Stricter Tax Policy Hits Vapes and E-Cigarette Industry in FY2026-27

The federal government has introduced a significant revision in the Federal Excise Duty (FED) structure on e-liquids used in electronic cigarettes as part of Budget 2026-27, aiming to enhance revenue collection from the rapidly expanding nicotine and vaping market. Under the new fiscal framework, the excise duty on e-cigarette liquids has been increased sharply from Rs. 10,000 per kilogram to Rs. 16,500 per kilogram, marking a notable upward adjustment in taxation on alternative tobacco products. Alongside this increase, authorities have also eliminated the earlier retail-price-based taxation system, which imposed duties of up to 65 percent depending on product pricing. Officials explained that the previous mechanism created administrative challenges, encouraged pricing inconsistencies, and made tax enforcement more complicated for regulatory bodies. According to budget documents, the reform is part of a broader effort to streamline taxation within the tobacco and nicotine sector, which has witnessed steady growth in recent years, particularly among urban populations and younger consumers. Previously, the industry operated under a dual taxation model combining fixed excise duties with ad-valorem charges linked to retail prices, a structure that was criticized for encouraging under-invoicing and compliance loopholes. The government believes the updated fixed-duty regime will simplify the tax system, improve transparency, and strengthen revenue efficiency while aligning vaping products more closely with traditional tobacco taxation standards. This measure forms a key component of the broader Budget 2026-27 strategy focused on fiscal consolidation and improving overall tax administration across the economy.