Pakistan budget 2026-27 sparks fresh debate over Tobacco tax policy

Pakistan's Federal Budget for fiscal year 2026-27 has renewed debate over the country's tobacco taxation policy, with the government opting for targeted changes rather than a comprehensive overhaul of cigarette taxes.

Pakistan’s Federal Budget for fiscal year 2026-27 has renewed debate over the country’s tobacco taxation policy, with the government opting for targeted changes rather than a comprehensive overhaul of cigarette taxes. While the budget strengthens taxation on certain nicotine products and introduces measures aimed at improving enforcement, experts believe the overall framework still lacks the consistency needed to maximise revenue and curb illicit trade.

At a time when Islamabad is seeking to increase tax collection, broaden documentation of the economy and reduce revenue leakages, the treatment of tobacco products in the new budget reflects a cautious approach. Instead of revising cigarette excise rates, the government has focused on selected fiscal adjustments and administrative reforms.

One of the most notable changes is a substantial increase in the Federal Excise Duty (FED) on e-liquids used in electronic cigarettes. The duty has been raised from Rs10,000 per kilogram to Rs16,500 per kilogram, signalling the government’s intention to bring emerging nicotine products under a stronger taxation regime.

However, taxation experts argue that the method used to calculate the tax may require reconsideration. Since e-liquids are typically manufactured, marketed and sold in millilitres rather than by weight, applying a kilogram-based tax could complicate valuation, compliance and enforcement. Analysts suggest that aligning the tax base with the way these products are traded in the market could improve transparency and make tax administration more effective.

Another key budget measure is the sharp reduction in Federal Excise Duty on acetate tow, the primary raw material used in cigarette filters. The duty has been lowered from Rs44,000 per kilogram to Rs10,000 per kilogram.

The move has raised questions among economists and tax policy observers because it reduces production costs for cigarette manufacturers at a time when excise duties on finished cigarettes have remained unchanged. Critics argue that lowering taxes on a major production input appears inconsistent with the government’s broader objective of strengthening tobacco taxation and boosting revenue collection.

The decision also comes against the backdrop of the government’s increased emphasis on combating cigarette smuggling, undocumented production and illicit trade. Officials have repeatedly stated that improving enforcement and monitoring remains central to their revenue strategy.

While stronger enforcement can help reduce tax evasion and expand the documented economy, fiscal experts caution that enforcement measures alone cannot compensate for a tax structure that remains unchanged despite persistent inflation.

Pakistan last revised cigarette excise duties in February 2023, meaning the rates have remained fixed for more than three years. During this period, inflation has significantly reduced the real value of specific excise taxes. As prices rise while tax rates remain static, the government’s effective revenue from tobacco products gradually declines unless duties are periodically adjusted.

Economists note that this erosion of the real tax burden weakens revenue mobilisation and reduces the efficiency of the country’s fiscal framework. Regular revisions or inflation-linked adjustments to excise duties are widely viewed as necessary to preserve the purchasing power of tax revenues.

Ahead of the budget, policymakers had reportedly considered introducing a third tier in Pakistan’s cigarette excise system. Such a proposal generated considerable discussion because it could have lowered the effective tax burden on lower-priced cigarette brands and altered the existing tax structure.

The proposal was ultimately omitted from the final budget, a decision that many analysts regard as significant. Although the government refrained from increasing cigarette taxes, it also avoided introducing a structural change that could have further weakened the tobacco tax base.

The policy debate surrounding tobacco taxation attracted input from economists, research organisations and public finance specialists. Institutions, including the Sustainable Development Policy Institute (SDPI), participated in consultations, policy discussions, research publications and stakeholder engagements aimed at shaping the government’s fiscal approach.

These discussions helped keep tobacco taxation on the policy agenda while also highlighting broader concerns related to revenue mobilisation, tax administration and illicit trade. As a result, the budget places greater emphasis on enforcement mechanisms than on increasing statutory tax rates.

Looking ahead, experts believe Pakistan requires a more comprehensive tobacco taxation strategy that balances revenue generation with administrative efficiency. They recommend periodic reviews of cigarette excise duties to ensure inflation does not erode their real value, while also reassessing whether tax relief on production inputs such as acetate tow aligns with broader fiscal objectives.

Specialists also suggest refining the taxation model for e-liquids by shifting towards a unit of measurement that reflects commercial practices, thereby simplifying compliance and improving enforcement.

Beyond conventional taxation, policymakers are also being encouraged to explore environmental levies linked to tobacco production. Tobacco cultivation, curing, manufacturing and post-consumption waste impose environmental costs through deforestation, fuel consumption, emissions and pollution. Some experts argue that future fiscal reforms could consider environmental surcharges or carbon-based levies on tobacco products, provided they are supported by credible environmental data.

Overall, the Federal Budget 2026-27 demonstrates that tobacco taxation remains an important yet unresolved element of Pakistan’s fiscal policy. While the government has strengthened taxation on electronic cigarette products and intensified its focus on enforcement, the reduction in duty on a key cigarette manufacturing input has sparked questions about policy consistency.