Punjab’s latest experiment with restaurant and other vendors’ service taxation, receiving payment through digital mode, has been marketed as a “50 percent relief” for consumers. The description is clever, but the policy is not.
The applicable rate is now eight percent where payment is made through debit or credit cards, mobile wallets or QR scanning, compared with 16 percent for other modes. What is conveniently omitted from publicity is that the digital rate was previously five percent. It has therefore been increased by 60 percent, not reduced.
Calling eight percent a rebate merely because cash payments attract 16 percent is fiscal advertising, not tax reform.
The deeper problem is not only the rate. Eight percent levy is expressly imposed without input tax adjustment. In economic substance, it is a single-stage tax on the gross value of restaurant service, not a bona fide value added tax.
Punjab Revenue Authority’s substituted Notification No. PRA/Member Legal/816/26 dated 02.07.2026 and subsequent clarification of July 24, 2026 are against the law. These tend to make scheduled banks, acquiring institutions, microfinance banks and payment processors not collecting agents but assessing authorities. They are required to retain tax before crediting the merchant and deposit 100 percent of it, except in the case of clubs where collection is split equally between the collecting agent and service provider.
This may capture a card payment, but it does not document a supply chain. A restaurant’s supply chain begins with meat, flour, rice, vegetables, cooking oil, beverages, electricity, rent, equipment, packaging, transport and outsourced services. A genuine VAT records these inputs and links them with output through the invoice-credit mechanism.
The Organisation for Economic Co-operation and Development (OECD) explains that input tax credit gives a business buyer an incentive to demand a VAT invoice from its supplier, thereby reducing the supplier’s ability to suppress the transaction. The International Monetary Fund (IMF) similarly identifies collection at successive stages, supported by input credits, as the central enforcement strength of VAT.
Punjab has removed precisely that incentive. A restaurant paying eight percent without input adjustment gains nothing by purchasing from a registered, invoice-issuing supplier. The tax suffered on its inputs becomes an embedded cost, while its output tax is charged again on gross restaurant receipts.
An undocumented supplier may consequently appear cheaper than a documented one. The regime may digitise the last payment made by the diner, but it leaves the purchases behind that meal outside the credit chain.
The effective burden is not merely the visible eight percent. Taxes embedded in ingredients, utilities, equipment and services become part of the restaurant’s cost because no credit is available; the eight percent output tax is then imposed on a price already carrying those unrecovered taxes. This is cascading—the very defect VAT is supposed to remove. A card swipe is a data point; it is not documentation of production and distribution.
This distinction matters because the federal and provincial governments routinely equate digitisation with formalisation. The federal government and State Bank of Pakistan (SBP) have been spending public money to expand cashless payments. A Rs 3.5 billion subsidy was allocated for Raast person-to-merchant QR transactions, shared between acquiring and issuing institutions.
SBP’s financial-inclusion reporting says more than 2.1 million merchants had been onboarded on Raast, while its 2026 “Go Cashless” Eid campaign processed more than 480,000 transactions worth over Rs 34 billion. These initiatives aim to reduce acceptance costs and bring merchants into formal payment channels. Punjab’s response is to raise the digital restaurant tax from five to eight percent and intercept the merchant’s funds at settlement.
The predictable result is distortion. A merchant already bears merchant discount, acquiring and interchange-related costs. International payment-industry experience shows that card-processing costs often induce merchants to impose convenience fees or cash discounts; one industry estimate places typical US processing costs between 1.5 and 3.5 percent. Pakistan’s costs and contractual rules are different, but the commercial principle is universal: when digital acceptance becomes more expensive than cash, businesses either pass the cost to customers, reduce discounts or return to cash.
The new regime by PRA is also silent on the practical problem of customer discounts. Section 7(5) of the Punjab Sales Tax on Services Act, 2012, recognises a trade discount where the invoice shows the discounted price and related tax and the discount conforms to customary business practice. The specific restaurant rules also permit discounts and temporary promotional price reductions. Therefore, where a restaurant itself offers a genuine discount, the taxable value should be the properly invoiced discounted price.
