The federal government is set to introduce a new tax measure in the upcoming fiscal year 2025-26 budget that will significantly increase the cost of cigarettes. Senior sources indicate that a 6 percent withholding tax (WHT) will be imposed on cigarette distributors, a move aimed at bolstering government revenue.
This new tax will be implemented by changing the existing withholding tax rates under Section 153 of the Income Tax Ordinance, 2001. The revised provision will mandate that the new tax be charged on the gross amount of payment received by distributors when they supply cigarette sticks to retailers.
Impact on Pharmaceutical Distributors
In a parallel move, distributors of pharmaceutical products will also be subject to a similar increase in their tax burden. These distributors will now face a 6 percent tax on the gross amount of payments they receive.
Previously, the withholding tax rate on distributors of cigarettes was 2.5 percent, while for distributors of pharmaceutical products, it stood at 1 percent. The proposed increase to 6 percent for both sectors marks a substantial hike, signaling the government’s intent to extract more revenue from these distribution channels.
Broader Implications for Consumers and Industries
The imposition of a higher withholding tax on cigarette distributors is expected to directly translate into increased prices for consumers, as distributors will likely pass on the additional tax burden to retailers and ultimately to end-users. This measure aligns with broader government efforts to generate revenue through various tax adjustments in the upcoming budget.
Similarly, the higher tax on pharmaceutical distributors could potentially impact the supply chain of medicines, although the direct effect on consumer prices for pharmaceuticals would depend on how the industry absorbs or passes on this increased cost.
This new tax “bomb” on cigarettes and pharmaceuticals highlights the government’s ongoing strategy to identify new avenues for revenue collection as it finalizes the federal budget for the next fiscal year.
