The federal government is reportedly reviewing a proposal to introduce a three-tier Federal Excise Duty (FED) structure for cigarettes as part of discussions surrounding the Finance Bill 2026.
The proposed change is aimed at tackling the growing share of illicit cigarette sales while easing pressure on the formal tobacco industry, which officials say has been affected by an uneven tax structure and weak enforcement.
If approved, the existing two-tier FED system would be replaced with a three-tier model. Under the proposal, a new middle tax slab could be introduced with an estimated duty of around Rs3,200 per 1,000 cigarette sticks, positioned between the current categories for premium and lower-priced brands.
At present, premium cigarette brands are subject to a duty of Rs16,500 per 1,000 sticks, while lower-tier products are taxed at Rs5,050 per 1,000 sticks.
The proposal is being considered at a time when illicit cigarettes are believed to account for nearly 56 percent of the market. Officials and industry stakeholders argue that high taxes, coupled with inadequate enforcement, have fueled the expansion of the illegal sector.
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According to industry observers, repeated increases in Federal Excise Duty in recent years, reportedly reaching 200 percent, have made legal cigarette products less competitive compared to untaxed and smuggled alternatives.
Supporters of the proposed three-tier system believe it could help strengthen the formal market by creating a more balanced taxation framework. Legal manufacturers have reportedly experienced declining sales due to higher prices and growing competition from illicit brands.
Policymakers are currently assessing whether changes to the tax structure could improve compliance, support the formal sector, and increase government revenue.
No final decision has been made so far, and the proposal remains under consideration ahead of the announcement of the Finance Bill 2026.