The government is preparing to introduce a third slab in the Federal Excise Duty (FED) structure on cigarettes in the upcoming Finance Bill 2026, as illicit tobacco trade continues to expand and now accounts for around 56% of the market.

According to official 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.

Industry estimates suggest that sharp increases in FED—reportedly up to 200% in recent years—have significantly 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 Rs3,200 per 1,000 cigarette sticks.

Currently, cigarettes are taxed under two slabs: Rs16,500 per 1,000 sticks for higher-priced brands and Rs5,050 per 1,000 sticks for lower-priced products.

Officials say the revised structure is intended to improve tax alignment, reduce incentives for smuggling, and strengthen revenue collection from the documented tobacco sector.