Why can a manufacturer adjust input tax only up to 90% of output tax, and how is the remaining input tax recovered?

Section 8B of the Sales Tax Act means a registered mill always pays at least 10 percent of its output tax in cash each month, even if its input tax is higher. Input tax on fixed assets and capital goods is outside the cap. The part blocked by the cap is not lost: it carries forward, and the Act and rules allow a yearly adjustment or refund once the financial year is over.

What does the law say?

The cap. 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”.

The provisos. Three provisos follow:

1. The restriction “shall not apply in case of fixed assets or Capital goods”.
2. The Board may, by notification, exclude any person or class of persons from section 8B(1).
3. The Board may, by notification, 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. This proviso was added by the Finance Act, 2026.

Yearly adjustment or refund. Section 8B(2) allows adjustment or refund of input tax not allowed under section 8B(1):

• (i) for persons whose accounts are audited under the Companies Ordinance, 1984, on furnishing a statement with the annual audited accounts, certified by the auditors, showing value additions less than the section 8B(1) limit;
• (ii) for other registered persons, subject to conditions the Board specifies by notification.

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”. Section 8B(5) says an auditor found guilty of misconduct in giving the certificate shall be referred to the Council for disciplinary action under section 20D of the Chartered Accountants Ordinance, 1961.

Other limits. Section 8B(4) lets the Board prescribe any other limit for a person or class, and, since the Finance Act, 2025, use a data-based automated risk management system to defer input tax or fix higher or lower limits. The registered person may contest that action before the Commissioner, who “shall decide the case within thirty days”.

Carry forward. 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, and shall be treated as input tax for that period”.

How is the refund claimed under the rules?

Rule 34(1)(c) of the Sales Tax Rules covers registered persons unable to adjust input tax above 90 percent of output tax because of section 8B. They may file a refund claim:

• if their accounts are audited under company law, after the end of their accounting year;
• otherwise, after the end of the financial year.

Rule 34(2) requires the claim to be filed electronically in Form STR-7A after the return claiming it, with the section 8B(2)(i) statement uploaded where applicable. Rule 34(4) says claims under clause (c), other than those of persons whose accounts are audited under the Companies Act, 2017, are sanctioned after a departmental audit and a certificate that actual value addition was not enough to require a net payment of tax. Rule 34(5) requires the claimed amount not to be shown again as carried-forward credit in later returns.

Rule 34(1)(a) separately lets some sectors, including cotton ginners, claim refund of excess input tax in any tax period.

Worked example (illustrative figures)

A registered weaving mill in Faisalabad sells grey cloth locally in November:

1. Taxable supplies: Rs. 25,000,000. Output tax at 18% = Rs. 4,500,000.
2. Input tax on yarn, sizing chemicals, electricity and gas (no capital goods) = Rs. 4,300,000.
3. Cap under section 8B(1): 90% x Rs. 4,500,000 = Rs. 4,050,000.
4. Input tax adjusted = Rs. 4,050,000 (the lower of Rs. 4,300,000 and the cap).
5. Tax payable = Rs. 4,500,000 minus Rs. 4,050,000 = Rs. 450,000.
6. Input tax not adjusted = Rs. 4,300,000 minus Rs. 4,050,000 = Rs. 250,000. Under section 10 this carries forward to December and is treated as input tax for that period.

Without the cap, the mill would have paid Rs. 4,500,000 minus Rs. 4,300,000 = Rs. 200,000. The cap means it pays Rs. 250,000 more that month.

If the mill’s financial year ends on 30 June, the second month following is August, which is when section 8B(3) says the yearly adjustment or refund is made.

What if …?

What if the mill buys a new loom that month? Input tax on fixed assets or capital goods is outside the 90 percent restriction under the first proviso. The Act does not set out the arithmetic order for combining capital goods input tax with other input tax under the cap.

What if the mill mainly exports? Section 10(1) deals separately with excess input tax arising from zero-rated local supplies or exports, which is refundable within forty-five days of the refund claim, subject to Board conditions. That route is covered on the exporter refund pages.

What if FBR’s risk system defers my input tax? Section 8B(4) allows the person to contest by application to the Commissioner, to be decided within thirty days.

Common mistakes

• Treating the blocked 10 percent as a cost. Section 10 carries it forward and section 8B(2) and (3) allow yearly adjustment or refund.
• Applying the cap to machinery. The first proviso to section 8B(1) excludes fixed assets and capital goods.
• Claiming the same amount twice. Rule 34(5) requires a refunded amount not to be carried forward again.

What to check in the official text

Read section 8B and section 10 of the Sales Tax Act and rule 34 of the Sales Tax Rules. Board notifications excluding persons from the cap, changing it, or setting conditions under section 8B(2)(ii) are not held in this corpus.