The legal sequence cannot be reversed. First, there must be a taxable service, rendered by a taxable person, for a legally ascertainable consideration and at a rate prescribed by law. Only thereafter may a validly designated collecting agent collect the amount that the taxable person is legally required to pay. A machinery provision cannot be used to create a taxable event, redefine the taxable person, replace the statutory value, or impose tax upon a gross payment merely because it passes through a digital settlement system
Card-linked promotions are more complicated. Suppose a pre-tax restaurant bill is Rs 10,000 and a 20 percent card discount is advertised. If the restaurant alone bears the entire discount, its consideration falls to Rs 8,000 and that should ordinarily be the taxable value. If the bank bears half of the discount and reimburses Rs 1,000 to the restaurant, the restaurant has economically received Rs 9,000; only the Rs 1,000 merchant-funded reduction is a genuine discount by the service provider. If the bank funds the entire discount and the restaurant ultimately receives Rs 10,000, the taxable value should remain Rs 10,000. A cashback paid separately by the bank after the customer settles the full bill is also a banking incentive, not a reduction in the restaurant’s consideration.
The collecting-agent notification provides no workable rule for these common arrangements. Will the bank deduct tax from the amount charged to the cardholder, the amount initially settled to the merchant, or the aggregate of customer payment and subsequent bank reimbursement?
How will co-funded promotions be reported? Who will correct the tax when a transaction is reversed, a booking is cancelled, a tip is added, or a promotional adjustment is made after settlement? A bank cannot determine the restaurant’s true taxable value merely from a merchant category code and a settlement message.
Split payments create another anomaly. A single restaurant supply may be settled partly by card and partly in cash or divided among several cards carrying different promotions. Does the entire bill qualify for the eight percent rate because some payment is digital, or should the bill be apportioned between eight and 16 percent?
The legislation provides no clear apportionment rule. A tax system that applies two rates to the same meal according to the instrument used for settlement invites manipulation and litigation rather than documentation.
There is also a consumer-protection issue. If banks deduct the entire tax before merchant credit, restaurants may seek to recover processing charges, lost discounts or convenience fees from customers.
The advertised “relief” can then disappear through higher menu prices, reduced promotional discounts, minimum card-payment conditions or additional charges. The customer sees a lower statutory rate but may pay a higher total bill. Punjab needs to decide whether it wants a VAT, a retail sales tax or a tax on digital payment behaviour. It cannot combine all three and call the result documentation.
A defensible reform would apply a low, uniform rate with full and verifiable input adjustment; integrate restaurant invoices with electronic POS reporting; preserve the invoice-credit chain; and prescribe clear treatment for merchant-funded discounts, bank-funded discounts, cashbacks, reversals and split tenders. Banks should transmit payment data, not be forced to guess the legal value of supplies made by merchants.
The real choice is not between eight percent on cards and 16 percent on cash. It is between genuine documentation of the full supply chain and a superficial levy on the final electronic settlement. Punjab’s policy chooses the latter. It may collect some revenue quickly, but it will neither create a bona fide VAT nor advance the cashless economy it claims to encourage, rather promote cash economy and incentivizing tax evasion.
Copyright Business Recorder, 2026
The writer is a lawyer and author, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Senior Visiting Fellow of Pakistan Institute of Development Economics (PIDE)
The writer, an Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws
The writer is a corporate lawyer based in the US with extensive expertise in financial regulations, including Virtual Asset Service Providers (VASPs), corporate governance, and global economic policies. He holds an LLM from Washington University in St. Louis and has completed the Management Development Program at the Wharton School. He has developed regulatory frameworks for North American and South American Financial Institutions and has consulted and trained bureaucrats of different regions. He can be reached at [email protected]
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