LAHORE: The Punjab government has introduced sweeping amendments to the Punjab Sales Tax on Services Act, 2012 through the Budget 2026-27, significantly strengthening tax compliance, digital documentation, and enforcement measures. The new changes, announced by the Punjab Revenue Authority (PRA), will impact thousands of service providers across the province.
The reforms include stricter Active Taxpayer List (ATL) rules, tighter input tax adjustment conditions, enhanced risk-based monitoring, substantially higher penalties for violations, and revised sales tax rates for several service sectors.
Stricter Active Taxpayer List (ATL) Rules
Under the new provisions, a registered taxpayer may be removed from the Active Taxpayer List (ATL) if:
- They fail to file two consecutive sales tax returns.
- Their PRA registration is suspended.
- They are blacklisted by the Punjab Revenue Authority.
The budget also introduces additional restrictions for non-ATL taxpayers:
- Registered persons excluded from the ATL will not be eligible for the issuance or renewal of business licences.
- Government departments and public sector organizations will be prohibited from awarding taxable service contracts to non-ATL registered persons.
- Newly registered businesses will receive a six-month grace period before ATL compliance requirements become fully applicable.
Input Tax Credit Rules Tightened
The Punjab Budget 2026-27 introduces several important restrictions on input tax adjustments.
Carry Forward Limit Reduced
Under the amended Section 16C, taxpayers can now carry forward input tax up to 80% of their output tax liability, reduced from the previous limit of 90%.
Capital Goods Input Tax to Be Claimed Over 12 Months
A newly inserted Section 16CC provides that input tax paid on machinery, capital goods, and fixed assets can no longer be claimed in full immediately.
Instead, taxpayers will be required to adjust the tax in 12 equal monthly installments.
Input Tax Disallowed on Purchases from Non-ATL Suppliers
A new clause under Section 16B(1)(ff) disallows input tax claims on purchases made from suppliers who are not included in the Active Taxpayer List of either the PRA or the FBR.
Businesses are therefore advised to verify a supplier’s ATL status before making taxable purchases.
PRA Introduces Risk-Based Tax Monitoring
The PRA has introduced a new risk-based enforcement framework under which taxpayers, suppliers, and transactions will be assigned risk profiles.
High-risk input tax claims may:
- Be deferred for verification.
- Be partially rejected.
- Be selected for audit.
However, taxpayers will be given an opportunity to present their case before any adverse action is taken.
Massive Increase in Penalties
The Punjab Budget significantly increases penalties for non-compliance.
Failure to Issue Tax Invoice
First offence
- Previous penalty: Rs. 20,000
- New penalty: Rs. 500,000
Second and subsequent offences
- Previous penalty: Rs. 50,000
- New penalty: Rs. 1,000,000
Bypassing the E-Invoicing System
The penalty for bypassing the electronic invoicing system has been increased from Rs. 25,000–100,000 to a flat Rs. 500,000.
Damaging E-Invoicing or Monitoring Systems
The fine has increased from Rs. 100,000 to Rs. 500,000.
Tax Fraud Threshold Raised
The monetary threshold for initiating criminal proceedings in tax fraud cases has been increased from Rs. 10 million to Rs. 50 million.
Sales Tax Rate Increased from 5% to 8%
The Punjab government has raised the sales tax rate from 5% to 8% for several service sectors, including:
- Restaurants accepting digital payments
- Catering services
- Tour operators
- Property dealers
- Architects
- Rent-a-car services
- Health and fitness clubs
- Laundry services
- Accountants and tax consultants
- Warehousing services
- Equipment rental services
- Real estate management services
New Tax Rates for IT Services
The budget introduces differentiated tax rates for IT services:
- 8% on payments made through digital channels.
- 16% on all other payment modes.
Event Management Services Brought Under Separate Category
Event management services have been classified as a separate taxable category with:
- Sales tax rate of 8%
- No entitlement to input tax adjustment
Foreign Exchange Services Become Taxable
The PRA has also introduced foreign exchange services as a new taxable category.
Key features include:
- Sales tax rate of 3%
- All exchange companies and foreign exchange dealers must obtain PRA registration by July 1, 2026.
Key Takeaways
The Punjab Budget 2026-27 reflects the PRA’s growing emphasis on digital tax administration and stricter compliance. The reforms focus on:
- Stronger enforcement based on ATL status.
- Expanded digital documentation through e-invoicing.
- Risk-based monitoring of taxpayers and transactions.
- Significant increases in penalties for tax violations.
- Greater transparency and accountability in the provincial sales tax system.
