Tobacco taxation and youth initiation

Business Recorder

5 days ago

Tobacco use in Pakistan is not just a public health concern, it is a fiscal crisis demanding urgent re-evaluation of cigarette taxation especially as it fuels youth initiation. Every year, it claims approximately 164,000 lives and drains nearly Rs 700 billion from the economy through healthcare and lost productivity.
Despite this, cigarette taxes have remained untouched since February 2023. Policymakers continue to hesitate at a time when swift and evidence-based action is needed most, especially to protect the youth from early addiction of tobacco consumption.
The 2025–26 federal budget with a total outlay of Rs 17.57 trillion reflects continued fiscal restraint, with health infrastructure development bearing the brunt. The combined budget for the Ministry of Health, National Health Services Regulation & Coordination was cut nearly 16 percent, declining from Rs 54.87 billion in FY2024-25 to just Rs 46.10 billion and the Public Sector Development Programme (PSDP) allocation shrank from Rs 27 billion to Rs 14.34 billion, a staggering 47 percent real-term cut. Meanwhile, defence outlay surged to Rs 2.55 trillion, which highlights an ongoing prioritisation of security over social development. This stark contrast underscores the need for an alternative sustainable revenue streams like tobacco taxation.
In this fiscal context, tobacco control remains sidelined. Our two-tier Federal Excise Duty (FED) remains unchanged with PKR 330 per pack applied on premium brands and PKR 101 on economy brands. As inflation and income have risen, this makes cigarettes more affordable. The 2023 hike provided a welcomed 19.2 percent drop in legal consumption and a 66 percent surge in revenue from Rs 142 billion to Rs 237 billion but without further action, affordability of tobacco products is climbing again. This reversal affects adolescents disproportionately who are more likely to initiate smoking when cigarettes are financially accessible.
There is compelling evidence for reform. A March 2025 fact sheet by Social Policy and Development Centre 'SPDC-WHO–Tobacco-Free Kids' shows that a modest PKR?39 FED increase, raising the duty to PKR 140 for economy and PKR?369 for premium pack would cut cigarette consumption by 6.9 percent. It would help reduce the number of smokers by approximately 263,000 and generate an additional Rs 67.4 billion in revenue. Youth would be particularly protected given their higher price sensitivity. Economic models from comparable countries suggest that taxation is the single most cost-effective method to deter smoking among youth.
Yet, this statistical warning is overshadowed by a dark reality, the rise of illicit cigarette trade. Pakistan is ranked 101st on the 2025 Illicit Trade Index. Illicit trade is estimated to be causing a revenue loss of Rs 300 billion in taxes potentially increasing to Rs 415 billion, as unauthorized brands now constitute 58 percent of the market. That leaves only 42 percent of cigarette consumption which contributes to the treasury. This is not a revenue issue solely rather it shows a significant breach in regulation and oversight undermining national development and exacerbating public health risks.
The industry protests that higher taxes worsen this. However, after the 2023 hike, legal consumption fell and revenue grew, hardly the signs of a failing tax policy. Instead, weak enforcement, porous borders and brand-switching loopholes exacerbated by our tiered excise system are the true culprits.
Umeed-e-Sehar study shows 67 percent of smokers shifted to illegal, unstamped cigarettes with 71 percent switching brands and 89 percent maintaining their consumption.
These figures point to the urgent need for administrative reform alongside fiscal changes. It will reduce consumption modestly, increase government revenue substantially and most importantly, discourage smoking among youth and low-income populations who are far more price-sensitive.
Pakistan has the legal tools; a WHO Illicit Trade Protocol-compliant Track & Trace system ratified in 2018 but implementation remains highly uneven. Only major manufacturers have installed the system while smaller firms lag behind and only 19 out of 413 brands comply fully. This leaves illicit players free to capitalize on gaps in retail enforcement especially in AJK and along the western corridor. Smuggling remains prevalent partly due to weak border controls and limited inter-agency coordination. Strengthening the Federal Board of Revenue's enforcement capacity, including real-time tracking and digital verification systems, must be prioritized.
Pakistan now stands at a policy crossroads. Without change cigarettes become more affordable, illicit trade expands further and youth initiation accelerates. A moderate excise hike of PKR 39–60 per pack, uniformly applied, indexed to inflation and linked to FED stamps, enforcement, and retailer compliance could reclaim lost revenue and reduce youth smoking. Such reform would also simplify taxation structures, making them easier to monitor and enforce. This is a win-win for both government and public health.
The opportunity is also strategic. With the health sector development cut by nearly half, tobacco tax reform could free up Rs 67 billion+ for prevention, withdrawal, pictorial warnings, and youth education, thereby plugging critical gaps in infrastructure. Funds can also be redirected toward developing smoke-free campuses, launching public awareness campaigns and training healthcare workers to provide support for quitting tobacco among at-risk youth populations.
Defenders of the status quo argue that illicit trade makes reform dangerous. Yet the evidence is clear; the main driver of illicit markets isn't taxation, it's our own institutional weakness. To counter this, enforcement must be paired with fiscal action. A uniform FED regime will reduce price gaps which would eliminate incentives to downgrade or buy illicit. Stronger penalties for smuggling and retailer non-compliance, combined with a well-publicised crackdown could help restore consumer trust and market stability.
Tobacco fiscal reform is not a luxury rather a strategic necessity. With political resolve and public support, Pakistan can shift from passive loss to proactive protection of its youth, its economy and its public health future.
Copyright Business Recorder, 2025