Pakistan: IMF expresses concern over cigarette tax evasion

The International Monetary Fund is concerned about tax evasion of tobacco products, estimating that illicit and untaxed cigarettes now account for up to 50% of the market.[1]While Pakistan's Federal Board of Revenue (FBR) has proposed reducing tobacco taxes to reduce fraud and increase tax revenue, the IMF's recommendation to the country is to combat smuggling through an effective tobacco tracking and tracing system, while PANAH calls for increasing taxes on tobacco and sugary drinks to improve public health and generate revenue.

Tax reforms in Pakistan to tackle illicit cigarette trade

In Islamabad, the Federal Board of Revenue (FBR), facing a downward revision of its tax collection target, proposed to the IMF a three-month tax rate cut for the tobacco, real estate, construction, and beverage sectors. The cut would be 25% for excise duties on cigarettes, a measure touted as likely to increase tax revenue. The FBR told the IMF that the rate increase would reduce the volume of legal transactions.

The IMF had expressed concerns about tax evasion by the tobacco industry in Pakistan, estimating that illicit cigarettes account for up to 50% of the market.[2], these cigarettes leaving the factories of tobacco manufacturers. During discussions to release a billion-dollar loan, the IMF recommended regulating the tobacco market and emphasized the need for an effective tracking and tracing system that could prevent tax evasion in several sectors. The current tracking and tracing system for tobacco products is provided by the company Authentix, which is linked to tobacco manufacturers. The IMF also emphasized the need to improve tax collection, including the introduction of a fixed tax regime for retailers.

PANAH warns of what it considers to be a strategic error

Following the FBR's announcement of its intention to reduce taxes, particularly on tobacco, the Pakistan National Heart Association (PANAH) has warned of the development of diseases linked to the consumption of sugary drinks and tobacco.[3]She reiterates the need to increase taxes on these products. Indeed, increasing taxes is a proven strategy to prevent initiation and encourage people to reduce or even stop using these products.[4]After several years of stagnation, the proposed 146,% increase in excise duties on tobacco products would lead to a drop in cigarette consumption of about a quarter, or 20 billion fewer cigarettes in Pakistan. It would help prevent diseases such as strokes and heart disease, as well as the incidence of diabetes. The same is true for tax increases on sugary drinks.

The stakes are high for health stakeholders, who point out that Pakistan has the highest prevalence of diabetes in the world, with 33 million cases in 2021; this number could rise to 62 million by 2045 if no action is taken. A 2022 World Bank study in Pakistan showed that a 50% increase in taxes on sugary drinks could lead to significant benefits, including 21 disability-adjusted life years (DALYs) gained per 10,000 inhabitants, an economic value of USD 7 million, and a USD 51 million increase in tax revenue. By 2023, the introduction of a 20% excise tax had already generated substantial revenue.

Commenting on some media reports, Masud Ur Rehman Kiani, President of PANAH, said: “ Any effort to reduce taxes on sugary drinks and tobacco runs counter to global best practices and scientific evidence. More than 85 countries have successfully raised taxes on these harmful products to reduce consumption and healthcare costs. Pakistan should strengthen its public health measures through tax policies rather than roll back critical steps already taken by the Pakistani government. ".

He calls for political actions to combat non-communicable diseases in Pakistan.

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[1] Web Desk, Express IMF 'concern' over cigarette tax evasion, Ary News, published March 7, 2025, accessed March 12, 2025

[2] Haider, Mehtab, Pakistan urges IMF to reduce tax rates for key sectors, Geo News, published March 7, 2025, accessed March 12, 2025

[3] Daily Parliament Times, President PANAH urges IMF and FBR for increasing taxes on sugary drinks and tobacco, published March 11, 2025, accessed March 12, 2025

[4] Tobacco-free generation, Sharp tax hike reduces tobacco consumption in Pakistan, published December 18, 2023, accessed March 12, 2025