The smokescreen over Pakistan’s cigarette taxes: a case for urgent fiscal scrutiny

As Pakistan continues to navigate persistent fiscal challenges, the recent budget documents for FY 2025-26, presented this month, contain an astonishing anomaly that demands immediate attention. It concerns the Federal Excise Duty (FED) on cigarettes – a seemingly mundane line item that, upon closer inspection, reveals a perplexing discrepancy between official production figures and actual tax collection, hinting at either profound systemic failure or, more troublingly, a strategic manipulation of numbers.

Let’s dissect the figures that raise eyebrows for any economist, or indeed, any discerning citizen. For the fiscal year 2023-24, the FBR successfully collected PKR 237.1 billion from cigarette FED. Building on this, the FBR initially set an ambitious target of PKR 323.7 billion for the current fiscal year, FY 2024-25, which concludes on June 30th. This optimism seemed plausible, especially considering data from the Pakistan Bureau of Statistics (PBS), which reported a robust 13.1 percent growth in cigarette production during July-March of FY 2024-25 compared to the previous year.

However, the revised estimates in the FY 2025–26 budget documents present a stark and perplexing contrast. The FBR now anticipates collecting a mere PKR 147 billion for the entire FY 2024-25. This isn’t just a shortfall; it’s a colossal 54.6% reduction from their own initial target, and a staggering 38% less than what was collected last year, despite reported production growth.

A closer look at the data deepens the concern. The first six months of FY 2024-25 saw a FED collection of PKR 102.895 billion from 17,627 million sticks, indicating an effective tax rate of PKR 5.837 per stick. This rate implies that around 93 percent of the market comprises economy brands, and 7 percent premium — a plausible split. When we extend this calculation using PBS’s reported production for the next three months (Jan-Mar 2025) — 8,746 million sticks — it projects an additional PKR 51.1 billion in revenue.

Adding these figures, the estimated FED collection for the first nine months (July-March 2025) stands at approximately PKR 153.95 billion.

Here is the crux of the conundrum: This PKR 153.95 billion, reflecting nine months of estimated revenue based on official production, already exceeds the FBR’s own revised full-year estimate of PKR 147 billion.

For the FBR’s revised estimate to hold true, it would imply that for the entire April-June 2025 quarter, the government expects not just zero, but a statistically impossible negative collection of nearly PKR 7 billion. Alternatively, to meet the PKR 147 billion revised estimate, and given the first six months’ collection, the FBR must assume virtually no premium brand production in the January-March quarter (as the numbers align perfectly with only the minimum tax rate), and absolutely zero cigarette production and zero tax collection in the final three months of the fiscal year. Such a scenario is economically untenable.

So, what explains this extraordinary discrepancy? The plausible explanations are deeply concerning for Pakistan’s fiscal health:

Firstly, this could be a deliberate attempt to under-report revenue to build a narrative for lowering tax rates. The argument, often peddled by the industry, is that high taxes fuel illicit trade, and therefore, lower taxes are needed to bring the market into the formal net. However, if PBS’s reported production is indeed growing, the problem isn’t just illicit trade; it’s that legal, declared production isn’t translating into tax revenue. This points to a massive, systemic leakage within the formal tax net, potentially through widespread under-declaration or other evasive tactics post-production. Lowering tax rates in such a scenario would simply legitimize current tax avoidance, short-changing the national exchequer.

Secondly, even if not deliberate manipulation, it signals a profound and alarming disconnect between declared economic activity and the FBR’s ability to collect taxes. It suggests that a significant volume of legally produced cigarettes is somehow escaping the tax system, whether through a broken track-and-trace mechanism, ineffective enforcement, or fundamental flaws in revenue assessment. The fact that the FBR’s own internal projections are so far off from what simple arithmetic of reported production suggests, is a damning indictment of forecasting and collection capabilities.

The implications for Pakistan are severe. At least PKR 50 billion in lost tax revenue from a segment known for its high consumption directly translates into less funding for critical public services and poverty alleviation programs. It erodes public trust in the integrity of our financial data and sets a dangerous precedent for other sectors.

As Pakistan embarks on a new fiscal year, this issue must not be dismissed as a mere accounting error. It is a matter of transparency, accountability, and the credibility of the nation’s tax system. Moreover, the stakes extend beyond fiscal integrity – cigarette taxation is also a critical public health tool. Weak enforcement and revenue leakage not only deprive the state of much-needed funds but also undermine efforts to curb tobacco consumption, which remains a leading cause of preventable illness and death in Pakistan. A thorough, independent investigation is essential, along with urgent reforms to restore integrity to the taxation of one of the country’s most heavily consumed and harmful products. Without decisive action, the smokescreen surrounding cigarette taxation will continue to obscure a harsh reality: Pakistan is haemorrhaging billions in revenue, and its citizens deserve to know why.

(The writer is Principal Economist, SPDC)