Non-banking financial institutions liable to pay tax on all non-interest-based services: LHC

LAHORE: The Lahore High Court has held that under the Punjab Sales Tax on Services (Adjustment of Tax) Rules, 2012, a non-banking financial institution (NBFI) is liable to pay tax on all non-interest-based services rendered for consideration in the form of fees, commissions, or charges.

The tax is to be levied on the gross amount charged for such services, with any markup or interest expressly excluded for the purposes of apportionment, the court added.

The court observed that the rules unequivocally provide a complete statutory mechanism for apportionment of input tax in cases where a taxpayer provides both taxable and non-taxable or exempt services from the same business premises.

Any adjustment of input tax without such apportionment is not sustainable in law, the court added.

The court passed this order in a petition of a microfinancing bank challenging the assessment of Rs 49,913,591 passed by the Commissioner (Enforce-ment) Punjab Revenue Authority (PRA) and upheld by the tribunal.

The court said the income received by the applicant in the form of mark-up or interest arises in the course of providing services to its customers and is, in that sense, intrinsically service related.

The court said, such mark-up or interest does not form part of the “gross amount charged” for the purposes of levy of tax and, therefore, stands excluded from the taxable value.

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The court held that although the services rendered by the applicant to its customers may yield income in the nature of mark-up or interest, and such income undeniably arises from the provision of services, the same is expressly excluded from the taxable value under the Rule 4.

Consequently, while mark-up or interest falls within the scope of services rendered by the applicant, it remains exempted from the levy of tax thereunder, the court added.

The court said, the applicant taxpayer is a registered entity with the respondents, providing both taxable services in the form of non-markup receipts and non-taxable or exempt services in the form of mark-up or interest receipts from the same business premises.

It is also not denied that the applicant has claimed adjustment of one hundred percent of the input tax paid on the procurement of goods and services, without any bifurcation or apportionment of input tax between taxable and non-taxable receipts, treating the entire business as a single taxable activity, the court added.

The court observed that where an input is used in providing both taxable services and non-taxable or exempt services, the input tax shall be apportioned in accordance with the prescribed formula for the purpose of availing input tax adjustment or deduction.

The court said, where both taxable services (non-markup receipts) and non-taxable or exempt services (mark-up or interest receipts) are rendered from the same business premises, the apportionment formula prescribed under Rule 3(2) is mandatorily applicable for determination of adjustable input tax.

The court observed that the tribunal was fully justified in upholding the orders-in-original and has rightly passed the impugned judgments.

The court also directed the office to transmit a copy of this judgment to the appellate tribunal.

Copyright Business Recorder, 2026