Islamabad – Pakistan is facing an alarming economic challenge, losing approximately $100 billion annually due to illegal economic activities such as tax evasion, smuggling, and counterfeiting, according to a newly launched study. The report, titled “Towards an Optimal Tax Regime for Pakistan’s Tobacco Sector,” was authored by renowned economist Sakib Sherani and released by ACT Alliance Pakistan. Pakistan’s economy is severely impacted by an unsustainable tax regime that has inadvertently fueled the rise of illegal trade, particularly in the cigarette sector. This crisis not only results in massive tax revenue losses but also undermines the state’s authority. The study reveals that the country loses over Rs300 billion annually due to inefficiencies in the taxation system, which have encouraged the growth of illicit markets. ACT Alliance Pakistan, a civil society network dedicated to combating illegal economic activities since 2016, estimates that Pakistan’s losses from illicit trade extend far beyond the tobacco industry, affecting various sectors and hampering economic growth. The report highlights the urgent need for policy interventions to counter the rapid expansion of illegal cigarette trade, which now dominates the market. It further explains that Pakistan’s government has exceeded the “optimal tax point,” where excessive tax hikes now decrease revenue instead of increasing it. The price elasticity of demand for cigarettes in Pakistan is -1.4, meaning that tax hikes on legal products only push consumers toward illicit alternatives. “The current tax policy on cigarettes is failing on multiple fronts,” said Sakib Sherani. “It has led to a surge in illegal trade, market distortions, and declining revenues. The formal sector, which contributes over 98% of tax revenue from the industry, is shrinking, while illegal operators continue to thrive unchecked.” For the first time in Pakistan’s history, illegal cigarette sales have surpassed legitimate sales for two consecutive years, accounting for 56% of the total market. Despite repeated tax increases on legally compliant brands, these measures have failed to meet revenue targets,…