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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
IOL News
09-05-2025
- Business
- IOL News
South Africa's SATTA demands government action against R100 billion illicit tobacco trade
There is a growing call for the government to intensify its action against illicit cigarette industry. Image: Courtney Africa / Independent Newspapers THE South Africa Tobacco Transformation Alliance (SATTA) has added its voice in calling on government law enforcement authorities to work together to destroy the R100 billion-worth illicit tobacco industry that is devastating to the economy. The illegal industry, according to Transnational Alliance to Combat Illicit Trade (TRACIT), has robbed the taxman of billions of rand while mopping thousands of jobs in the legitimate sector. As a result of the illicit cigarette selling on the street and in informal shops, the legal industry is suffering a devastating blow. According to SATTA, there are currently only 10 emerging tobacco farmers compared to 125 that existed in 2019 before the Covid-19 lockdown. 'Independent research by Oxford Economics shows that the tobacco industry supported a total of 160 924 jobs in 2019. 'Since then, however, the industry has struggled to regain the jobs it supported as illicit trade gained the upper hand. 'By 2022, when the most recent survey was undertaken, the industry supported 124 933 jobs - 35 991 fewer jobs than in 2019, which represents a 22.4% decline,' SATTA's spokesperson Zachariah Motsumi said in response to questions from this reporter. He said Zimbabwe was the major source of illicit cigarettes coming to South Africa. 'According to Ipsos, more than 80% of all illicit cigarettes are produced by local manufacturers, registered and licensed by SARS. The balance of around 20% is smuggled into our country, mainly from Zimbabwe,' he said. SATTA's call was in support of TRACIT's recently published report that stated that illicit cigarette sales in the country had grown by 60% in 2021, and slightly declined to 58% in 2022. Video Player is loading. 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Next Stay Close ✕ The report stated that this had robbed the state of R18 billion in revenue, R15 billion in excise duties, and R3 billion in VAT. It said between 2002 and 2022, the losses in excise and VAT revenue amounted to R119 billion. Motsumi said in a statement released on Friday that the alliance proposed that the South African Revenue Service (SARS) be provided with additional resources to tackle and investigate the illicit tobacco trade. It also called for more arrests and prosecutions of the fraudsters involved in this underworld business. 'It is time the government got its act together and various arms of the state worked in unison. 'In our view, it is only decisive and integrated action that will break the back of the R100 billion illicit economy. And it has to happen now,' said Motsumi. SATTA's report points out that: 'Illicit trade continues to pose a serious threat to South Africa's economic stability, governance, and the country's international standing.' He described statistics released by TRACIT as having a devastating impact of illicit trade on the tobacco sector. 'Tobacco farmers, processors, manufacturers, and importers of tobacco products in the legal value chain can bear witness to the profound drop in the sale of legal tobacco products as the illicit tobacco market has grown to comprise around 70% of the total market. 'And, as a consequence, thousands of workers have lost their jobs – and billions of rand have been lost in unpaid taxes.' He said the illicit trading contributed to the Financial Action Task Force (FATF) placing the country on greylisting in February 2023. 'Surely there is now sufficient evidence before the government of the benefits of acting against illegal traders in general and illegal cigarette traders in particular? Illicit trade in tobacco is estimated to cost the government R28 billion a year in lost revenue.' He said instead of talking about increasing the Value Added Tax, Finance Minister Enoch Godongwana should have been emphatic on the fight against illicit cigarettes, which evade paying tax. 'This at a time when the Finance Minister is threatening to increase VAT – effectively punishing law-abiding and tax-paying citizens at a time when the focus should be on the industrial-scale tax-dodging that we are seeing in the tobacco industry,' said Motsumi. He said the SATTA was fully behind former Trade & Industry Director-General Lionel October's suggestion that there should be collaboration between government and business to deal with the illicit economy and that this should be a national priority. 'These are vital steps to stamping out the illicit economy once and for all. 'It is also encouraging that Business Unity South Africa is partnering with TRACIT on tracking illicit trade in our country, and we fully support greater involvement in this process. 'TRACIT's proposal of creating a national Anti-Illicit Trade Coordinator makes complete sense as a move to strengthen inter-agency coordination and ensure unified enforcement strategies,' he said.
