Cigarette Giant Urges Govt to Skip Tax Increase on Tobacco Sector in Next Budget

A representative of British American Tobacco (BAT) has urged the Pakistani government to avoid increasing the Federal Excise Duty (FED) on cigarettes in the upcoming 2026-27 federal budget, warning that further tax shocks could expand the already massive illicit cigarette market.

Speaking during an interaction with journalists, Simon Trussler, Group Head of International Trade and Fiscal Affairs at BAT, said the company has strongly recommended maintaining tax stability, arguing that consumers are no longer able to absorb sudden excise increases.

He said recent stability in cigarette taxation had begun producing positive results through improved legal sales volumes, stressing that policymakers should prioritize predictability instead of abrupt fiscal changes.

According to Trussler, Pakistan now has one of the largest illicit cigarette markets globally. He claimed the share of illegal cigarettes has reached around 55 percent, reflecting widespread tax evasion and significant revenue leakage.

He acknowledged that the Federal Board of Revenue (FBR) understands the scale of the problem and has taken steps to address it, but emphasized that the challenge remains severe.

Trussler argued that the sharp tobacco tax increases introduced between 2022 and 2023 unintentionally fueled illicit trade rather than boosting revenue. Independent analyses suggest illegal cigarettes now account for the majority of consumption in Pakistan.

Data cited during the briefing indicated that in 2023-24, approximately 58 percent of cigarettes consumed were illicit, with 85 percent of these produced domestically. He described this outcome as a policy failure that could only be corrected if taxation and enforcement strategies were designed together rather than treated separately.

Referring to a report by Oxford Economics, Trussler said Pakistan’s cigarette fiscal policy has failed to achieve its stated goals — neither significantly increasing tax revenue nor reducing overall cigarette consumption.

Despite repeated tax hikes, total cigarette consumption has remained broadly stable at roughly 80 billion sticks annually since 2012, while consumer demand has increasingly shifted toward untaxed brands.

He argued that rapid increases in cigarette taxes made legal products unaffordable for many consumers, pushing them toward cheaper illicit alternatives rather than discouraging smoking altogether.

Following tax increases exceeding 100 percent above inflation between early 2022 and mid-2023, a large price gap emerged between legal and illegal cigarettes. In 2023-24, illicit cigarettes were estimated to sell at about 47 percent of the price of duty-paid products, creating a strong incentive for consumers to switch.

Trussler also challenged claims by some global health organizations that taxation does not encourage illicit trade, stating that international evidence shows a strong link between cigarette affordability and the growth of illegal markets.

He noted that more than 80 percent of cigarette price increases in Pakistan have resulted directly from higher taxes. At the same time, extremely low pre-tax industry margins — ranked 173rd out of 184 countries in WHO data — have made it difficult for legitimate manufacturers to operate profitably, creating incentives for tax evasion.

Discussing enforcement efforts, Trussler said Pakistan’s track-and-trace system is a useful monitoring tool but cannot succeed without consistent market inspections and supply-chain enforcement.

He acknowledged recent enforcement actions, including seizures in 2025 of 480 metric tons of acetate tow, 2.5 billion smuggled cigarettes, 1.7 billion duty-unpaid cigarettes, and the sealing of 10 illegal factories, describing them as evidence of the government’s commitment to protecting the tax base.

However, he stressed that sustained enforcement across manufacturing, distribution, and retail networks is essential to control the illicit trade effectively.