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Business Recorder
21-05-2025
- Business
- Business Recorder
Pakistan's smuggling epidemic
EDITORIAL: For decades, illicit trade and smuggling of goods across multiple sectors have imposed a crippling drain on Pakistan's economy, depriving the national exchequer of vital revenue while nurturing a parasitic shadow economy that has strangled legitimate businesses and stifled growth. The alarming scale of this scourge was underscored last week in a report by the Policy Research Institute of Market Economy and the Transnational Alliance to Combat Illicit Trade (TRACIT), which revealed that Pakistan loses Rs750 billion in tax revenue each year due to rampant smuggling and illegal manufacturing, particularly in sectors like tobacco, petroleum, and pharmaceuticals. Meanwhile, the country's vast informal economy, valued at USD 123 billion, is responsible for an even more severe annual tax loss of Rs3.4 trillion, 30 percent of which stems from the gross abuse of the Afghan Transit Trade facility. Moreover, TRACIT's Illicit Trade Index 2025 ranks Pakistan a dismal 101st out of 158 countries, significantly lagging behind regional peers like India (52) and Sri Lanka (73). The report has further emphasised the country's glaring vulnerabilities in taxation, weak regulatory enforcement and porous supply chains. Pakistan's highly inequitable tax regime, in particular, has played a critical role in fostering this crisis, overburdening legitimate businesses while enabling illicit sectors to flourish without meaningful scrutiny. The tobacco industry exemplifies this distortion perfectly: excessively high tax rates have squeezed formal manufacturers, which contribute 98 percent of the sector's tax revenue, while the illicit sector now controls 56 percent of the market. Far from boosting revenue, higher taxes have led to a nosedive in tax collection, driving consumers towards cheaper, illicit alternatives smuggled effortlessly across Pakistan's porous borders. This brings us to another aspect of this crisis: the sheer volume of counterfeit and contraband products flooding markets, exposing both shocking incompetence and outright corruption by official circles in border management, as well as further down the supply chain, indicating that smuggling networks are operating with near impunity. As far back as December 2023, this newspaper had reported the federal government uncovering a network of mobile phone smugglers and dealers, allegedly supported by multiple departments, including the FBR, FIA, police, FC and PIA. Since then, there has been little meaningful progress in addressing corruption within these agencies, as smuggling persists unchecked across various sectors. The TRACIT report prescribes a multipronged reform agenda that the authorities would do well to urgently adopt, including rationalising of the tax regime to eliminate incentives for smuggling and counterfeit trade, and upgrading of enforcement mechanisms. Despite some improvements in border control measures, domestic market oversight remains weak, necessitating more rigorous market inspections in a bid to crack down on illicit trading activities. The FBR's much-touted Track and Trace system is also in need of more robust implementation. Meant to combat tax evasion by digitally monitoring goods with unique QR-coded stamps, tracking them from factory to sale, the system has faltered due to the widespread use of counterfeit stamps and poor compliance, undermining its effectiveness. Technological upgrades of the system, more exacting audits and stiffer penalties for non-compliance are the needs of the hour. Furthermore, the persistent lack of coordination between Customs, the FBR and security agencies needs urgent redress through the formation of dedicated task forces, streamlined intelligence-sharing and joint operations. Additionally, integrating cutting-edge border management tools, such as high-resolution surveillance drones and automated cargo scanning technology at key transit points and highways, can significantly strengthen the ability of law enforcement to detect smuggling networks. For these measures to have the desired impact, however, Pakistan must first confront the entrenched corruption within its law enforcement apparatus and key departments. Purging institutionalised nexuses between smuggling networks and official circles has become critical. Until this rot is excised, no solution will work. Copyright Business Recorder, 2025
Express Tribune
18-05-2025
- Business
- Express Tribune
Rethinking policies to curb illicit trade
