Pakistan taxpayers to face 20% penalty over invalid input tax credits

Taxpayers in Pakistan will face a 20% penalty for claiming incorrect or mismatched input tax credits under the Finance Act 2026, in addition to refunding the inadmissible tax amount and paying the applicable default surcharge.

The new provisions also impose a 20% penalty where tax credit claimed against fake invoices is not repaid within 60 days.

According to the Finance Act, the Federal Board of Revenue’s (FBR) computerized system will identify cases where the input tax credit claimed by a registered person for a particular tax period does not correspond with the output tax declared by the relevant supplier during the same or a nearby tax period.

Where such a discrepancy is detected, the taxpayer will be issued a notice and given an opportunity to provide an explanation and appear for a hearing. If the discrepancy is subsequently confirmed, the taxpayer will be required to reverse the inadmissible input tax credit.

In addition to repaying the mismatched input tax amount, the taxpayer will be liable to pay a penalty equivalent to 20% of the disputed input tax along with default surcharge under Section 34 of the Income Tax Ordinance.