FBR cuts minimum value addition tax on imported coal to 1% for direct supplies to IPPs while tightening tax waiver rules for manufacturers.
ISLAMABAD: The Federal Board of Revenue (FBR) has announced a reduced minimum value addition tax (VAT) on imported coal used for electricity generation, subject to specific conditions.
The FBR explained the measure through Sales Tax Circular No. 1 of 2026, which outlines major amendments to the Sales Tax Act, 1990 introduced through the Finance Act, 2026.
Under the amended provisions, the rate of minimum value addition tax at the import stage on coal has been reduced to 1%, provided that the imported coal is exclusively and directly supplied to Independent Power Producers (IPPs).
The FBR said the reduction is subject to compliance with prescribed conditions, linking the concession specifically to imported coal intended for electricity generation.
FBR changes value addition tax waiver rules
The circular also explains changes concerning the waiver of value addition tax on imported raw materials and input goods under the Twelfth Schedule of the Sales Tax Act.
Under the existing procedure and conditions, manufacturers importing raw materials or input goods for in-house consumption are eligible for a waiver of value addition tax at the import stage.
However, a newly added proviso restricts such manufacturers from selling the imported raw materials to other persons in the same state in which they were imported.
The FBR clarified that where an importing manufacturer supplies the imported raw material in the same state, the manufacturer will become liable to pay the applicable value addition tax along with default surcharge.
The manufacturer may also face other penal action under the relevant provisions of the law.
FBR aims to prevent misuse of tax waiver
The measure is intended to ensure that the value addition tax waiver remains focused on imported inputs genuinely used by manufacturers for their own production, rather than being used to facilitate onward sales without payment of the applicable tax.
The restriction is designed to strengthen compliance and prevent manufacturers from using the in-house consumption facility to avoid value addition tax on imported goods that are subsequently sold without being processed or incorporated into production.
Reduced VAT for coal supplied to IPPs
The reduction in the minimum VAT rate for imported coal provides a specific tax concession for coal that is directly and exclusively supplied to IPPs.
The measure could reduce the tax burden associated with coal imports used for power generation while retaining conditions designed to prevent misuse of the concession.
The changes are part of the broader amendments introduced through the Finance Act, 2026, aimed at improving tax compliance, strengthening documentation and ensuring that sales tax concessions are used for their intended purposes.