WHO warns unchanged FED on cigarettes may boost consumption
According to a report of the WHO on post-budget analysis and review issued on Wednesday, since February 2023, the Federal Excise Duty (FED) rates on cigarettes have remained unchanged. The Cabinet has maintained these rates in the proposed budget for FY 2025–26.
With inflation rising by 26% over this period, the real value of FED rates and cigarette prices has declined, and this trend is expected to continue in the absence of any adjustment.
For FY 2024–25, WHO has estimated cigarette production at approximately 37 billion sticks, an increase compared to the previous fiscal year—and projected FED revenue at Rs. 208 billion.
Given the decision to keep FED rates unchanged for FY 2025–26, nominal cigarette prices are likely to remain flat, implying a further decline in real prices. This will likely result in increased cigarette consumption. Based on a simple simulation model, cigarette production (and consumption) is projected to reach around 38 billion sticks, generating Rs 217.6 billion in FED revenue in FY 2025–26.
Alternatively, a policy intervention involving a Rs 39 per pack increase in FED could reduce cigarette consumption by an estimated 10.7%, bringing production down to around 34 billion sticks. This policy would also boost FED revenues by 20.9% compared to the current plan, resulting in higher fiscal and public health gains.
Notably, the government has set a revised FED revenue target of only Rs. 147 billion from cigarettes in FY 2024–25—a surprisingly conservative figure, considering actual collections reached Rs 157 billion during the first nine months of the fiscal year. We estimate that total FED revenue for FY 2024–25 will reach approximately Rs. 208.2 billion, nearly Rs. 60 billion more than collected in the first three quarters.
Estimated cigarette FED collection in FY 2024/25. Based on PBS's data, the average annual growth rate of cigarettes production from July 2024 to April 2025 is 12.4% higher when compared to July 2023/April 24. By assuming the same annual growth rate for the next two months, the estimated production of cigarettes for 2024-25 will be around 37 billion sticks.
By applying the above market shares and FED and GST rates, it is important to note that the estimated FED revenue collection for 2024-25 is 208.2 billion Rs. This is much higher than 147.8 billion Rs of the government's revised target for 2024-25.
The total indirect tax collection from cigarettes (FED+GST) in 2024-25 will be around Rs 275.7 billion. To protect both public health and government revenue, Pakistan's tobacco tax policy should be reassessed and strengthened. This includes regular adjustments to the Federal Excise Duty (FED) rates and stricter oversight of industry practices, such as production front loading ahead of the budget and manipulation of brand mixes. However, the current budget proposal for cigarette FED rates does not incorporate these tax policy corrections needed to meet revenue and health objectives.
With this decision, the government and FBR hope to control cigarette illicit manufacturing and smuggling. To address those challenges, however, proper tax administration measures should be implemented, such as effective controls of the distribution movements of tobacco leaves, used cigarette machinery and other key cigarette inputs inside the national territory, WHO added.
Copyright Business Recorder, 2025
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