Pakistan is grappling with a significant economic crisis, compounded by an alarming rise in illicit trade that threatens both revenue generation and public health. As the government seeks a $7 billion loan from the International Monetary Fund (IMF), experts argue that addressing rampant smuggling and tax evasion should take precedence over imposing additional taxes on the people of Pakistan.
Recent estimates reveal that illicit trade costs Pakistan over 2 trillion rupees (approximately $7 billion) annually, with major sectors such as real estate, pharmaceuticals, tobacco, tyres and lubricants, and tea contributing to this staggering figure.
The real estate sector alone accounts for a staggering Rs 500 billion in annual tax evasion, while the illicit tobacco trade results in losses of Rs 310 billion. The tyre and lubricant sectors see tax evasion of Rs 106 billion, and the pharmaceutical industry incurs losses of Rs 65 billion annually. Smuggling through the Afghan Transit Trade is projected to cost the national exchequer at least Rs 1,000 billion in import-related tax revenue.
Finance Minister Muhammad Aurangzeb has indicated that without increasing tax rates, Pakistan will remain dependent on IMF loans to address its external deficit. However, macroeconomic analyst Osama Siddiqui emphasizes that merely raising taxes is not a sustainable solution. Instead, he advocates for a comprehensive strategy to curb illicit trade, which includes enhancing border control, implementing stricter regulations, and utilizing technology to monitor compliance.
The IMF has previously underscored the importance of curbing illicit trade as a condition for financial assistance. Specifically, the Fund has recommended that the Federal Board of Revenue (FBR) impose a uniform excise duty on all locally manufactured cigarettes to boost tax revenues.
Currently, the legal tobacco sector is dominated by just two companies, while a significant portion of the market—estimated at 63%—is occupied by illicit cigarette manufacturers. This disparity has led to a loss of over Rs 310 billion in tax revenue, exacerbating the economic challenges facing the country.
To combat this issue, Siddiqui suggests that the government must enforce the Track and Trace (T&T) system more rigorously across various industries. This system has the potential to generate over Rs 550 billion annually by ensuring that all manufacturers comply with tax regulations. However, its implementation has been inconsistent, allowing illicit trade to flourish.
“Pakistan’s path to economic recovery hinges not just on securing international loans but on taking decisive action against illicit trade. By addressing tax evasion and smuggling, the government can restore fiscal health, enhance public safety, and ultimately secure a more stable economic future,” he concluded.
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Not only that reducing overhead expenditure on government and armed forces, curbing corruption, elimination of undue perks and privileges of every one in authority, all put together can put Pakistan back on it’s feet.