The federal government is currently evaluating a proposal to extend significant tax relief to the tobacco sector in the forthcoming federal budget for the fiscal year 2025–26. Industry representatives have reportedly submitted two key demands: the creation of a third excise duty tier with a lower rate of Rs 2,525 per 1,000 cigarette sticks, and a reduction in the current federal excise duty (FED) from Rs 5,050 to Rs 3,800 per 1,000 sticks.
These proposals arrive at a contentious time, as the tobacco industry faces mounting criticism for alleged manipulation of production data and potential tax evasion. During a recent roundtable hosted by the Sustainable Development Policy Institute (SDPI) in Karachi, Muhammad Asif Iqbal from the Social Policy and Development Centre (SPDC) accused major manufacturers of intentionally misreporting production volumes to shape fiscal policy in their favor.
Iqbal presented data showing a 19.2% increase in tobacco production during the July–December period of the current fiscal year, compared to the same period last year. Paradoxically, despite this rise in output, the government recorded a 2.4% decline in FED collections and a dramatic 26.1% drop in GST revenues. These figures, according to Iqbal, point to systemic issues within the industry’s tax compliance.
The SPDC report also revealed that illicit cigarette trade continues to pose a challenge, with 21.3% of the market composed of locally produced, tax-evading products. Smuggled cigarettes account for an additional 11.9%. However, Iqbal argued that contrary to the industry’s claims, high taxes are not the primary cause of this illicit trade—rather, the tobacco sector’s own underreporting and evasion practices are largely to blame.
Public health experts and fiscal analysts are raising red flags, warning that granting tax relief could severely undermine Pakistan’s anti-smoking efforts and fiscal credibility. There are signs that the International Monetary Fund (IMF) might support the government’s proposals, which could enable the tobacco industry to secure additional profits of Rs 10–20 billion annually.
Critics stress that any short-term financial gain would likely be outweighed by a far greater long-term health cost. As the budget announcement nears, the government’s decision on the tobacco tax structure remains under intense scrutiny from both local and international observers.