The federal government is preparing to introduce a third slab in the Federal Excise Duty (FED) structure on cigarettes in the upcoming Finance Bill 2026, as the illicit tobacco trade continues to expand to 56 percent of the market.
According to sources, the existing two-tier excise system will be revised into a three-tier structure.
The change is aimed at easing pressure on the formal cigarette industry while addressing distortions created by a rapidly growing illegal market.
The expansion of illicit cigarettes has also raised concerns among international development partners, who argue that high tax rates combined with weak enforcement have pushed a large portion of the market into the informal sector.
Sharp increases in FED (up to 200 percent in recent years) have badly affected legal manufacturers and contributed to declining compliance in the sector.
Under the proposed system, a new third tier is expected to be introduced with an estimated duty rate of around Rs. 3,200 per 1,000 cigarette sticks.
Currently, cigarettes are taxed under two slabs: Rs. 16,500 per 1,000 sticks for higher-priced brands and Rs. 5,050 per 1,000 sticks for lower-priced products.
