ISLAMABAD: The government is considering introducing a third tier of Federal Excise Duty (FED) on cigarettes, replacing the current two-tier tax structure, through the Finance Bill 2026 as part of efforts to address the growing share of illicit cigarettes in the domestic market, Business Recorder reported, citing sources.
The move is aimed at supporting the documented tobacco sector, which officials say has been adversely affected by the expansion of illicit trade.
Sources said illicit cigarettes now account for around 56% of the local market, reducing the share of tax-compliant manufacturers.
Under the proposal, a new third-tier FED rate of around Rs3,200 per 1,000 cigarette sticks may be introduced.
Officials said concerns over Pakistan’s tobacco taxation regime have also been raised by international donor agencies, which have highlighted the increasing share of illicit cigarettes and its impact on the formal industry.
According to sources, the documented sector has faced challenges following substantial increases in cigarette taxation in recent years, including a sharp rise in FED rates.
At present, locally produced cigarettes with an on-pack retail price exceeding Rs12,500 per 1,000 cigarettes are subject to FED of Rs16,500 per 1,000 sticks.
For cigarettes with an on-pack retail price of up to Rs12,500 per 1,000 sticks, the applicable FED rate is Rs5,050 per 1,000 cigarettes.
Industry seeks stronger enforcement
Separately, Federal Minister for Commerce Jam Kamal Khan assured representatives of the tobacco industry that the government would examine proposals related to taxation, enforcement against illicit trade and measures to strengthen the documented economy.
The assurance came during a meeting with a delegation of Pakistan Tobacco Company (PTC), which discussed budget proposals, tax policy and challenges facing the tobacco sector.
The delegation informed the minister that enforcement measures introduced over the past year had helped reduce the share of illicit cigarettes in the market, contributing to higher government revenues and growth in the documented sector. It argued that continued action against non-duty-paid and smuggled cigarettes could further improve tax collection and support legitimate businesses.
PTC also highlighted concerns over the increasing inflow of smuggled tobacco products through border regions, stating that cigarettes had become one of the most profitable smuggled commodities, resulting in revenue losses and undermining tax-compliant manufacturers.
The company called for the restoration of a simplified Final Tax Regime (FTR) for imports and urged the government to rationalise tax policies in a way that discourages illicit trade while encouraging investment and documentation. It also proposed expanding the tax base by bringing undocumented businesses into the formal economy instead of imposing additional burdens on existing taxpayers.
The delegation further cited high taxation, elevated financing costs, growing compliance requirements and provincial levies as factors affecting business competitiveness. Concerns were also raised over the migration of skilled workers and difficulties in retaining experienced staff.
Speaking at the meeting, Jam Kamal Khan said sustainable revenue growth would come from broadening the tax base and formalising undocumented economic activity.
“The formal sector should be encouraged and facilitated, as it remains the backbone of economic activity, investment and employment generation,” the minister said.
He added that Pakistan must maintain a business-friendly environment capable of attracting both domestic and foreign investment and invited PTC to formally submit its proposals for consideration by the relevant authorities.
The minister also stressed the need for stronger coordination between federal and provincial institutions to reduce business costs, streamline regulations and support exports, investment and industrial growth.
The meeting concluded with both sides agreeing that continued engagement between the government and industry would help develop policies aimed at increasing revenue collection, promoting investment and curbing illicit trade.
