Aftab Anwar Baloch
Tax evasion remains one of Pakistan’s most critical economic challenges, eroding the fiscal foundation on which sustainable development depends. It is a core reason behind our persistently low tax-to-GDP ratio, which hovers around 10.5% one of the lowest in the region (Revenue Statistics in Asia and the Pacific 2025). This imbalance severely limits our capacity to invest in health, education, and infrastructure the very sectors that determine a nation’s trajectory.
According to IPSOS Global Market Research, Pakistan loses approximately Rs 956 billion every year due to tax evasion and illicit trade across key sectors such as tobacco, sugar, and cement. These figures are not merely statistics they represent lost opportunities, diminished public services, and a widening gap between potential and reality.
Understanding the Nature of the Problem
The pattern of evasion is most pronounced in indirect taxation, particularly excise duties, where monitoring and enforcement are weaker compared to direct taxes. The tobacco sector illustrates this challenge vividly. In 2016, illicit cigarette trade made up nearly 24% of total sales. Despite several fiscal reforms, by 2021, this number had escalated to 38%, costing the exchequer over Rs 77 billion annually (Business Recorder, 2022).
In an attempt to curb these leakages, the Federal Board of Revenue (FBR) introduced a third tier of Federal Excise Duty (FED) in 2017–18, which temporarily boosted revenue collection to Rs 87.5 billion. However, gains were short-lived due to the re-emergence of unregistered manufacturers, weak monitoring mechanisms, and a lack of digital integration.
The Track and Trace Initiative: A Step toward Digital Governance
Recognizing the urgency, the Government of Pakistan launched the Track and Trace System (TTS), a technology-driven initiative aimed at digitizing the production and supply chain of selected industries in accordance with Article 8 of the Protocol to Eliminate Illicit Trade in Tobacco Products 2012. This system allows the government to monitor real-time production data, distribution, and sales through secure digital stamps and mobile verification.
The Track and Trace consortium, comprising Authentix Inc., AJCL Pvt. Ltd., and MITAS Ltd., was awarded the national license. The project officially commenced on March 5, 2021, with the pilot phase focusing on the cigarette industry; long considered the epicentre of tax evasion.
Implementation timeline:
- Cigarettes: July 2021
- Sugar: November 2021
- Cement: August 2023
- Fertilizers and others: Under consideration
By fiscal year 2021-22, the system yielded a measurable impact. The tobacco sector alone registered an 11% increase in revenue, confirming that technology-driven compliance could reverse the tide of evasion when implemented effectively.
Fiscal Gains and Economic Impact
By 2023-24, Federal Excise Duty (FED) from the cigarette industry surged to Rs 237 billion, compared to Rs 142 billion a year earlier, a remarkable 70% increase. Likewise, sales tax collection rose by over 54%, reaching Rs 60.6 billion. The legitimate cigarette industry now contributes 41% of total excise revenues, becoming the single largest contributor to FED (FBR Annual Report 2024).
Yet, the challenge persists. Despite legal enforcement, non-compliant cigarette packs, lacking both Track and Trace stamps and graphical health warnings remain widely available. According to the National University of Sciences and Technology (NUST) 2024 report, this evasion could cost the national exchequer up to Rs 310 billion annually if enforcement gaps remain unaddressed.
The Pakistan Tobacco Company (PTC) estimates total cigarette consumption at 81 billion sticks annually. Of these, 44% are from legitimate producers, while 56% belong to the illicit and untaxed segment; a clear indication that despite digital measures, enforcement and compliance remains key challenges.
Operational and Institutional Challenges
The initial rollout of the Track and Trace System faced numerous obstacles.
- Litigation and lobbying by vested interests delayed implementation.
- Technical challenges arose from outdated manufacturing lines and limited digital literacy among operators.
- Frequent administrative reshuffling within FBR disrupted continuity and decision-making.
- Insufficient training of field officers led to uneven enforcement and reduced the system’s efficiency.
Moreover, the lack of synchronization between TTS data and customs intelligence systems has hindered real-time enforcement. Without seamless integration, illicit manufacturers can still exploit loopholes between production and retail monitoring.
