Increasing the price of tobacco products through higher taxation is widely acknowledged as the most effective way to reduce tobacco consumption. Although evidence shows that tobacco taxation does not have a significant impact on the illicit trade of cigarettes1, a common argument of the cigarette industry in Pakistan is that higher taxes drive illicit trade. The industry claims that smokers seek out non-duty-paid cigarettes because they are cheaper. Even the national tax collection agency, Federal Board of Revenue (FBR), has adopted this argument at times.2

Illicit trade can be divided into three categories: undeclared local production, undeclared imports, and tax avoidance. While the first is a major contributor to the illicit trade of cigarettes in Pakistan (SPDC, 2019)3, the other two also pose challenges for tax collection. Read More