Government Plans Revised Cigarette Tax Structure to Address Illicit Tobacco Trade
The federal government is planning to introduce changes to the Federal Excise Duty (FED) structure on cigarettes in the upcoming Finance Bill 2026, in response to the growing share of illicit tobacco in the market.
According to official sources, the current two-tier tax system is expected to be replaced with a three-tier structure aimed at improving regulation and reducing market distortions caused by illegal cigarette sales.
Focus on Controlling Illicit Trade
Authorities estimate that the illicit cigarette market has expanded to around 56% of total sales, raising concerns for both policymakers and international development partners. Officials believe that high tax rates, combined with enforcement challenges, have contributed to the growth of the informal sector.
The proposed changes are intended to strengthen the formal industry while improving tax compliance and overall market regulation.
Impact of Existing Tax Structure
In recent years, sharp increases in Federal Excise Duty—reported at nearly 200%—have placed pressure on legal manufacturers. This has also contributed to a decline in compliance and a shift toward untaxed or smuggled products.
Currently, cigarettes are taxed under two slabs:
- Rs. 16,500 per 1,000 sticks for premium brands
- Rs. 5,050 per 1,000 sticks for lower-priced brands
Proposed Changes
Under the new proposal, a third tax tier is expected to be introduced with an estimated duty of around Rs. 3,200 per 1,000 cigarette sticks. Officials say the revised structure is designed to create a more balanced taxation system across different price segments.
Outlook
The government hopes the revised framework will help reduce illegal trade, improve revenue collection, and support the formal cigarette industry, while ensuring better enforcement across the supply chain.
