Can my input tax be reduced because I sell to unregistered shopkeepers?

A distributor whose customers are mostly small unregistered shops can lose part of its input tax, not only charge extra tax. Two separate provisions of the Sales Tax Act, 1990 do this. Section 73(4) looks at the total supplies made to unregistered persons. Section 8(1)(m) looks at supplies to unregistered distributors whose identity is missing from the invoice.

What does section 73(4) say?

Section 73(4), as amended to 30 June 2026, says a registered person “shall not be entitled to deduct input tax” which is attributable to taxable supplies exceeding, in aggregate, “the amount in a financial year or in a tax period, as may be prescribed by the Board, with the approval of Federal Government” as are made to a person who is not a registered person under the Act.

Three points follow from the text:

1. The limit is not in the Act. Its footnote records that the Finance Act, 2025 substituted the words about an amount prescribed by the Board with Federal Government approval. The figure itself is set outside the Act, and it is not held in this corpus.
2. The limit can be annual or per tax period. The sub-section refers to “a financial year or … a tax period”.
3. The disallowed amount is input tax attributable to those supplies. The sub-section does not set out a method of attribution, and it does not say in terms whether the bar covers all input tax on supplies to unregistered persons once the amount is crossed or only the part attributable to the excess. The wording “exceeding, in aggregate” points towards the excess, but this page does not settle the point.

Which buyers are not counted?

The proviso to section 73(4) says the bar does not apply to supplies made to:

Clause	Buyers excluded from the bar
(a)	Federal, provincial or local Government departments, authorities, etc. not engaged in making taxable supplies
(b)	Foreign missions, diplomats and privileged persons
(c)	All other persons not engaged in supply of taxable goods
(d)	Persons or classes of persons specified by the Board through notification in the official Gazette, subject to its conditions

Clause (c) is broad: it covers buyers who are unregistered but do not themselves supply taxable goods. A typical retail shop reselling taxable goods does supply taxable goods, so clause (c) does not help with most shopkeeper customers. Board notifications under clause (d) are not held in this corpus.

What does section 8(1)(m) add?

Section 8(1)(m) bars input tax on “the input goods or services attributable to supplies made to un-registered distributor, on pro-rata basis, for which sale invoices do not bear the NIC number or NTN as the case may be, of the recipient as stipulated in section 23.”

Section 23(1)(b) is the invoice rule it points to. It requires the invoice to show the recipient’s name, address and registration number and, “in case of supplies by manufacturer or importer to unregistered distributor, the NIC or NTN of such unregistered distributors”.

The two sections fit together this way:

• The NIC or NTN requirement in section 23(1)(b) is worded for supplies by a manufacturer or importer to an unregistered distributor.
• Section 8(1)(m) applies to the registered person making supplies to an unregistered distributor, and the missing NIC or NTN on those invoices is what triggers the bar.
• A distributor that also imports, or that sells to unregistered sub-distributors, should read both sections against its own invoices.

Section 3(1A) sits alongside all of this: supplies to an unregistered person also carry further tax at four percent, covered on a separate page.

Worked example (illustrative figures)

Zubair Enterprises, a registered distributor in Rawalpindi, makes these taxable supplies in October 2026. All amounts are invented.

Buyer	Value excluding tax
Registered, active retailers	Rs. 4,000,000
Unregistered shops that resell the goods	Rs. 5,000,000
A government hospital not making taxable supplies	Rs. 1,000,000
Total	Rs. 10,000,000

Its input tax for the month is Rs. 1,500,000.

1. The Rs. 1,000,000 to the hospital falls in clause (a) of the proviso, so it is not counted for section 73(4).
2. Supplies to unregistered persons that count: Rs. 5,000,000.
3. If input tax is attributed by value, the share linked to those supplies is Rs. 1,500,000 x 5,000,000 / 10,000,000 = Rs. 750,000. The Act does not prescribe this method; value is used here only to show the size of the amount at stake.
4. Whether any of that Rs. 750,000 is disallowed depends on the amount prescribed by the Board and on the reading of “exceeding, in aggregate” above. Neither can be settled from the Act alone.

Separately, if Rs. 800,000 of the October supplies had gone to an unregistered sub-distributor on invoices without its NIC or NTN, section 8(1)(m) would bar input tax attributable to those supplies on a pro rata basis.

Common mistakes

• Quoting a fixed rupee limit as if it were in the Act. Section 73(4) leaves the amount to the Board with Federal Government approval.
• Counting government supplies as unregistered sales. Clause (a) of the proviso takes government departments not making taxable supplies out of the bar.
• Treating the NIC as optional. Where section 23(1)(b) requires the NIC or NTN of an unregistered distributor, its absence triggers section 8(1)(m).
• Forgetting the rest of section 73. Sub-sections (1) to (3) separately deny input tax where payments above Rs. 50,000 in aggregate to a single supplier in a tax period are not made through the banking channel.

What to check in the official text

Read section 73 in full, section 8(1)(m) and section 23(1)(b) of the Sales Tax Act amended to 30 June 2026, and section 3(1A) for further tax. Before relying on any figure, find the Board’s prescription of the amount under section 73(4) and any notification under clause (d) of its proviso. Neither is held in this corpus.