Effective control over tax evasion in the tobacco sector can significantly reduce the revenue deficit and enable the government to better withstand internal and external economic pressures.

The evolving situation in the Middle East, coupled with the failure to meet tax targets, is putting a serious strain on Pakistan’s fiscal balance. On the one hand, the government is cutting development funds to provide fuel relief to the public and on the other, a shortfall of Rs185 billion in the March tax target is widening the budget deficit. To bridge this gap, the IMF is pushing for the withdrawal of tax exemptions, a move expected to increase the cost of doing business.

The Federal Board of Revenue (FBR) had been assigned a target of Rs1,367 billion for March; however, collections fell short by Rs185 billion, reaching Rs1,182 billion. Last year, the FBR collected Rs1,116 billion in March, requiring a 21% growth this year to meet the target, but only a 6% rise was recorded.

Meanwhile, significant cuts have been made to the development budget, including Rs22.3 billion for the National Highway Authority, Rs12.9 billion for water-sector projects, Rs10.2 billion for provincial schemes, Rs9.1 billion for the Power Division and Rs7 billion for Sustainable Development Goals (SDGs)-related projects, along with smaller reductions across other sectors.

“Amid rising fiscal pressure, the illegal cigarette trade is a major source of tax evasion, with more than Rs300 billion in annual revenue losses from non-duty-paid cigarettes,” said Osama Siddiqui, a macroeconomic analyst.

He added that curbing tax evasion in the tobacco sector could substantially reduce the revenue shortfall and help the government better manage both domestic and external economic challenges.

He emphasised that instead of repeatedly increasing direct or indirect taxes on consumers, the salaried class or already taxed sectors, the government should focus on targeted enforcement against illegal manufacturing and the smuggling of cigarettes, effective implementation of the track-and-trace system and strict monitoring at the retail level. Moreover, he said that eliminating tax evasion in the cigarette trade could not only provide fiscal space for public relief but also generate additional resources for development projects, playing a critical role in addressing current economic challenges.