IOL News
07-05-2025
- Business
- IOL News
Industry urges South Africa to curb illicit trade as report reveals economic losses
South Africa ranked 60th out of 158 countries, 'indicating moderate resistance to illicit trade, but with notable vulnerabilities in areas such as supply chain control and enforcement' capacity. Image: Supplied Tawanda Karombo Industry players are urging the South African government to prioritize policies to curb illicit trade through the crafting of an anti-illicit trade strategy, strengthening border controls and utilising technology in securing supply chains. This follows the release of the Transnational Alliance to Combat Illicit Trade (TRACIT) report reviewing South Africa's fight against illicit trade this week. The report, released in conjunction with Business Unity South Africa (Busa), highlights how South Africa's economy continues to be threatened by illegal trade, specifically in sectors such as alcohol, tobacco, food items, pharmaceuticals, agri-chemicals, counterfeiting, mining, and wildlife trafficking. It notes that illicit trade in tobacco and alcohol alone was costing South Africa as much as R30 billion a year in lost revenue. 'Illicit trade deprives the government of critical revenue, fuels organised crime, and puts legitimate businesses at a disadvantage,' said Philippe Van Gils, director of illicit trade prevention at Philip Morris International on Tuesday. Philip Morris International is thus urging the South African government to consider crafting of a national anti-illicit trade strategy, integrating smart tax policies, robust regulatory enforcement, and corruption safeguards. It also believes that strengthening border control and customs capacity, particularly at high-risk points such as ports and Free Trade Zones will help to curb illicit trade. Moreover, securing supply chains with digital track-and-trace systems and enhanced due diligence requirements for manufacturers and logistics providers is also seen improving measures to reduce illicit trade in substances such as alcohol, wildlife, tobacco and others.; 'The TRACIT Index reminds us that a comprehensive approach is required, one that addresses corruption, strengthens enforcement, and ensures regulatory frameworks are both appropriate and effectively implemented,' added Van Gils. South Africa ranked 60th out of 158 countries, 'indicating moderate resistance to illicit trade, but with notable vulnerabilities in areas such as supply chain control and enforcement' capacity. 'The country performs strongly in trade, customs, and borders, reflecting progress in cross-border enforcement and customs modernization. However, performance remains weak in supply chain intermediaries , criminal enablers and sectoral illicit trade, highlighting systemic gaps in oversight, regulation, and inter-agency coordination,' notes the report. TRACIT director general, Jeffrey Hardy, said that 'now is the time for bold policies and strong enforcement to dismantle illicit networks' in South Africa and across the world. 'South Africa stands at a crossroads,' said Hardy, noting the continued threat illicit trade posed to South Africa's economic recovery, public safety, and institutional integrity. 'Despite authorities' efforts a to address illegal trade, corruption, and money laundering, illicit trade remains deeply entrenched and highly damaging,' said Esteban Giudici, TRACIT director of programs. 'If left unchecked, it will continue to rob the government of vital revenues, distort legal markets, and deter both domestic and foreign investment.' Alongside other industry players, Philip Morris South Africa said it remained committed to playing its part in combating illicit trade through 'collaborating with law enforcement and customs agencies; investing in digital authentication and track-and-trace technologies; running consumer awareness campaigns on the dangers of illicit products and supporting regional cooperation' efforts. 'The TRACIT Index gives South Africa and other nations a playbook for action. We urge all stakeholders—public and private—to align, act, and protect our economies from the corrosive effects of illicit trade and corruption,' added Van Gils. BUSINESS REPORT
IOL News
06-05-2025
- Business
- IOL News
South Africa's battle against illicit trade: Urgent actions required to mitigate economic losses
Transnational Alliance to Combat Illicit Trade (TRACIT) has asked the government to make illicit trade a deterrent. Image: David Ritchie / Independent Newspapers The government has been requested to prioritise illicit trade and make it a deterrent as South Africa continues to grapple with the pervasive effects of illegal activities across sectors. These include alcohol, foodstuffs, agrichemicals, pharmaceuticals, counterfeiting, mining, and wildlife trafficking. This was revealed in the South Africa Illicit Economy 2.0 Report, launched by the Transnational Alliance to Combat Illicit Trade (TRACIT) in conjunction with Business Unity South Africa (Busa). TRACIT is an independent, business-led initiative that works to mitigate the economic and social impacts of illicit trade by reinforcing