gap between tax-paid and untaxed cigarettes widens, consumers increasingly shift toward cheaper illegal products. As a result, higher taxes may not necessarily translate into higher revenues and can instead accelerate the migration of consumers to the illegal market,” he said. Referring to production data from the Pakistan Bureau of Statistics (PBS), Akram highlighted historical trends that demonstrate the relationship between excise increases and declines in legal cigarette production. According to PBS data, tax-paid cigarette volumes fell from approximately 67 billion sticks to 37 billion sticks following successive excise increases between FY2013 and FY2017. After subsequent tax reforms and a period of relative fiscal stability, legal volumes recovered to nearly 60 billion sticks. However, following substantial tax increases implemented during FY2022 to FY2024, legal production once again declined sharply to approximately 33 billion sticks, before showing signs of recovery in recent months. “This recurring pattern suggests that sharp tax increases often shift production and consumption from formal channels to illegal ones rather than sustainably expanding the tax base,” Akram noted. WHO’s policy brief also argues that maintaining current tax rates has contributed to increased cigarette consumption and limited revenue growth. However, Akram said available evidence paints a different picture. “Following significant FED increases during 2022 and 2023, legal cigarette sales volumes declined sharply while overall consumption remained broadly stable. This indicates substitution from taxed products to untaxed products rather than a meaningful reduction in demand,” he explained. He added that revenue gains from higher tax rates have been relatively modest compared with the magnitude of the increases because the taxable base itself contracted. “This effect was particularly evident in the premium segment, where rising prices coincided with falling volumes and a shrinking tax base,” he said. Akram noted that the phenomenon is consistent with established economic theory. “As tax rates increase beyond a certain threshold, marginal revenue gains begin to decline because consumers switch to lower-taxed or untaxed alternatives. This is consistent with the principles of the Laffer Curve, where excessively high rates can weaken the effective tax base and reduce revenue efficiency,” he explained. Addressing WHO’s suggestion that stable tax rates have reduced real cigarette prices and contributed to increased consumption, Akram said there is little evidence to support claims of sustained growth in aggregate demand. “Long-term market estimates indicate that Pakistan’s annual cigarette consumption has remained broadly stable at approximately 80 billion sticks. The major change has been the movement of volumes between the legal and illegal sectors rather than an overall increase in smoking,” he said. According to Akram, recent increases in recorded legal production should therefore be interpreted cautiously. “Improved enforcement measures can lead to the recapture of illegal volumes into the formal economy. Consequently, higher legal production figures do not necessarily mean overall cigarette consumption has increased,” he stated. The WHO brief also attributes the growing share of economy cigarette brands to industry efforts aimed at reducing tax liabilities. However, ACT Alliance Pakistan maintains that the trend is primarily consumer-driven. “Pakistan is an extremely price-sensitive market, particularly among lower-income consumers. Affordability pressures naturally encourage smokers to switch to lower-priced products,” Akram said. He cited findings from IPOR and Ipsos market studies, which indicate that more than 50 percent of cigarette brands on the market are sold below the legally mandated minimum retail price. Many of these products, he added, are also sold without mandatory graphic health warnings and other regulatory requirements. “These findings highlight the scale of market non-compliance. Consumers are not only shifting from premium to economy brands within the legal market but also moving toward illegal products that are significantly cheaper and widely available,” he said. Akram argued that illegal trade undermines both fiscal and public health objectives. “When illegal products dominate a substantial portion of the market, governments lose tax revenue while tobacco-control measures such as minimum pricing regulations, health warnings and TAPS restrictions become less effective,” he noted. While reaffirming support for evidence-based tobacco control policies, Akram emphasized that enforcement must precede any further tax increases. “Sustainable revenue growth depends on expanding the compliant tax base rather than repeatedly increasing rates on a shrinking formal sector,” he said. He called for stronger implementation of track-and-trace systems, tighter control over tobacco inputs and raw materials, enhanced market surveillance, and coordinated action against illegal supply chains. “Without meaningful improvements in enforcement and compliance, further excise increases or automatic tax indexation are unlikely to deliver the intended revenue outcomes. The priority should be to bring the untaxed market into the formal economy before imposing additional burdens on compliant taxpayers,” Akram concluded. Copyright Business Recorder, 2026