1. Context: Illegal Trade as an Economic and Governance Threat
Illegal trade in Pakistan is no longer a marginal problem at the country’s borders; it is central to the tax system, distorts entire markets, and erodes investor confidence. Recent research by the PRIME Institute and TRACIT estimates that Pakistan loses approximately Rs. 3.4 trillion in tax revenue annually to illegal trade, smuggling, and counterfeit goods, with key sectors such as tobacco, petroleum, and pharmaceuticals particularly affected.
The Pakistan Business Council (PBC) goes further, framing illegal trade as a systemic economic emergency. PBC estimates that the combined value of smuggling, under-invoicing, mis-declaration, counterfeiting, and adulteration is around $68 billion, about 20 percent of the formal economy, and that the associated annual tax loss is roughly Rs. 8 trillion, almost 85 percent of the FY24 tax target. Taken together, these numbers explain why the government’s intensified actions since mid-2025 are not merely revenue measures; they are about restoring the rule of law and creating credible conditions for investment.
2. Tobacco and Cigarettes: High-Tax Sector Under Siege
Within this broader picture, the cigarette industry occupies a special position. Historically, tobacco has been the second largest tax-paying sector after oil and gas, contributing around 36 percent of total federal excise duty, with Pakistan Tobacco Company and Philip Morris Pakistan once accounting for almost the entire tax collection from legal cigarette sales. More recent FBR yearbooks show that cigarettes remain the single largest contributor to federal excise duty, providing close to 40–41 percent of total FED receipts in recent years.
Current tax collection figures underline this dependence. FBR data and press reports indicate that the cigarette and tobacco sector has generated in the range of Rs. 225–285 billion annually in recent years through FED and related taxes, even after a sharp increase in rates.
At the same time, PRIME and TRACIT estimate that illegal tobacco now makes up about 56 percent of the cigarette market and alone causes more than Rs. 300 billion in lost tax revenue each year.
This contrast is stark. Legal manufacturers in a sector that is one of Pakistan’s top tax contributors are effectively competing with an illegal industry that already controls more than half the market and pays almost nothing into the exchequer. For investors, both domestic and foreign, this is a textbook example of a distorted playing field and a direct disincentive to invest in compliant, higher-productivity operations.
3. A New Enforcement Pivot Since Mid-2025
Policy direction at the political level has shifted noticeably in the second half of 2025. A federal press release on 30 November 2025 records that the Prime Minister has given explicit instructions to clamp down on illegal cigarette production and tax evasion, acknowledging that illegal manufacturing and trade in cigarettes alone are costing the exchequer roughly Rs. 250–300 billion each year.
Operationally, FBR has responded with what it calls a “multi-layered enforcement plan” targeting non-duty-paid cigarette production and illegal supply chains. This includes deploying about 120 Pakistan Rangers personnel at Green Leaf Threshing units, placing more than 200 monitors under tax statutes inside factories, and coordinating tightly with Inland Revenue, FBR Intelligence, and Pakistan Customs. These measures are complemented by a surge of field operations since November and December 2025, many of which have directly hit politically connected players.
4. Taking on Politically Connected Cigarette Manufacturers
One of the most visible actions has been the sealing of factories associated with high-profile political figures. Business Recorder reports that on 29 November 2025, FBR sealed the Souvenir Tobacco Company’s factory in Mardan, despite pressure from “influential quarters.” The same reporting notes that Souvenir is owned by JUI-F Senator Dilawar Khan and that the facility contained multiple high-capacity cigarette-making machines.
Alongside this, the government’s own press communication records that earlier enforcement targeted M/s Souvenir Tobacco for manufacturing non-duty-paid, non-Track-and-Trace cigarettes, and that similar action soon followed against M/s Indus Tobacco Company. In the case of Indus Tobacco, FBR’s Intelligence and Investigation wing first recovered 200 cartons of non-duty-paid cigarettes in Mardan, then RTO Peshawar used that contravention report to seal the manufacturing machinery under relevant federal excise rules. The same press release explicitly notes armed resistance during this operation and identifies one director, Bilal Khan, as belonging to a prominent local political family.
