The World Health Organization (WHO) has officially submitted its budget proposals for FY 2025–26 to the Federal Board of Revenue (FBR), urging Pakistan’s tax authorities to revise and reinforce tobacco taxation policies. The global health body emphasized the importance of regular Federal Excise Duty (FED) adjustments and stronger monitoring to prevent manipulation of cigarette production and sales strategies by the industry.
According to WHO’s submission, the reduced tax revenue from tobacco in the first nine months of FY 2024–25 cannot be reasonably linked to illicit trade, as tobacco companies claim. Instead, the primary reason for lower-than-expected revenue is a shift in consumer sales from heavily taxed premium cigarette brands to lower-taxed economy brands. This shift was deliberately facilitated by companies that increased production and stockpiled premium brands in the last quarter of FY 2023–24, taking advantage of the static FED rates.
FED Rates Have Remained Unchanged Despite Rising Inflation
Since February 2023, the FED rates on cigarettes have not been adjusted. In the same period, Pakistan’s inflation has surged by 26%, while cigarette companies only increased the retail prices of their top-selling brands by 10%. This has effectively reduced the real tax per pack, significantly impacting revenue collection.
As a result of unchanged FED rates and strategic manipulation by the tobacco industry, FED revenue from cigarettes grew by just 7.4% during July–March 2024–25, falling short of projections. The increased focus on economy brands—which are taxed at Rs 101 per pack compared to Rs 330 for premium brands—has led to a significant drop in the average effective FED rate per cigarette.
Industry Claims vs. Official Data
While tobacco companies argue that illicit trade has hurt tax revenues, official production data contradicts this claim. In fact, the production of economy brands has increased by nearly 30%, and total cigarette production rose by approximately 22% during the first nine months of FY 2024–25. However, production of premium brands dropped sharply by 53.4%, confirming a strategic shift toward lower-taxed products.
This shift in product mix, combined with the absence of FED adjustments, has diluted the impact of excise duty and reduced the government’s per-pack revenue. WHO stated that to preserve the purchasing power of February 2023’s excise rates, the FBR should have increased the FED to Rs 127 for economy brands and Rs 416 for premium brands. The failure to make these adjustments has cost the government an estimated Rs 82 billion over the past two fiscal years.
Significant Revenue Despite Lower Production
Contrary to industry claims, revenue collection from cigarette taxes surged after the FED rate hike in February 2023. In FY 2023–24, Pakistan saw its lowest cigarette production on record but still achieved record-high revenue from tobacco taxation. The FBR collected Rs 237 billion in FED from cigarettes—well above the revised target of Rs 205 billion—reflecting a 15.7% increase year-on-year.
