Why can my company not adjust all its input tax, and how does the 90 percent limit in section 8B work?

A company registered for sales tax normally pays the difference between the tax it charges on its sales (output tax) and the tax it paid on its purchases (input tax). Section 8B of the Sales Tax Act, 1990 limits that deduction, so even a company whose purchases carry almost as much tax as its sales pays something each month.

What does the law say?

Section 8B(1) says that, in relation to a tax period, a registered person “shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for that tax period”. A tax period is normally one month. Put simply, on running purchases, at least ten percent of the month’s output tax is paid in cash, however large the input tax.

The sub-section has three provisos:

• Capital goods are outside the cap. The restriction “shall not apply in case of fixed assets or Capital goods”.
• The Board may exclude persons. The Board can, by notification in the official Gazette, take any person or class of persons out of sub-section (1).
• The limit can move with compliance. A proviso added by the Finance Act, 2026 lets the Board reduce or enhance the limit for a registered person based on compliance or non-compliance with production monitoring, digital invoicing, e-bility, POS or other electronic systems prescribed by the Board.

Section 8B(4) separately lets the Board prescribe any other limit for any person or class of persons, and, after the Finance Act, 2025, use a data-based automated risk management system to defer certain input tax or fix higher or lower limits. A person affected by action under sub-section (4) can apply to the Commissioner, who must decide within thirty days.

How does the company recover the input tax above 90 percent?

There are two routes in the Act.

Carry forward to the next month. The first proviso to section 10(1) says excess input tax on supplies other than zero-rated supplies or exports “may be carried forward to the next tax period, along with the input tax as is not adjustable in terms of sub-section (1) of section 8B”. It is then treated as input tax for that next period, where the 90 percent cap applies again.

Yearly adjustment or refund for audited companies. Section 8B(2)(i) allows adjustment or refund of the input tax that sub-section (1) did not allow, for registered persons whose accounts are subject to audit under the Companies Ordinance, 1984, “upon furnishing a statement along with annual audited accounts, duly certified by the auditors, showing value additions less than the limit prescribed”. Section 8B(3) says this adjustment or refund is made yearly, in the second month following the end of the company’s financial year. For other registered persons, section 8B(2)(ii) leaves the conditions to a Board notification.

Section 8B(5) refers an auditor found guilty of misconduct in giving this certificate to the Council for disciplinary action under the Chartered Accountants Ordinance, 1961.

Worked example (illustrative figures)

Ravi Packaging (Pvt) Ltd in Lahore makes cartons. The figures are invented. The 18% rate is the standard rate in section 3(1).

Step	Amount
Taxable sales in March	Rs. 10,000,000
Output tax at 18%	Rs. 1,800,000
Input tax on paper, glue and ink	Rs. 1,750,000
90% of output tax (Rs. 1,800,000 x 90%)	Rs. 1,620,000
Input tax adjusted in March	Rs. 1,620,000
Sales tax payable (Rs. 1,800,000 - Rs. 1,620,000)	Rs. 180,000
Input tax not adjusted (Rs. 1,750,000 - Rs. 1,620,000)	Rs. 130,000

Without section 8B, the company would have paid Rs. 50,000 (Rs. 1,800,000 - Rs. 1,750,000). The cap raises the payment to Rs. 180,000. The Rs. 130,000 not adjusted is carried to April under section 10(1). If Ravi Packaging’s audited accounts show that its value addition for the year was below the limit, section 8B(2)(i) and (3) allow it to claim what remains unadjusted, in the second month after its financial year ends.

Now suppose Ravi Packaging also bought a new corrugating machine in March and paid Rs. 100,000 input tax on it. Because the first proviso to section 8B(1) excludes capital goods, a reading of the text is that this Rs. 100,000 is not held back by the cap, which would reduce the March payment to Rs. 80,000 (Rs. 180,000 - Rs. 100,000). The Act does not set out the arithmetic for combining capital and non-capital input tax in one period, so confirm how the return form treats it.

Which input tax is never allowed at all?

The 90 percent cap only limits timing. Section 8(1) goes further and denies input tax outright on, among other things:

• goods or services used for any purpose other than taxable supplies, or not related to taxable supplies;
• goods or services on which the supplier has not deposited the tax, and purchases where CREST shows a discrepancy or the input tax is not verifiable in the supply chain;
• fake invoices;
• goods and services acquired for personal or non-business consumption;
• building and construction materials and fittings attached to immoveable property, with exceptions for goods bought for resale or used directly in manufacturing taxable goods;
• vehicles in Chapter 87 of the First Schedule to the Customs Act, 1969, their parts, electrical and gas appliances, furniture, furnishings and office equipment (other than electronic cash registers), unless bought for resale;
• goods or services the supplier has not declared in its return, or on which it has not paid the tax shown, from a date the Board notifies.

Section 8(2) adds that a company making both taxable and non-taxable supplies can reclaim only the proportion of input tax attributable to taxable supplies. Input tax denied under section 8 never enters the 90 percent calculation.

What if…?

The company is a Tier-1 retailer that has not integrated its outlet. Section 8B(6) reduces the adjustable input tax for the whole tax period by 60% if the outlet is not integrated as required under section 3(9A).

The company manufactures electric vehicles at the reduced Eighth Schedule rate. Section 8B(4A) limits input tax to the amount of output tax, with no refund or carry forward of the excess.

The company forgot to claim an invoice in the right month. The proviso to section 7(1) lets a registered person claim input tax it did not deduct in the relevant period in the return for any of the six succeeding tax periods. The 90 percent cap still applies in the month it is claimed.

Common mistakes

• Treating the cap as a permanent loss. Section 10(1) carries the unadjusted amount forward, and section 8B(2) provides a yearly route for audited companies.
• Applying the cap to machinery. The first proviso to section 8B(1) excludes fixed assets and capital goods.
• Assuming 90 percent is fixed. The Board can change it for a person under the Finance Act, 2026 proviso or under section 8B(4).
• Counting disallowed input tax. Input tax on vehicles, furniture or non-business items is removed by section 8 before the cap is applied, not recovered through it.

What to check in the official text

Read section 8B in full, including the provisos to sub-section (1) and sub-sections (4), (4A) and (6), with the first proviso to section 10(1) and the list in section 8(1). Section 8B(2)(i) still refers to the Companies Ordinance, 1984 as printed; the text does not update that reference. Any notification excluding persons from the cap, changing the limit or setting conditions under section 8B(2)(ii) is an SRO this site does not hold, so check it separately.