From an investor’s standpoint, these actions matter for two reasons. First, they signal that enforcement is not limited to small roadside units, but can extend to factories linked with sitting legislators and powerful families. Second, they demonstrate that tax administration is willing to absorb political pressure and physical risk in order to enforce compliance, which is a core element of regulatory credibility.
5. Cutting the Illegal Tobacco Supply Chain at Source
Beyond factory closures, Inland Revenue has moved upstream into raw tobacco and semi-processed inputs. On 10 December 2025, RTO Abbottabad seized 3,000 bales of raw tobacco in a large enforcement operation, sealing the premises and initiating a formal investigation. The government has described this as one of the largest tobacco confiscations in the region’s history.
Just two days later, RTO Abbottabad dismantled a fully operational illegal cigarette manufacturing setup found inside the hujra of a politically influential individual. This facility housed high-speed MK-8 machines, a complete packing unit, stamping and bundle-making equipment, and substantial stocks of non-duty-paid cigarettes and branded packaging materials. Packaging linked to Falcon Tobacco, already under investigation in another case, was also recovered, highlighting the networked nature of illegal manufacturing.
Earlier in December, RTO Peshawar had already made what it called “a major enforcement operation” against M/s Universal Tobacco Company in Mardan. Officials discovered undeclared plant and machinery used to process cut tobacco for brands such as “Café” and “Ranger,” with an estimated daily output of 6,000–7,000 kilograms of tobacco. FBR calculated that if converted into cigarettes, the revenue risk from this clandestine production would be around Rs. 45 million each day.
Taken together, these actions show a clear strategy: break the illegal cigarette business at every stage, from raw tobacco movement, to cut tobacco processing, to final manufacturing and storage. For legal investors, including the two large formal cigarette manufacturers, this is the kind of enforcement that can slowly restore confidence that compliance is worth the cost.
6. Customs and Police: Wider Crackdown on Smuggling and Contraband
Illegal trade in Pakistan is not limited to cigarettes. Pakistan Customs and provincial police have been active across a range of smuggled and untaxed products that undercut legitimate businesses in electronics, beverages, cosmetics, tyres, gutka, and even liquor.
In Khyber Pakhtunkhwa, the Collectorate of Customs Enforcement, Peshawar, reported in November and early December 2025 a series of operations worth roughly Rs. 74.4 million. One major action in Dera Ismail Khan intercepted three trucks carrying 12,200 kilograms of smuggled betel nuts, 4,021 sleeves of foreign cigarettes, and 170 tyres, while other operations recovered non-duty-paid cosmetics and seized a JAC pickup loaded with 2,000 sleeves of smuggled cigarettes. A separate Peshawar operation captured smuggled goods valued at Rs. 27.4 million, including cigarette acetate tow, cigarette paper, filter-rod trays, shisha flavours, huqqa pots, and branded soaps.
In southern Punjab, Customs Enforcement Multan, according to a federal press release, seized smuggled cigarettes worth Rs. 21.134 million during targeted operations in the first half of November 2025. In Balochistan, Customs Quetta has reported seizures of smuggled goods worth around Rs. 138 million, including tyres, fabric, cigarettes, and other high-value items, as part of strengthened anti-smuggling drives.
Along Pakistan’s northern border, Pakistan Customs foiled a significant smuggling attempt at Sost dry port in Gilgit-Baltistan on 26 November 2025. Officials seized a consignment of mobile phones, weapon parts, alcohol, and pork meat valued at about Rs. 157.7 million, with the estimated duty and taxes on the seized items amounting to roughly Rs. 78.5 million.
On the coastal belt, Customs Enforcement Gadani has intensified operations along the RCD Highway and nearby routes. In late November 2025, officials reported seizures worth approximately Rs. 1 billion in a single week, including 188 kilograms of hashish and multiple consignments of smuggled goods such as Iranian fuel, agricultural produce, and other contraband.
In Karachi, the Collectorate of Customs (Enforcement), working with Sindh Rangers and Sindh Police, intercepted 22 trucks and a 40-foot container of foreign-origin fabric in November 2025, despite violent resistance from a mob that tried to obstruct the operation.