At high tax rates, profit margins for sellers decrease, leaving them with options to pass on the burden to consumers, compromise on the quality of products, evade taxes or find cheaper illicit goods. photo: file Listen to article Illicit trade has emerged as a significant threat to economic stability. Despite an annual tax revenue loss of more than Rs750 billion — and an estimated total tax revenue loss of Rs3.4 trillion considering that one-third of the economy operates informally — the policy response has remained confined to bridging revenue gaps by raising taxes while completely neglecting market distortions. The significant tax burden placed on citizens is a driving factor behind the stronghold of illicit trade in Pakistan. When we talk about illicit trade, a common perception is that this is an enforcement issue. However, in reality, the root cause of this problem is the faulty economic policy. Economic agents develop business practices based on the incentives or dis-incentives created by policies. The ineffective enforcement only complements the problem. This is also corroborated by the Illicit Trade Index 2025 of the Transnational Alliance to Combat Illicit Trade (TRACIT). Illicit trade has gradually become a significant threat to the economy. It not only undermines formal businesses, but also erodes competition and innovation in the market, drains government revenues and exposes consumers to unsafe, counterfeit products. The unconducive business environment created by short-term economic policies creates incentives for malpractices. By economic policies, I am referring to taxes and tariff or non-tariff barriers, both aimed at generating revenues and restricting imports into Pakistan. At high tax rates, profit margins for sellers decrease, leaving them with options to pass on the burden to consumers, compromise on the quality of products, evade taxes or find cheaper illicit goods. For instance, the increase in federal excise duty (FED) on tobacco products in 2023 has created a large and flourishing market for smuggled brands. Aimed to generate revenues, the high taxes shifted demand towards illicit products, depriving the government of Rs300 billion in tax revenues. Now, the market share of illicit cigarettes is 56%. With high tariff or non-tariff barriers, intended to protect local manufacturers or restrict imports, the consequence is not only an increase in prices of imported goods but also lower competition and no incentive to innovate. Moreover, cumbersome regulations and bureaucratic hurdles at ports and borders have added to the costs of legitimate trade without effectively deterring illegal activity. Complex procedures often delay legal imports, while organised smuggling networks exploit gaps in monitoring and control. In many cases, the outdated customs practices and the lack of modern scanning equipment allow illicit goods to move with relative ease. Legitimate businesses suffer as they are forced to compete with cheaper, untaxed products. Investment slows down as investors shy away from markets where the rule of law is weak and unfair competition is rampant. Consumers, on the other hand, experience lower purchasing power and affordability constraints, especially in the last couple of years when inflation remained much higher and real incomes declined. The options available to consumers are low quality but expensive local goods or cheaper but illicit goods. The viable option in most cases appears to be the illicit goods. Enforcement shortcomings further compound the problem. Pakistan's enforcement agencies remain under-resourced and sometimes poorly coordinated. The number of customs and anti-smuggling personnel is insufficient compared to the scale of the problem. Sporadic crackdowns and intelligence-driven efforts have failed to restrict smuggling. In addition, the lack of reliable data and weak inter-agency cooperation hamper efforts to track and control illicit flows effectively. Addressing illicit trade requires a comprehensive and coordinated approach. To begin with, tax and trade policies should be rationalised to ensure that taxes and duties are set at levels where compliance becomes economically viable rather than burdensome. Pakistan must strengthen enforcement by significantly increasing resources and personnel, particularly at the retail level where illicit goods reach consumers. At the same time, technology must be upgraded by strengthening systems like Track and Trace and equipping law enforcement agencies with modern tools to authenticate tax stamps and verify the legitimacy of goods. Finally, inter-agency coordination must be enhanced to ensure that the Pakistan Customs, Federal Board of Revenue (FBR), provincial excise departments and security agencies work together strategically, sharing information and resources to dismantle illicit networks more effectively. Combating illicit trade is not simply about policing; it is about restoring the economic foundations that drive business behaviour. Rationalising tax and trade policies, strengthening enforcement, modernising technology and fostering better coordination across agencies are crucial to address this issue. Pakistan must recognise that illicit trade is not just a fiscal loss but a deeper economic distortion that weakens businesses, undermines consumer welfare and erodes public trust. Without decisive action, the parallel economy will continue to expand, dragging formal growth and prosperity down with it. The writer is a Research Economist at the Policy Research Institute of Market Economy (PRIME), an independent economic policy think tank
