Smuggling causing Rs3.4tr/year loss

Express Tribune

01-05-2025

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A new independent report has estimated that illicit trade is causing annual revenue losses of a whopping Rs3.4 trillion, including nearly 30% loss because of misuse of the Afghan Transit Trade facility.
The losses estimated by the Policy Research Institute of Market Economy (PRIME) in its report titled "Combatting Illicit Trade in Pakistan" are equal to 26% of this fiscal year's annual tax target.
The gravity of this issue (illicit trade) is manifested by an estimated annual tax revenue loss of Rs3.4 trillion on account of an estimated $123 billion informal economy, according to the report released on Thursday.
The report underlined that the illicit trade has emerged as a critical challenge for Pakistan's economy, undermining formal businesses, eroding government revenues, and jeopardising consumer safety.
From smuggled petroleum and counterfeit pharmaceuticals to non-tax-paid cigarettes and under-invoiced consumer goods, illicit trade has entrenched itself across key sectors, it added.
The findings are released at a time when there is a growing focus on the role of tax officials in facilitating smuggling and under-invoicing to evade taxes. The country's intelligence and investigation agencies have recently pointed fingers towards the customs officials facilitating the smuggling and under-invoicing. There has been credible evidence of even manipulating the goods declaration forms to facilitate tax evasion.
PRIME said that the loss of revenues from the smuggling of tobacco is estimated to be more than Rs300 billion. The government increased the federal excise duty on tobacco products by up to 150% to generate additional revenues for budgetary support in February 2023.
But PRIME said that since then, the market share of illicit cigarettes has increased manifold from 30% to 56%, causing a loss of more than Rs300 billion annually.
The estimated revenue loss from Afghanistan Transit Trade is Rs1 trillion, according to the report.
After making stringent conditions to curb smuggling under the transit trade, Pakistan last month relaxed the conditions by allowing import of Afghanistan-bound goods against insurance guarantees.
PRIME said that the smuggling of oil was causing Rs270 billion losses. The report has estimated the volume of smuggled Iranian oil at 2.8 billion litres. The government charges Rs16 per litre customs duty and a petroleum development levy of Rs78 per litre, a reason for smugglers to shift towards the smuggled oil to make higher profits.
The report said that the outdated border control infrastructure and limited automation in the customs processes make it difficult for the government to prevent smuggling of goods. Pakistan is also lacking in risk-based profiling systems and modern container scanning technologies, it added.
While commenting on the size of the informal economy, the report stated that independent experts consider the size of the informal economy to be one-third of the formal economy. According to the Small and Medium Enterprise Development Authority, the informal economy has a market share of more than 40% of the GDP.
High customs duties, complex tariff regimes, inflation, and a growing informal economy incentivise businesses and consumers to move away from the formal sector, according to the report.
Regulatory inconsistency and protectionist trade policies further add to the cost of doing legal business. Simultaneously, porous borders, outdated customs infrastructure, and limited inter-agency coordination allow the unchecked movement of illicit goods, it added.
Enforcement mechanisms, though partially effective at the borders, remain weak within domestic markets, especially at the retail and distribution levels.
The report stated that the suboptimal performance of the Track and Trace System, adopted to monitor tax compliance, reflects weak implementation, with only a fraction of cigarette brands complying. A study by the Institute of Public Opinion and Research (IPOR) in 2024 found that only 19 out of 264 cigarette brands were compliant with Track and Trace System regulations, with 56% of the market comprising non-compliant and untaxed products.
The report estimated the revenue loss due to counterfeit pharmaceutical goods at Rs65 billion. About 40% of medicines are counterfeit and substandard, it added.
Over 60% of tires sold are smuggled and are causing revenue loss of Rs106 billion, said PRIME. Around 30 % of the market share of tea is taken by smuggling, causing a Rs10 billion loss. Minimum Retail Price of tea is Rs1,200 per kg, and an 18% sales tax is charged.
Pakistan sinks on Illicit Trade Index
According to the 2025 Illicit Trade Index, Pakistan ranks 101 out of 158 countries, performing below global and regional averages due to systemic weaknesses in governance, enforcement, and economic policymaking, according to the report.
The Illicit Trade Index, a publication of TRACIT, monitors the performance of countries in preventing illicit trade by considering six broad categories comprising 37 indicators.
Pakistan's score on the index was 44.5, placing it below the global average of 49.9. In contrast, the neighbouring countries have fared well with China at 40th rank, India at 52nd, Sri Lanka at 73rd, and Bangladesh at 95th, according to PRIME.
Similarly, comparison with emerging economies also shows that Pakistan is lagging behind all of them.
The report said that it is a cause of concern that Pakistan is among the few developing economies falling at the bottom of lower-middle income countries. This ranking reflects risks and vulnerabilities across multiple dimensions of trade governance, enforcement, and economic regulation.