LAHORE, June 20, 2025 – The Punjab government has unveiled far-reaching changes to its sales tax regime under the Punjab Finance Bill 2025, marking a major structural reform aimed at expanding the tax base and digitizing the provincial economy.
Presented before the Punjab Assembly on June 16, 2025, the Bill proposes a fundamental transition in how services are taxed within the province.
At the heart of the reform is the proposed shift from a “positive list” model—where only pre-specified services are taxable—to a “negative list” framework. Under this new structure, all services will be deemed taxable unless explicitly exempted. This shift brings Punjab’s tax regime in line with similar models already adopted in provinces like Sindh and Khyber Pakhtunkhwa (KPK), and is seen as a key step toward tax harmonization at the provincial level.
According to a detailed commentary issued by PwC A.F. Ferguson & Co., this structural overhaul under the Finance Bill 2025 will effectively broaden the scope of taxable services, thereby increasing potential revenue while reducing ambiguities in classification.
Reclassification of Taxable and Exempt Services
Currently, the Punjab Sales Tax on Services Act, 2012 organizes taxable and exempt services through its First and Second Schedules. The new Bill proposes the complete reorganization of these schedules by introducing:
• A new First Schedule for tax-free services, and
• A new Second Schedule for taxable services, divided into:
o Part I: Standard and other variable rate services,
o Part II: Fixed tax rate services, and
o Part III: Reduced rate services.
This reorganization clearly distinguishes exempt services from taxable ones. However, the scope of what is taxable has widened dramatically, meaning that several services previously outside the tax net will now be subject to sales tax unless explicitly listed in the tax-free category.
Key Exemptions Maintained
To prevent disruption in essential public sectors, the Punjab Finance Bill 2025 has retained exemptions for several critical services. These include:
• Healthcare services in public hospitals such as consultation fees and hospital stays,
• Education services in public institutions,
• Public transportation services,
• Postal and courier services provided to government departments,
• Registration services such as passports and identity cards,
• Services related to religion, arts, sports, and public amusement,
• Affordable housing services provided by builders registered under the Punjab Housing and Town-Planning Agency (PHATA),
• Services provided by religious and charitable organizations and INGOs registered with the federal government,
• Residential rental services, and
• Manufacturing or processing on a toll or job basis.
These services will now be listed in the newly proposed First Schedule, ensuring their continued exemption from sales tax despite the switch to a negative list model.
Anomalies and Technical Gaps
While the Finance Bill represents a substantial improvement in tax architecture, it is not without inconsistencies. Experts have pointed out certain anomalies, such as:
• Services for “carriage of goods by rail or road” have been placed under Part I (standard rate) rather than Part III (reduced rate), potentially leading to confusion.
• The exemption for water transportation through pipelines appears to have been removed or unintentionally omitted.
• References to classification codes remain in the new Second Schedule, although the schedules where these codes were previously defined are proposed to be abolished.
These discrepancies, if unaddressed before the finalization of the Bill, could create challenges for implementation and taxpayer compliance.
Curtailment of Government Powers
One of the more notable governance-related amendments proposed in the Punjab Finance Bill 2025 is the restriction on the provincial government’s unilateral power to increase sales tax rates. The Bill stipulates that no increase beyond the standard 16% sales tax rate can be made without approval from the Punjab Assembly. This provision promotes legislative oversight and transparency in future tax decisions.
The Finance Bill also includes provisions that allow the government to adjust reduced tax rates listed in Part III of the Second Schedule, enabling dynamic adjustments in response to economic needs.
Digitization and Compliance Measures
To encourage digital adoption and strengthen compliance, the Punjab Finance Bill 2025 significantly increases penalties for non-compliance with digital invoicing and payment regulations. Businesses failing to install the Electronic Invoice Monitoring System (EIMS) may face fines between Rs 400,000 to Rs 1 million—up from the current range of Rs 25,000 to Rs 100,000.
Additionally, harsh penalties are introduced for merchants refusing digital payments. First-time offenders may be fined up to Rs 1 million, with repeat offenders risking closure of business premises for up to one month.
The Bill also disallows input tax credits on:
• Tax-free services,
• Excess tax paid on telecom services beyond 19.5%,
• Carriage of goods where tax exceeds 15%, and
• General services taxed above 16%.
Conclusion
The Punjab Finance Bill 2025 represents a bold and comprehensive step toward modernizing Punjab’s fiscal framework. By embracing a negative list regime, tightening enforcement, and digitizing the tax system, the Bill aims to significantly improve revenue collection and tax administration in the province. However, stakeholders await further clarification and possible amendments to address anomalies before the Bill becomes law. As Punjab pivots toward a more inclusive and digitized taxation model, the success of these reforms will largely depend on effective implementation and responsive governance.