Urgent review needed for Pakistan's cigarette taxation, hiding questionable financial practices revealed
Taking a Closer Look at Pakistan's Fiscal Budget Anomaly
The latest fiscal budget in Pakistan, projected for FY 2025-26, has revealed an intriguing mystery—a massive gap between tobacco tax collections and official production figures. This peculiar inconsistency is particularly noticeable regarding the Federal Excise Duty (FED) on cigarettes.
To provide some context, the FBR collected approximately PKR 237.1 billion from cigarette FED in FY 2023-24. They then set their sights on PKR 323.7 billion for the current fiscal year, which ends on June 30th. Given the robust 13.1% growth in local cigarette production, this initial target seemed reasonable according to the Pakistan Bureau of Statistics (PBS).
However, the recent revisions in the FY 2025-26 budget documents have sparked confusion and raised concerns. The FBR now anticipates collecting a mere PKR 147 billion for the entire FY 2024-25—a staggering 54.6% reduction from their own initial target, and a stark contrast to the PKR 237.1 billion collected the previous year.
Further inspection of the data deepens the intrigue. The first six months of FY 2024-25 saw a FED collection of PKR 102.895 billion, representing 17.6 billion sticks, with an effective tax rate of PKR 5.837 per stick. Based on this rate, we find that approximately 93% of the market is dominated by economy brands, and the remaining 7% is premium. Projecting this rate using PBS's reported production figure for the next three months (Jan-Mar 2025), we estimate an additional PKR 51.1 billion in revenue.
In total, this calculation suggests that FED collections for the first nine months (July-March 2025) would stand at roughly PKR 153.95 billion. However, this estimated revenue for nine months already surpasses the FBR's revised full-year estimate of PKR 147 billion. To meet their revised estimate, the government would have to assume no premium brand production in the Jan-Mar quarter and zero cigarette production in the final three months of the fiscal year. Such a scenario is highly implausible, making the revenue discrepancy all the more puzzling.
So, what factors might explain this enigmatic gap? Here are some possibilities:
- Strategic Manipulation of Numbers: The government might be intentionally under-reporting revenue to build a case for lower tax rates, citing arguments that high taxes fuel illicit trade. However, if the PBS's reported production growth is accurate, the problem isn't just illicit trade; it's that legal production isn't translating into tax revenue, indicating a larger systemic issue.
- Broken Taxation Systems: The discrepancy could indicate weaknesses in the tracking and tracing mechanism, ineffective enforcement, or fundamental flaws in revenue assessment, causing a significant portion of legally produced cigarettes to escape the tax system.
- Illicit Trade and Smuggling: The possibility of widespread smuggling and consumption of illicit cigarettes, untaxed and untraceable, could lead to lower-than-expected revenue collection.
- Tax Evasion and Non-compliance: Manufacturing entities or distributors may engage in tax evasion or non-compliance with excise tax regulations, thus reducing collected taxes compared to declared production.
These potential explanations have serious implications for Pakistan's fiscal health. The estimated loss of at least PKR 50 billion from cigarettes alone means fewer resources for crucial public services and antipoverty programs. The inconsistency in the data also undermines public trust in Pakistan's financial figures, setting a dangerous precedent for other sectors.
As Pakistan proceeds into a new fiscal year, it is essential for the government to address this issue transparently, root out corruption, and restore credibility to the nation's tax system. If left unchecked, the veil of uncertainty surrounding cigarette tax collection will continue to cloud the nation's pursuit of financial integrity.
(The writer is Principal Economist, SPDC)
Copyright Business Recorder, 2025
Hauntingly low tax collections might indicate systemic failures or deliberate manipulations within Pakistan's tax network. Whether an intentional ploy to lower tax rates, weaknesses in the tracking system, or illicit trade, the revenue discrepancy is worrying.
The estimated revenue loss could reach up to PKR 50 billion, threatening the provision of essential public services. Worse still, such discrepancies may promote a culture of mistrust towards Pakistan's financial data.
*To maintain its fiscal health and uphold the public's trust, swift and decisive action is required to investigate and rectify the errors within Pakistan's excise tax system.
Resolving this enigma in tax collection is critical for addressing chronic financial difficulties that could exacerbate the country's chronic diseases and respiratory conditions, impacting health and wellness.
- gym memberships and wellnessventure capital or wealth management strategies, as a weakened tax system may adversely affect personal and business finance in the long run.*
Environmental science students studying the effects of climate change might find this situation intriguing, as it underscores the broader impact of weakened environmental regulations and the seizure of resources for environmental conservation.
This oddity has sparked debates in political circles, with politicians calling for increased accountability and transparency in finance, investing, and wealth management.
The issue has also drawn the attention of medical-condition advocates, who argue that the funds allocated for addressing medical-conditions could be compromised by inadequate revenue collection.
Identifying the root cause of this discrepancy could lead to improvements in fiscal policies, strengthening the business environment and promoting fiscal responsibility.
Another viable option lies in exploring the potential benefits of alternative investment areas, such as nutrition and CBD products, which could generate additional revenue while supporting various environmental-science initiatives.
Crime-and-justice experts have weighed in on the discussion, pointing out that this kind of financial irregularity could foster an environment conducive to corruption and unethical practices.
In addition, the general news media has continually covered this story, seeking to unravel the tangled web of misreportings and public mismanagement, aiming to foster a more informed public opinion.
To tackle such challenges and maintain fiscal stability, Pakistan's government must embrace a comprehensive approach that encompasses political will, innovative policy-making, and citizen engagement.