Law enforcement is also active against socially harmful but highly profitable products like gutka and mainpuri. In January 2025, Hyderabad Police seized a large quantity of Indian gutka, raw materials, and prepared mainpuri, and arrested two suspects under the Gutka and Mainpuri Act.
Separately, Pakistan Customs in Dera Ismail Khan intercepted a truck carrying 4,461 bottles and 2,900 cans of foreign-origin liquor valued at over Rs. 10 million, further illustrating the reach of smuggling networks and the breadth of recent enforcement. These seizures, ranging from cigarettes and their inputs to tyres, electronics, beverages, cosmetics, narcotics, fabrics, and liquor, collectively show that enforcement agencies are beginning to treat illegal trade as a holistic problem rather than a set of isolated incidents.
7. Revenue Potential and Investor Confidence
Once the scale of both legal contribution and illegal leakage is placed side by side, the economic stakes become clear. Legal tobacco companies are already contributing in the range of Rs. 225–285 billion annually in federal excise and related taxes. illegal tobacco, according to PRIME and TRACIT, is depriving the exchequer of more than Rs. 300 billion per year, with 56 percent of the market now outside the tax net.
If enforcement efforts succeed in bringing even a significant portion of the illegal cigarette segment into the tax base, total annual revenue from this single sector could plausibly move into the band of roughly Rs. 500–600 billion, based on the combination of current receipts and estimated losses. That incremental revenue would not only help close Pakistan’s fiscal gap, it would also reassure prospective investors and multinationals that they are entering a market where staying compliant is not a competitive disadvantage.
For other sectors, PRIME and TRACIT highlight similar dynamics: smuggled petroleum alone is linked with about Rs. 270 billion in lost tax revenue, while counterfeit pharmaceuticals, non-duty-paid cigarettes, smuggled tyres, and tea drive further losses, contributing to the Rs. 3.4 trillion overall annual shortfall.
The recent wave of Customs operations in KP, Multan, Gadani, Karachi, Quetta, and Sost directly complement Inland Revenue’s actions in the tobacco sector and collectively represent a structural attempt to turn those leakages into revenue.
Investors looking at Pakistan’s risk profile pay close attention to such signals. Consistent enforcement against well-connected tax evaders, cross-agency coordination, and a visible increase in seizures all indicate greater seriousness about rule of law. In parallel, business advocacy groups such as PBC have repeatedly argued that tackling illegal trade is necessary to protect formal manufacturers, improve competitiveness, and build a credible case for foreign direct investment.
8. Policy Direction: From Campaign to System
Sustaining investor confidence will depend on whether current actions become a permanent system rather than a temporary campaign. The deployment of Rangers at GLT units, the posting of dedicated tax monitors, and the use of intelligence-based raids against large, politically connected operators are important institutional innovations.
For the next phase, three priorities stand out from an investment and governance standpoint. First, consolidation of the Track-and-Trace regime, with genuine coverage of all cigarette and key excisable products, can make it harder for illegal operators to hide within the supply chain. Second, prosecution and conviction of key violators, including those connected to political elites, would send an even stronger message that compliance is non-negotiable. Third, transparent reporting of enforcement results, including sector-wise revenue gains from anti-smuggling operations, would help domestic and foreign investors see the link between enforcement and an improving business environment.
9. Conclusion
Recent enforcement actions by the Government of Pakistan, FBR’s Inland Revenue and Customs wings, and provincial police represent a marked escalation in the fight against illegal trade across cigarettes, gutka, electronics, beverages, cosmetics, fabrics, and liquor. These efforts are beginning to align the tax system more closely with the formal economy and to protect compliant investors from unfair competition by untaxed and smuggled goods.
If this trajectory is maintained and deepened, the combined effect of higher, more predictable tax revenues and a cleaner competitive landscape can play a significant role in rebuilding investor confidence in Pakistan’s key sectors. For a country that loses trillions of rupees annually to illegal trade, sustained action against illegal businesses is not only a fiscal necessity, it is a precondition for credible, long-term investment and growth.