(Following is a summary of PRIME Institute’s landmark report on the illegal trade activity in Pakistan. The report can be accessed via https://primeinstitute.org/. PRIME Institute is based in Islamabad, Pakistan.)
1. Big Picture: Illegal Trade As A Structural Threat
The report frames Illegal trade as a central threat to Pakistan’s economy, formal businesses, and consumer safety. Illegal trade includes smuggling, tax evasion, counterfeiting, and unauthorized manufacturing across sectors such as petroleum, tobacco, tires, food, pharmaceuticals, and electronics.
According to the brief, Pakistan’s informal economy is estimated at about USD 123 billion, which is linked to an annual tax revenue loss of roughly Rs. 3.4 trillion.
Pakistan’s performance on the 2025 Illegal Trade Index underlines the depth of the problem:
| Indicator | Value |
| Global average score (2025) | 49.9 |
| Pakistan’s rank | 101 / 158 |
| Pakistan’s composite score | 44.5 |
| Top performer | Denmark – 76 |
| United States | 75.4 |
| Germany | 73.5 |
| Lowest performers | Central African Republic – 29.7; Venezuela – 27.1; Yemen – 25.7 |
Pakistan scores below global and regional averages and trails peers such as China (rank 40), India (52), Sri Lanka (73), and Bangladesh (95).
2. Pakistan’s Profile On The Illegal Trade Index
The Index assesses six broad categories. Pakistan’s own profile is mixed, with one relative strength and several serious weaknesses:
| Category | Pakistan’s Score |
| Trade, Customs and Borders | 75.4 (above global average 56.5) |
| Taxation and Economic Environment | 47.3 (below global average 60.5) |
| Regulatory Framework and Enforcement | 46.4 |
| Criminal Enablers of Illegal Trade | 42.7 |
| Supply Chain Intermediaries | 25.9 |
| Sectoral Illegal Trade Indicators | 29.3 |
While the border-related score is relatively high, the report stresses that internal supply chains, enforcement, and sectoral controls are weak, so illegal trade flourishes inside domestic markets despite some border capability.
3. Illegal Cigarettes: The Core Case Study
The brief repeatedly uses the cigarette market as the clearest example of how taxation and weak enforcement stimulate illegal trade.
3.1 Tax Shock And Market Shift
In February 2023, the government increased Federal Excise Duty (FED) on tobacco products by up to 150 percent to raise revenue. After this move, the market share of illegal cigarettes jumped from about 30 percent to 56 percent, and the report estimates an annual tax loss of more than Rs. 300 billion from tobacco smuggling and non-tax-paid cigarettes.
Key details:
| Element | Figure |
| FED on filter rods | Rs 80,000 per kg |
| FED on acetate tow | Rs 44,000 per kg |
| FED on tobacco | Rs 390 per kg |
| Minimum legal retail price (MLP) – Value Tier | Rs 119 per pack (sales tax + FED) |
| MLP – Premium Tier | Rs 389 per pack (sales tax + FED) |
| Illegal cigarette market share (post-2023 hike) | 56% |
| Annual revenue loss from illegal cigarettes | > Rs. 300 billion |
High excise and a steep MLP are presented as critical triggers pushing both consumers and traders into the illegal segment.
3.2 Track And Trace Failure In Cigarettes
The Federal Board of Revenue introduced the Track and Trace System (TTS) in 2021–22 to curb tax evasion and monitor production. Implementation in tobacco has been poor:
- An IPOR study in 2024 found that only 19 of 264 cigarette brands were compliant with TTS rules.
- About 56 percent of the cigarette market consisted of non-compliant and untaxed products.
- The executive summary notes that around 95 percent of cigarette brands are selling openly without tax stamps.
The report concludes that despite taxing raw materials (tobacco leaf, acetate tow, filter rods), illegal cigarettes remain widely available and continue to evade roughly Rs. 300 billion in taxes each year, highlighting a classic enforcement failure rather than a lack of legal instruments.
4. Sectoral Picture: Where The Money Is Lost
A core section of the brief quantifies illegal trade across several key sectors.
4.1 Sectoral Revenue Losses
| Sector | Illegal Share / Problem | Tax / Duty Structure | Estimated Annual Revenue Loss |
| Tobacco | 56% of market illegal | High FED on rod, acetate tow, tobacco; raised MLP in 2023 | Rs 300 billion |
| Pharmaceuticals | Around 40% of medicines counterfeit or substandard | Low import rates for essentials, DRAP approvals required | Rs 60–65 billion |
| Tires & lubricants | Over 60% of tires sold are smuggled | 35% customs duty, 17% sales tax | Rs 106 billion |
| Petrol/Diesel | About 2.8 billion liters smuggled from Iran | Customs duty Rs. 16 per liter, Petroleum Development Levy Rs. 60 per liter | Rs 270 billion |
| Tea | Around 30% market share illegal | Minimum retail price Rs. 1,200 per kg, 18% sales tax | Rs 10 billion |
| Total (these sectors) | — | — | Rs 751 billion |
In addition, the report cites:
- Rs 1 trillion revenue loss from leakages linked with Afghanistan Transit Trade.
- Rs 270 billion lost from oil smuggling, which ties into the petrol/diesel figures above.
