While consumption of duty-paid cigarettes has grown from 77 billion in 2010 to 80 billion in Pakistan in 2015, overall, their share has reduced, as consumers turn to the black market for more affordable price point. Over 2010-2015, the share of non-duty paid cigarettes has more than doubled, from 11% of the market to 24%. High levels of unemployment and low incomes fuel the importance of lower prices, meaning consumers prioritize value above anything else when it comes to cigarettes.
The black market comprises two major market sectors: tax-evaded cigarettes and smuggled cigarettes. The tax-evaded sector is the most significant out of the two, being responsible for a fifth of cigarette consumption in 2015. Meanwhile, smuggling is also growing in importance, as it has risen from 1.9% to 2.6% over 2010-2015. The main reason for the rise in smuggling appears to be the long and now porous border between Pakistan and Afghanistan. According to the Dawn newspaper publication in 2015 which cites the Federal Board of Revenue statistics, overall, the illicit tobacco trade cost the Pakistani government Rs7.4bn (US$0.07bn ) in taxes.
In an attempt to counteract illicit sales, the government suggested introducing tax stamps. However, low incomes and proposed excise tax rises mean that the black market is unlikely to decline, making the country a difficult market for legitimate producers, especially in the value sector.
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