A method of manufacture of an integrated circuit packaging system includes: providing a base substrate; attaching a package stack assembly, having a contact pad, on the base substrate; applying an encapsulation having a cavity with a tapered side directly over the package stack assembly, the contact pad exposed in the cavity; attaching a recessed circuitry unit in the cavity and on the contact pad, a chamber of the cavity formed by the recessed circuitry unit and the tapered side of the cavity; and mounting a thermal structure over the recessed circuitry unit, the cavity, and the encapsulation.