These sectoral losses sit on top of the broader Rs. 3.4 trillion tax gap associated with the informal economy.
5. Economic Policy, Inflation, And The Informal Economy
The analysis stresses how macroeconomic conditions and tax policy amplify illegal trade.
5.1 Inflation Pressures
Pakistan’s recent inflation track is presented as a major demand-side driver:
| Year | Average Inflation Rate |
| 2022 | 12.15% |
| 2023 | 29.18% |
| 2024 | 23.41% |
| First 9 months of FY 2025 | 5.25% |
Sharp price increases over 2022–24 decimated purchasing power, creating strong incentives for consumers to shift to cheaper, often illegal substitutes, whether in cigarettes, fuel, or medicines.
5.2 Size Of The Informal Economy And Tax Ratios
The size of the informal sector is given through several estimates:
- Independent experts often place it at roughly one-third of the formal economy.
- SMEDA estimates the informal economy at more than 40 percent of GDP.
- The Pakistan Business Council puts the informal economy at USD 123 billion, tied to a Rs. 3.4 trillion annual revenue loss.
Despite high statutory rates, Pakistan’s tax-to-GDP ratio remains around 9–10 percent, which the report interprets as evidence that rising rates without enforcement simply push activity into the shadows rather than expanding the tax base.
6. Border Management, Seizures, and Control Gaps
Although Pakistan scores 75.4 on the Index’s “Trade, Customs and Borders” category, the brief points to persistent and serious weaknesses.
6.1 Seizure Data
Federal Board of Revenue seizure statistics underscore both the scale of the problem and the limits of current enforcement:
| Year | Value of Seized Smuggled Contraband & Drugs |
| 2022 | Rs 3,052 million |
| 2023 | Rs 10,860 million |
| 2024 | Rs 2,400 million |
These numbers are tiny relative to the scale of smuggling (for example, 2.8 billion liters of fuel from Iran and Rs. 300+ billion in illegal cigarettes), which suggests the majority of illegal flows are not intercepted.
6.2 Structural Enforcement Problems
The report highlights several structural weaknesses:
- Porous borders with Afghanistan and Iran, particularly for petroleum, electronics, tobacco, spare parts, and drugs.
- Outdated border infrastructure and limited automation, especially in Balochistan, where enforcement resources are spread thin.
- Lack of risk-based profiling and modern container scanning technologies.
- Weak interagency coordination between Pakistan Customs and security agencies, leading to fragmented and reactive enforcement.
7. Investment Climate And Sovereign Risk
The brief connects illegal trade, policy distortion, and weak enforcement to Pakistan’s deteriorated investment climate.
International rating agencies classify Pakistan as high risk:
| Agency | Long-Term Rating | Interpretation |
| Fitch | B- | Highly speculative |
| Moody’s | Caa2 | Substantial risk |
| S&P | CCC+ | Substantial risk |
Illegal trade, by damaging tax collection, undermining rule of law, and eroding incentives for formal investment, is presented as one of the structural reasons behind this low credit profile. High borrowing costs and limited access to global capital then feed back into slow growth and weak state capacity.
8. Policy Response: What The Report Recommends
The recommendations aim to attack both demand and supply, with cigarettes and other excisable goods at the center.
8.1 Demand-Side Measures
Key proposals include:
- Increase budgetary allocations for enforcement, with a stated potential revenue upside of Rs. 750 billion if done properly.
- Strengthen retail-level enforcement, making spot checks routine, empowering provincial governments to raid wholesale and retail outlets, and equipping officers with tools to verify tax stamps.
- Enhance and modernize tax stamps so the distinction between tax-paid and non-tax-paid goods is clearer.
- Run consumer awareness campaigns against illegal trade and tax evasion, using media coverage of raids to build deterrence.
- Raise penalties and speed up judicial processes for illegal trade cases.
8.2 Supply-Side Measures
On the supply side, the report calls for:
- Crackdowns on clandestine factories and strict monitoring of inflows from non-tariff areas like AJ&K.
- Tighter control of key raw materials in sectors such as cigarettes, where smuggling of tobacco leaf, acetate tow, and filter rods undermines current excise structures.
- Recognition and rewards for effective enforcement officers, plus continuation of the policy to confiscate and destroy non-duty-paid stock and publicize such actions.
- A formally commissioned FBR survey to estimate illegal market share, funded with support from credible international partners, to ensure impartial measurement.
9. Overall Message
The PRIME–TRACIT brief portrays illegal trade in Pakistan as a macro-level problem tied to inflation, distorted tax policy, porous borders, and weak internal enforcement. Illegal cigarettes occupy a central place in the analysis: after a sharp excise hike, illegal brands now hold over half the market, depriving the state of more than Rs. 300 billion a year and exposing serious failures in tools such as Track and Trace.
The report’s core argument is that Pakistan can reclaim hundreds of billions of rupees and improve its investment climate only if it simultaneously rationalizes taxes, fully enforces systems like TTS in the cigarette sector and beyond, modernizes border and customs controls, and builds a culture of compliance from factory gate to retail shelf.
Please read the full file here: https://actalliance.pk/wp-content/uploads/2025/11/PRIME-Report-on-Combating-Illicit-Trade-in-Pakistan.pdf