Pakistan's high tobacco taxes fuel illicit market growth

Pakistan's tax system has come under heavy criticism for being flawed and inefficient. Despite ongoing concerns, tax authorities have not made necessary reforms. This has led to a situation where documented earners bear the tax burden, while those in the undocumented and cash-based sectors evade taxes. A new report by economist Sakib Sherani focuses on the tobacco sector, showing significant issues caused by high taxes. It highlights that around Rs300 billion are lost each year due to these tax policies. Excessive taxation, including various duties and levies, has increased the illicit tobacco market, which now holds 56% of the total market share. The report indicates that the high tax rates have surpassed what is considered optimal. This means that instead of increasing tax revenue, higher taxes drive consumers to cheaper, unregulated products. The formal tobacco sector, which contributes nearly all tax revenue from the industry, continues to shrink, while a large part of the tobacco supply chain remains untaxed. The current tax policy harms legitimate businesses and distorts market competition. Major companies, like British American Tobacco, have warned they may leave Pakistan if taxes rise, which could diminish foreign investment and worsen the business environment. The government also struggles to combat smuggling and the counterfeit tobacco trade effectively. Illicit tobacco could pose health risks, as these unregulated products lack necessary quality controls and are often cheaper, making them more accessible to young people. Experts suggest reform is urgently needed. This includes reducing high taxes on compliant businesses, broadening the tax base, and improving measures against smuggling. A strategic approach to economic policy is essential to foster a healthier business climate and ensure sustainable growth.