Punjab reduces the input tax adjustment cap to 80% and introduces a 12-month phased adjustment for capital goods under new sales tax reforms.
LAHORE: The Punjab government has introduced stricter rules for input tax adjustment under the Punjab Finance Act, 2026, reducing the maximum adjustment limit and introducing a deferred mechanism for claiming input tax on capital goods as part of its fiscal measures for FY2026-27.
The amendments to the Punjab Sales Tax on Services Act, 2012 are aimed at strengthening provincial revenue collection, improving tax compliance and enhancing the administration of the sales tax regime.
Input tax adjustment capped at 80%
The Punjab Finance Act, 2026 has amended Section 16C of the Punjab Sales Tax on Services Act, 2012, reducing the maximum permissible input tax adjustment from 90 per cent to 80 per cent of the output tax payable during a tax period.
Under the revised provision, registered taxpayers will now be required to pay at least 20 per cent of their output tax liability in cash, irrespective of the amount of admissible input tax available for adjustment.
Previously, taxpayers were permitted to offset up to 90 per cent of their output tax liability through input tax credits.
Tax experts said the reduction is expected to increase immediate revenue collection for the provincial government, although it will also increase the working capital requirements of businesses by reducing the amount of tax that can be adjusted in a single tax period.
Input tax on capital goods to be spread over 12 months
The Finance Act has also inserted a new Section 16CC, introducing a phased mechanism for claiming input tax on capital assets.
Under the new provision, input tax relating to:
• Capital goods;
• Machinery; and
• Fixed assets,
will no longer be available for full adjustment in the tax period in which the assets are acquired.
Instead, taxpayers will be permitted to claim the input tax in 12 equal monthly instalments against their output tax liability.
Cash flow implications for businesses
The new mechanism effectively delays the recovery of input tax on capital investments by one year, replacing the previous system under which eligible input tax credits could generally be claimed immediately.
Tax professionals believe the amendment will particularly affect businesses making substantial investments in machinery, equipment and other capital assets, as the deferred recovery of input tax may increase financing and cash flow requirements.
They noted that companies planning expansion projects or significant capital expenditure may need to reassess their financial planning to accommodate the staggered availability of tax credits.
Part of wider tax reforms
The revised input tax adjustment rules form part of a broader package of fiscal reforms introduced through the Punjab Finance Act, 2026 to strengthen tax compliance, enhance revenue collection and improve the efficiency of the provincial sales tax system.
Businesses registered under the Punjab Sales Tax on Services Act, 2012 are expected to review their tax planning strategies, accounting practices and cash flow management to ensure compliance with the amended provisions and minimise the financial impact of the new restrictions.