Can a distributor adjust all its input tax, or does the 90% limit in section 8B apply?

A distributor that buys and resells taxable goods usually has input tax close to its output tax, because its margin is thin. That makes section 8B of the Sales Tax Act, 1990 matter more to a distributor than to most businesses: in a month where input tax is above 90% of output tax, part of it cannot be adjusted in that month.

What does the law say?

Section 8B(1) says that, notwithstanding anything else in the Act, 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 one month unless the Board specifies otherwise.

Three provisos follow:

1. The restriction “shall not apply in case of fixed assets or Capital goods”.
2. The Board may, by notification in the official Gazette, exclude any person or class of persons from sub-section (1).
3. Added by the Finance Act, 2026: the Board may, by notification, reduce or enhance the limit for any registered person on the basis of compliance or non-compliance with production monitoring, digital invoicing, e-bilty, POS or any other electronic system the Board prescribes.

Section 7(1) is the general right to deduct input tax from output tax, and it is expressly subject to sections 8 and 8B. So section 8B works as a ceiling on top of the normal section 7 entitlement.

How does the disallowed input tax come back?

Section 8B(2) allows adjustment or refund of input tax not allowed under sub-section (1), on these conditions:

• Companies audited under the Companies Ordinance, 1984: a statement furnished with the annual audited accounts, certified by the auditors, showing value additions less than the limit in sub-section (1).
• Other registered persons: conditions and restrictions specified by the Board by notification in the official Gazette.

Section 8B(3) says this adjustment or refund “shall be made on yearly basis in the second month following the end of the financial year of the registered person.”

For a sole proprietor or partnership distributor, the route therefore depends on a Board notification. The Act itself does not set out those conditions.

What other powers does the Board have over the limit?

Section 8B(4) lets the Board prescribe any other limit of input tax adjustment for any person or class of persons. Words added by the Finance Act, 2025 also let the Board use a data based automated risk management system to defer certain input tax or fix higher or lower limits. A registered person may contest such action by filing an application and documents with the Commissioner, who shall decide within thirty days.

Worked example (illustrative figures)

Rehman Traders, a registered distributor of packaged food in Multan, has these figures for one month. The amounts are invented; the 90% limit is the one in section 8B(1).

Item	Amount
Output tax on sales for the month	Rs. 1,000,000
Input tax on stock purchased for resale	Rs. 950,000
Input tax on a new delivery van bought as a capital asset	Rs. 0 (see note)

Step by step:

1. Ceiling under section 8B(1): 90% x Rs. 1,000,000 = Rs. 900,000.
2. Input tax on stock: Rs. 950,000, which is above the ceiling.
3. Input tax adjustable this month: Rs. 900,000.
4. Tax payable for the month: Rs. 1,000,000 - Rs. 900,000 = Rs. 100,000.
5. Input tax held back: Rs. 950,000 - Rs. 900,000 = Rs. 50,000, which can only come back through the yearly route in section 8B(2) and (3).

Note: the van is shown at nil because section 8(1)(i) bars input tax on vehicles falling in Chapter 87 of the First Schedule to the Customs Act, 1969, unless acquired for sale or re-sale. The fixed asset proviso in section 8B only lifts the 90% ceiling; it does not make an inadmissible item admissible.

What if my input tax is below 90% of output tax?

Then section 8B(1) does not bite for that month. If output tax is Rs. 1,000,000 and input tax is Rs. 700,000, the full Rs. 700,000 is within the Rs. 900,000 ceiling.

What if I forgot to claim input tax in the month of purchase?

The proviso to section 7(1) says that where a registered person did not deduct input tax within the relevant period, he may claim it in the return for any of the six succeeding tax periods. The Act does not say how a late claim interacts with the 90% ceiling of the later month, other than that section 7 is subject to section 8B.

Common mistakes

• Treating the 10% as a permanent cost. Section 8B(2) provides a yearly adjustment or refund route, though for non-audited persons it depends on Board conditions.
• Assuming distributors are exempt from section 8B. The Act has no distributor exclusion. Any exclusion would come from a Board notification under the second proviso.
• Applying the ceiling to capital goods. The first proviso keeps fixed assets and capital goods outside the 90% cap.
• Ignoring the new compliance link. Since the Finance Act, 2026, the Board may raise or lower the limit for a person based on digital invoicing, e-bilty or POS compliance.

What to check in the official text

Read sections 7 and 8B of the Sales Tax Act, 1990 as amended to 30 June 2026. Any Board notification excluding a class of persons from section 8B(1), setting conditions under section 8B(2)(ii), or prescribing a different limit under section 8B(4) is an SRO that this site does not hold, so confirm the current notifications for your trade separately. Section 7(1) also says output tax for input tax deduction excludes the amount of further tax; section 8B does not say whether its 90% figure is measured the same way.