Finance Act 2026 links sales tax collection to electricity consumption and offers lower rates for digitally compliant steel manufacturers.
ISLAMABAD: The Federal Board of Revenue (FBR) has overhauled the sales tax collection mechanism for Pakistan’s steel industry by linking tax collection to electricity consumption, as part of amendments introduced through the Finance Act, 2026.
The revised framework came into effect on 1 July 2026 and will apply during Tax Year 2027, with the objective of improving tax compliance, reducing evasion and streamlining sales tax collection from steel manufacturers.
Electricity consumption to determine tax
Under the amended provisions of the Sales Tax Act, 1990, steel melters, steel re-rollers and composite units will pay sales tax based on their per-unit electricity consumption, including electricity generated through captive power plants or any other alternative source of energy.
The applicable per-unit sales tax rates will be notified separately by the FBR through notifications published in the official Gazette.
Adjustable input tax
The Finance Act provides that sales tax collected under the electricity-based mechanism will be treated as adjustable input tax.
Manufacturers will be able to claim the tax paid in their sales tax return for the month in which the payment is made, ensuring that the levy remains adjustable within the existing sales tax regime.
Incentives for digitally compliant manufacturers
The amended law also empowers the FBR to prescribe lower per-unit electricity-based tax rates for compliant manufacturers.
The concession will be available to steel melters, re-rollers and composite units based on the amount of input tax paid on imports or purchases supported by electronic invoicing and digitally issued invoices.
According to the government, the reduced rates are intended to encourage digital integration, improve documentation within the steel sector and minimise the accumulation of sales tax refund claims.
Benchmark-based valuation
The revised framework further provides that the per-unit sales tax will be determined by the FBR using the minimum notified price under Section 2(46) of the Sales Tax Act, 1990, together with industry benchmarks for electricity consumption per tonne of steel production.
This methodology is designed to establish a more transparent and standardised basis for calculating tax liabilities across the industry.
Part of wider tax reforms
The revised collection mechanism forms part of the government’s broader tax reform agenda introduced through the Finance Act, 2026.
The reforms aim to enhance revenue collection, curb tax evasion, promote digital compliance and strengthen transparency in Pakistan’s indirect tax system.
Tax experts believe the electricity-based model will improve tax administration by linking tax liability to a measurable production input while encouraging greater adoption of digital invoicing and documented business transactions throughout the steel industry.