enforcement mechanisms and mobilising private sector collaboration across sectors most affected by illicit activity. The report recommended that the government strengthen criminal penalties and appoint an Interagency Anti-Illicit Trade Coordinator in conjunction with the private sector, such as Business Against Crime South Africa, Busa, and affected stakeholders. Illicit activities have been undermining businesses, depleting tax revenues, undermining international trade, and exacerbating social and economic inequalities. The South African Revenue Service estimated that illicit trade costs the country's economy R100 billion annually. In terms of lost tax revenues, Business Leadership South Africa estimated that South Africa loses around R250 million a day. TRACIT director of programmes, Estaban Giudici, said the South African government must prioritise efforts to combat illicit trade and the underlying conditions that facilitate it. 'Left unaddressed, illicit trade and its associated criminal activities will continue to rob the government of essential tax revenue and deter investments in the country,' said Giudici. Video Player is loading. Play Video Play Unmute Current Time 0:00 / Duration -:- Loaded : 0% Stream Type LIVE Seek to live, currently behind live LIVE Remaining Time - 0:00 This is a modal window. Beginning of dialog window. Escape will cancel and close the window. 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Organised crime, corruption, and structural weaknesses remain key drivers, with the lingering impacts of the Covid-19 pandemic compounding the challenges. TRACIT director-general, Jeffery Hardy, said: 'The Covid-19 pandemic provided ample opportunities for illicit traders to adjust and expand their operations during a time when government-imposed lockdowns, bans, and other restrictions disrupted legal markets and created shortages. 'For South Africa to restart and grow its economy, it must formulate policies and implement programs that deter and preclude illicit traders from consolidating roots in the post-pandemic economy.' The report stated that illicit traders in South Africa exploit vulnerabilities throughout supply chain networks to facilitate illegal commerce. These supply chains vary significantly, from maritime shipping routes and free trade zones to postal and courier services, as well as online marketplaces. South Africa's weak performance in the e-commerce protection frameworks indicator of the TRACIT 2025 Illicit Trade Index underscores significant gaps in consumer protection and platform accountability. Key deficiencies include inadequate regulations establishing platform liability for third-party illicit sales, insufficient transparency measures such as seller verification, limited proactive risk management by online marketplaces, and weak consumer recourse mechanisms. According to the report, the rapid expansion of e-commerce platforms has created fertile ground for illicit trade, particularly in emerging categories such as electronic cigarettes, heated tobacco products, and pharmaceuticals. It added that existing frameworks, including the Medicines and Related Substances Act, have not sufficiently evolved to address digital commerce, resulting in critical vulnerabilities. Online and informal digital marketplaces frequently facilitate counterfeit medicines and other unregulated products, posing severe health and safety risks due to unverified quality and efficacy. The report also suggested that a strong government commitment to securing parcel delivery infrastructure is essential to prevent criminal exploitation and the trafficking of illegal goods through global postal networks. TRACIT added that enforcement agencies often lack the technical expertise and tools required to detect and respond to illicit flows, particularly in industries where goods are easy to smuggle, conceal, or duplicate. 'For example, tobacco products remain a primary concern. Their small size, durability, ease of transport, and especially high profit margins make them a favourite among smugglers. Similarly, counterfeit pharmaceuticals, substandard alcohol, and falsified consumer goods also continue to flood informal markets, driven by weak regulation, high demand, and gaps in enforcement,' reads the report. The report stated that illicit cigarettes currently account for nearly 60% of the South African market. It added that the illicit share has grown significantly, starting at 5% in 2009, peaking at 60% in 2021, and slightly declining to 58% in 2022. 'That same year, the government lost an estimated R18 billion in revenue — R15 billion in excise duties and R3 billion in VAT. Over the 20 years from 2002 to 2022, cumulative losses in excise and VAT revenue amounted to R119 billion (adjusted to 2022 prices).' Hardy added that South Africa stands at a crossroads, adding that now is the time for bold policies and strong enforcement to dismantle illicit networks. 'That's why this year we've gone a step further and proposed a structured Public-Private Partnership to support South African and regional authorities in their fight against illicit trade,' he said.
