Top Takeaways:

• Pakistan’s federal government raised the withholding tax on cigarette distributors from 2.5% to 6% in its 2025–26 budget.
• The industry is already under strain from a 200% Federal Excise Duty (FED), which manufacturers say has fueled illicit trade and reduced legal sales.
• The World Health Organization has continued pressuring Pakistan to further increase tobacco taxes as part of global public health recommendations.

Pakistan’s government has introduced another tax hike on its already struggling cigarette industry, tripling the withholding tax on cigarette distributors to 6% as part of the 2025–26 federal budget. The increase, confirmed by senior sources to ProPakistani, raises the previous 2.5% rate and applies to payments distributors receive when transferring cigarette stocks to retailers under Section 153 of the Income Tax Ordinance.

The move comes as cigarette manufacturers warn of severe pressures following recent federal excise duty increases, which pushed FED on cigarettes to an unprecedented 200%. Companies operating legally in Pakistan report significant sales declines and growing competition from the illicit market, which industry analysts estimate now controls a sizable portion of total cigarette sales.

Government officials have acknowledged the scale of the smuggling problem. Federal Board of Revenue (FBR) Chairman Rashid Mahmood Langrial recently stated that only a fraction of smuggled shipments are intercepted, describing enforcement challenges that have allowed untaxed cigarettes to flood the market. According to FBR estimates, Pakistan loses approximately Rs 300 billion (US$1.1 billion) annually in tax revenue to illicit cigarette sales.

Despite these enforcement shortfalls, the government is under ongoing pressure from international organizations, particularly the World Health Organization (WHO), to continue raising tobacco taxes. WHO officials have argued that higher tobacco taxes are essential to reduce smoking rates and associated health costs, which they estimate result in over 160,000 deaths and Rs 615 billion ($2.2 billion) in annual economic losses in Pakistan.

While tobacco tax collections increased modestly by 7.4% in the first three quarters of fiscal year 2024–25, the underlying data reveals a deeper problem for legal manufacturers. Official figures show a sharp decline of more than 50% in premium cigarette production compared to the prior year, while lower-priced economy brands saw a production increase of around 30%, highlighting consumer shifts toward cheaper, and often illicit, alternatives.

Industry leaders argue that repeated tax hikes risk driving even more consumers into the black market, further weakening legitimate sales and undermining public health objectives. Without significant improvements to enforcement and anti-smuggling efforts, they warn, additional tax increases may have diminishing returns for both revenue generation and health policy.

The new withholding tax is effective with the 2025–26 budget cycle and reflects the government’s continued effort to secure revenue from a sector facing growing instability. However, the balance between raising tax revenue and maintaining control over legal sales will likely remain a major challenge for Pakistan’s fiscal and public health policymakers in the year ahead.