The first half of fiscal year 2025 has painted a perplexing picture of Pakistan’s cigarette industry.

The latest data on cigarette production and tax collection in Pakistan reveals that production is soaring compared to the same period last year, yet tax revenues are mysteriously declining. To further complicate the narrative, a curious anomaly in December 2024 data adds another layer to the puzzle. Let’s dissect these two conundrums and see if we can make sense of the smoke and mirrors.

The numbers reveal a surprising narrative. According to the Pakistan Bureau of Statistics, between July and November of FY25, the cigarette industry produced 15.4 billion sticks. This marks a substantial 30.8% increase compared to the same period last year, when production was 11.8 billion sticks.

While this surge in production raises concerns about potential adverse health implications for the population, one might also expect it to result in a significant revenue boost for the Federal Board of Revenue (FBR). After all, higher production should logically lead to increased tax revenues.

However, the reality is quite the opposite. Revenue collection from both Federal Excise Duty (FED) and Sales Tax have actually declined, by 7.8% and a concerning 27.4%, respectively (Table 1). This paradox raises an important question: how can production soar while tax revenues plummet?

To unravel this first puzzle, we need to examine Pakistan’s distinctive two-tier tax system for cigarettes. This system differentiates between ‘economy’ brands, taxed at a........

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