Illicit trade has emerged as a critical challenge for Pakistan’s economy, undermining formal businesses, eroding government revenues, and jeopardizing consumer safety. From smuggled petroleum and counterfeit pharmaceuticals to non-tax-paid cigarettes and under-invoiced consumer goods, illicit trade has entrenched itself across key sectors. The gravity of this issue is manifested by an estimated annual tax revenue loss of Rs. 3.4 trillion on account of an estimate of $123 billion informal economy. According to the 2025 Illicit Trade Index, Pakistan ranks 101 out of 158 countries, performing below global and regional averages, highlighting systemic weaknesses in governance, enforcement, and economic policymaking.

The drivers of illicit trade in Pakistan are both economic and institutional. High customs duties, complex tariff regimes, inflation, and a growing informal economy incentivize businesses and consumers to move away from the formal sector. Regulatory inconsistency and protectionist trade policies further add to the cost of doing legal business. Simultaneously, porous borders, outdated customs infrastructure, and limited inter-agency coordination allow the unchecked movement of illicit goods. Enforcement mechanisms, though partially effective at the borders, remain weak within domestic markets, especially at the retail and distribution levels. The suboptimal performance of the Track and Trace System, adopted to monitor tax compliance, reflects weak implementation, with only a fraction of cigarette brands complying.

To address these multifaceted challenges, a comprehensive and coordinated strategy is required. Based on extensive consultations, data analysis, and technical review, the report proposes the following key recommendations:

1. Fully implement the Track & Trace system in sectors which are prone to counterfeiting and smuggling (e.g. 95% of cigarette brands are selling openly without the affixation of tax stamps).
2. Improve retail-level enforcement by conducting regular spot checks at points of sale and strengthening the visibility of enforcement actions to deter illegal trade. Law enforcement agencies should be equipped with the necessary tools to authenticate tax stamps. Strengthen and evolve tax stamps as they play a crucial role in distinguishing between taxpaid and non-tax-paid goods.
3. Avoid unplanned tax increases as they encourage illegal trade to thrive. All tax increases should be aligned with inflation.
4. Ensure stricter border control and monitor the flow of goods coming from neighboring countries and non-tariff areas such as AJ&K, ensuring that products coming into Pakistan are duty paid.
5. Launch consumer awareness campaigns by educating the public on the risks of counterfeit and tax evaded goods with support from industry and international partners.
6. Enhance inter-agency coordination by facilitating information sharing and joint operations between FBR, provincial Governments and border security forces.