Institutional inertia remains a major barrier. The OECD Illicit Trade Index 2025 ranks Pakistan 101st out of 158 countries, placing it below both global and regional averages. This reflects not only weak enforcement but also the need for structural reforms in how compliance systems are designed and managed.
Recommendations for Strengthening the Track and Trace Framework
To transform the Track and Trace System into a truly effective fiscal tool, several institutional measures are essential:
- Ensure full independence of authentication elements including holograms, microprints, and UID generation from industry influence.
- Enhance transparency by requiring access to contracts between the FBR and private sector TTS providers to avoid collusion risks.
- Integrate export monitoring the system should track both domestic and export-bound goods to prevent diversion into illicit local markets.
- Expand enforcement capacity develop a specialized workforce trained in data analytics, digital forensics, and on-ground inspections.
- Public engagement and awareness empower consumers to verify legitimate products via smartphone applications linked to the FBR database.
These steps will not only strengthen compliance but also build public trust in the transparency and fairness of Pakistan’s tax system.
Health and Socioeconomic Implications
The implications of illicit trade extend beyond fiscal damage; they pose serious public health and social risks. The easy availability of cheap, untaxed cigarettes fuels higher consumption among youth and low-income groups. According to The News (2024), around 1,200 children aged 6 to 15 starts smoking every day in Pakistan. The lower prices of illegal cigarettes directly contribute to this alarming trend.
Globally, health taxes are being recognized as dual-purpose tools reducing harmful consumption and generating essential revenue. The World Health Organization (WHO) has recently launched the “3 by 35” Initiative, urging nations to increase excise taxes on tobacco, alcohol, and sugary beverages by 50% by 2035 as these are responsible for 75% deaths due to noncommunicable diseases caused by these products. The objective is to curb noncommunicable diseases while simultaneously boosting health-related revenue streams.
Countries like Colombia, India, Mauritius and South Africa have demonstrated success with similar tax models reducing consumption, improving health outcomes, and increasing fiscal stability. Pakistan can take inspiration from these examples by gradually aligning its excise and health taxation policies with WHO recommendations.
FCTC in its recent publication has negated the 14 myths advocated/argued by the Industry in its document DEBUNKING TOBACCO INDUSTRY MISINFORMATION as baseless.
Pakistan has also to regulate and appropriately taxed the new substitutes of tobacco like e-cigarettes, nicotine pouches and vapes as they are freely available in market in a through away prices and alluring the kids, youth, students and affluent and middle and lower middle class people simultaneously. It is also pertinent to draft strict rules and regulations to curb their ads in the social media as it is becoming a menace to addiction.
The Way Forward: Sustained Commitment over Temporary Fixes
The problem of tax evasion cannot be solved through fragmented or short-term measures. It demands sustained political will, institutional continuity, and technological adaptability.
The Track and Trace initiative represents a strong step toward modernizing Pakistan’s tax administration, but its promise will only be realized when policy consistency and enforcement discipline replace administrative fragmentation.
To ensure long-term success:
- The FBR’s data systems must be linked with NADRA, Pakistan Customs, and State Bank databases to detect anomalies across the entire supply chain.
- The government must invest in public-private partnerships that encourage compliance rather than adversarial relations with legitimate businesses.
- And finally, citizens must be engaged as stakeholders in national fiscal integrity through awareness, mobile verification tools, and civic education.
Conclusion
Tax evasion is not just an economic crime; it is an injustice to every citizen who pays honestly, a blow to public welfare, and a hindrance to national progress. Pakistan’s efforts through the Track and Trace System mark the beginning of a digital transformation in governance an effort to restore transparency, accountability, and trust in our fiscal system.
But for this transformation to succeed, every institution from policymakers to enforcement officers must work in synergy. We must move from reactive measures to strategic foresight, from policy announcements to policy execution, and from fragmented enforcement to integrated governance.
As Pakistan steps into a new phase of economic recovery, strengthening our tax system is not just a fiscal necessity; it is a national imperative. Through technology, transparency, and tenacity, we can turn the challenge of tax evasion into an opportunity for sustainable and inclusive.
