Government Weighs Third FED Tier For Cigarettes

The federal government is reportedly evaluating the introduction of a third tier of Federal Excise Duty (FED) on cigarettes through the Finance Bill 2026, replacing the existing two-tier taxation framework as part of broader efforts to address the growing prevalence of illicit tobacco products in the domestic market.

According to a report by Business Recorder, the proposal is intended to provide support to the documented tobacco industry, which officials believe has experienced significant market pressure due to the rapid expansion of untaxed and illicit cigarette trade.

Sources indicated that illicit cigarette products currently account for approximately 56% of the local cigarette market, substantially reducing the market share of tax-compliant manufacturers and impacting government revenue collection.

Under the proposal being considered, a third-tier FED rate of approximately Rs3,200 per 1,000 cigarette sticks may be introduced. The objective is to create an intermediate taxation category that could help narrow the price gap between legal and illicit products while encouraging greater market documentation.

Officials further noted that concerns regarding Pakistan’s tobacco taxation framework have also been raised by international donor institutions, which have highlighted the increasing penetration of illicit cigarettes and its adverse implications for both revenue generation and the formal tobacco sector.

According to sources, the documented tobacco industry has faced considerable challenges following substantial increases in cigarette taxation over recent years, including significant upward revisions in Federal Excise Duty rates.

Currently, locally manufactured cigarettes carrying an on-pack retail price exceeding Rs12,500 per 1,000 sticks are subject to FED at the rate of Rs16,500 per 1,000 cigarettes. Cigarettes with an on-pack retail price of up to Rs12,500 per 1,000 sticks are taxed at Rs5,050 per 1,000 cigarettes under the existing structure.

Separately, Jam Kamal Khan met representatives of Pakistan Tobacco Company (PTC), during which discussions focused on taxation policy, budget proposals, regulatory challenges, and measures to address illicit trade within the tobacco sector.

During the meeting, the tobacco industry delegation informed the minister that enforcement actions undertaken over the past year had contributed to reducing the market share of illicit cigarettes, resulting in increased government revenues and improved performance of the documented sector. The delegation maintained that continued action against smuggled and non-duty-paid tobacco products could further strengthen tax collection and support legitimate businesses.

PTC also expressed concerns regarding the increasing inflow of smuggled tobacco products through border regions, arguing that cigarettes have become one of the most profitable commodities within the illicit trade network. According to the company, this trend has resulted in significant revenue losses and placed tax-compliant manufacturers at a competitive disadvantage.

The company urged the government to restore a simplified Final Tax Regime (FTR) for imports and to pursue a more balanced taxation framework aimed at discouraging illegal trade while promoting investment, business growth, and economic documentation.

In addition, PTC recommended expanding the national tax base by bringing undocumented businesses into the formal economy rather than imposing additional tax burdens on existing compliant taxpayers.

The delegation also highlighted a number of operational challenges affecting the sector, including high tax rates, elevated financing costs, increasing regulatory compliance obligations, provincial levies, and difficulties associated with retaining skilled workers amid growing migration trends.

Addressing the meeting, Commerce Minister Jam Kamal Khan stated that sustainable growth in government revenues would depend upon broadening the tax base and formalising undocumented economic activity.

He emphasised that the formal sector should be encouraged and facilitated, describing it as a critical contributor to economic activity, investment, industrial development, and employment generation.

The minister further stated that Pakistan must maintain a competitive and business-friendly environment capable of attracting both domestic and foreign investment and invited the company to formally submit its proposals for review by the relevant authorities.

He also underscored the importance of stronger coordination between federal and provincial institutions to reduce business costs, simplify regulatory procedures, and support exports, investment, and industrial growth.

The meeting concluded with a mutual understanding that continued engagement between government stakeholders and industry representatives would assist in developing policies designed to improve revenue collection, enhance investment opportunities, strengthen documentation, and combat illicit trade.