KPK Finance Act

Briefing

By Rahnuma · AI-generated

The Khyber Pakhtunkhwa Finance Act, 2025 (Khyber Pakhtunkhwa Act No. XVIII of 2025) received gubernatorial assent on July 8, 2025 and came into force on July 1, 2025. Section 10 substantially amends the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022 (Khyber Pakhtunkhwa Act No. XIX of 2022). Key changes include a shift from a positive-list to a negative-list regime for taxable services under Section 3(1), a standard rate of fifteen percent (15%) under Section 9(1), expanded definition of "Service" to explicitly include digital, electronic and online platforms under Section 2(aaa), mandatory e-filing under Section 39(1), and new pecuniary jurisdiction thresholds for appeals under new Section 70A. The Act also introduces reduced tax rates for hospitality services (5-10%) and retains an elevated rate for telecommunications (19.5%) in the newly substituted Second Schedule.

Plain-language explanation

The Khyber Pakhtunkhwa Finance Act, 2025 is a provincial tax law that takes effect July 1, 2025 and makes significant changes to how IT and digital services are taxed in Khyber Pakhtunkhwa. The most important change for technology companies is that all services are now taxable by default, whereas previously only listed services were taxed. If your company provides software development, IT consulting, cloud services, digital marketing, or any online service from or into Khyber Pakhtunkhwa, you are likely now liable for a 15% provincial sales tax unless your specific service appears on the new exemptions list. The law also explicitly brings digital and online services within the tax net, which is a direct response to the growth of remote and platform-based service delivery. Registered businesses must now file tax returns electronically and maintain detailed records, including cross-province transactions. Penalties for failing to install required invoicing systems can reach Rs. 200,000 per instance. The good news is that restaurant and hotel services received reduced rates (5-10%) which may affect business travel and entertainment costs, and certain small-scale traditional services like barber shops and laundries remain exempt. Companies with tax assessments up to Rs. 5 million appeal to the Collector (Appeals); larger assessments go directly to the Appellate Tribunal.

Compliance & opportunity checklist

Review all service lines against the new First Schedule (exemptions list) to confirm taxability under Section 3(1) and Section 9(1) standard rate of 15%.
Register with the Khyber Pakhtunkhwa Revenue Authority and ensure e-filing compliance under Section 39(1) before the next tax period.
Update invoicing systems to meet Restaurant Invoice Management System or prescribed e-invoicing requirements per Section 53 TABLE Serial No. 4B to avoid penalties.
Cross-check all contracts with customers and vendors across provinces against the expanded 'Service' definition in Section 2(aaa) that now includes digital and online platforms.
Reconcile inter-provincial service provision records as required by Section 35(1A) for accurate Khyber Pakhtunkhwa tax liability calculation.
Assess whether any RIMS, digital platform, or SaaS services qualify for First Schedule exemptions and document the basis for any exemption claimed.
Verify if any existing notifications or special exemptions granted to your projects or class of persons are still valid under the Note following First Schedule Serial No. 30.
Confirm the new appeals forum based on assessment value under Section 70A: Collector (Appeals) up to Rs. 5 million; Appellate Tribunal for amounts exceeding Rs. 5 million.

Key numbers

Standard Sales Tax Rate on Services

15 percent

· Section 9(1)

Telecommunication Services Tax Rate

19.5 percent

· Second Schedule Part-I Sr. No. 1

Restaurant and Hotel Services Tax Rate (non-corporate hostels)

5 percent

· Second Schedule Part-II Sr. No. 2(i)

Restaurant and Hotel Services Tax Rate (stand-alone restaurants and hotels)

10 percent

· Second Schedule Part-II Sr. No. 2(ii)

Reduced Rate for Restaurant/Hotel via Digital Payment

6 percent

· Second Schedule Part-II Sr. No. 2 proviso

Cash Transaction Exemption Threshold

50000 PKR

per tax period (aggregate) · Section 17(1)(c)

Pecuniary Limit for Collector (Appeals)

5000000 PKR

· Section 70A(1)(a)

Pecuniary Limit for Appellate Tribunal

5000000 PKR

· Section 70A(1)(b)

Penalty for Non-Compliance with RIMS/E-invoicing

200000 PKR or 5% of tax involved, whichever is higher

per instance · Section 53 TABLE Serial No. 4B

E-filing Response Period for Short Levy

120 days

· Section 39(6)

Lump-sum Tax Arrears Rebate Validity

30-Oct-2025

· Section 8(b) Appendix-V TABLE

Cement Industry Royalty Enhancement (Year 1 of 5)

350 to 385 PKR per ton

FY 2026-27 · Section 9(g) Note

Frequently asked

By Rahnuma · AI-generated

Does the expanded definition of 'Service' in Section 2(aaa) now capture software, SaaS, and cloud-based IT services provided from or into Khyber Pakhtunkhwa?

Yes. The amended definition explicitly states that 'Service' includes anything performed 'by whatever means, including but not limited to digital, electronic or online platforms.' This language is broad enough to encompass software development, SaaS subscriptions, cloud hosting, IT consulting, and digital agency services performed in the province. Explanation-I clarifies that a service remains a service regardless of whether goods are used in its delivery, further broadening the scope for IT service providers.

How does the shift from a positive-list to a negative-list regime affect our IT company's tax liability under Section 3(1)?

Under the prior regime, only services explicitly listed in the Second Schedule were taxable. Under the amended Section 3(1), all provision of service is now taxable unless it appears explicitly in the newly substituted First Schedule (exemptions) or qualifies under conditions specified therein. Services previously taxable remain taxable (second proviso to Section 3(4)), but previously untaxed services may now fall within the tax net. IT companies should review all service lines to confirm they are not newly subject to tax or rely on First Schedule exemptions.

What are the compliance deadlines and filing obligations under the amended Section 39 for registered persons?

Every registered person must now furnish returns 'through an e-file' under Section 39(1). The time to respond to a notice of short levy has been reduced from six months to one hundred and twenty days under Section 39(6). Section 35(1A) additionally requires that registered persons engaged in providing taxable services in other provinces maintain records that permit reconciliation of their provincial tax liability. Non-compliance with RIMS or prescribed e-invoicing systems attracts a penalty of Rs. 200,000 or 5% of the tax involved, whichever is higher, per instance under Section 53 TABLE Serial No. 4B.

Under what circumstances can we appeal a tax assessment, and to which forum under new Section 70A?

Under new Section 70A(1), appeals against tax assessments under Section 27 lie to the Collector (Appeals) where the value of assessment does not exceed five million rupees. Where the value exceeds five million rupees, appeals lie directly to the Appellate Tribunal. Cases pending before the Collector (Appeals) that exceed the five-million-rupee threshold were transferred to the Appellate Tribunal on July 10, 2025, and must be decided within six months of transfer under Section 70A(3). This creates a clear two-tier appellate structure based on monetary threshold.

Can the Khyber Pakhtunkhwa Revenue Authority share our tax return data with the FBR or other provinces under Section 83(4)?

Yes. The amended Section 83(4) now permits the Khyber Pakhtunkhwa Revenue Authority to make arrangements or agreements on reciprocal or multilateral bases with the Federal Board of Revenue and the sales tax authorities of other provinces for sharing electronic data of tax returns filed in the computerized system. Such arrangements are subject to limitations and conditions specified by the Authority and agreed to in the relevant agreements. IT companies operating across multiple provinces should be aware that their Khyber Pakhtunkhwa tax data may be shared with federal and other provincial tax authorities.

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