The Punjab Finance Act, 2025, presented to the Provincial Assembly of Punjab on June 16, 2025, has brought transformative changes to the sales tax regime under the Punjab Sales Tax on Services Act, 2012 (the “Act”). The most significant structural amendment is the shift from a positive list-based taxation model to a negative list regime.
Under the pre-2025 structure, only those services explicitly listed in the Second Schedule of the Act were considered “taxable services”. This meant that non-listed services – including commercial property rental – were outside the purview of sales tax. Residential rentals for personal dwellings were already explicitly exempt.
This article aims to present a comprehensive legal and practical analysis of how the Punjab sales tax on services is now applicable on rental of commercial (non-residential) properties.
1. Legal Framework: Charging Provisions and Taxable Services
The original charging mechanism under Section 3 of the Act was based on a positive list model, whereby sales tax was levied only on those services explicitly specified in the Second Schedule to the Act. Section 3(1) used to state:
Taxable service.- (1) Subject to such exclusion as mentioned in Second Schedule, a taxable service is a service listed in Second Schedule, which is provided by a person from his office or place of business in the Punjab in the course of an economic activity, including the commencement or termination of the activity.
As the rental of non-residential (commercial) property was not included in the Second Schedule, such rentals were not subject to Punjab Sales Tax under the previous legal regime.
However, under the amended Section 3, all services provided, rendered, received, or consumed in Punjab are now subject to sales tax by default, unless specifically mentioned in the new First Schedule as tax-free services. In other words, the burden of proof has shifted: rather than proving a service is listed to make it taxable, a service is now presumed taxable unless it is explicitly exempted.
The new Section 3 states:
Taxable service.– (1) Subject to [section 3A, all services are taxable under this Act, including but not limited to the services] listed in Second Schedule, which is provided by a person from his office or place of business in the Punjab in the course of an economic activity, including the commencement or termination of the activity.
To operationalize this framework, the Act introduces Section 3A, which defines tax-free services as those listed in the newly substituted First Schedule. Among the listed exemptions is the “renting of personal dwellings for residential use” (Serial Number 19 of the First Schedule), thereby continuing the exemption for residential leases. However, there is no mention of non-residential or commercial rentals in the First Schedule. This omission seems intentional and has the legal effect of making rental income from commercial properties subject to Punjab Sales Tax under the revised regime.
Therefore, as a consequence of the move to a negative list, all services that were previously outside the tax net are now brought within scope, unless explicitly declared tax-free. As commercial property rental services are not included among the exemptions, they are now presumed taxable under Section 3, with no need for specific inclusion in a schedule, thereby significantly expanding the tax base.
2. Classification and Rate of Tax on Commercial Rentals
With the adoption of the negative list regime, the classification and applicable rates of sales tax on services have also been reorganized. The previously used Second Schedule, which listed taxable services along with their respective rates, has now been replaced with a restructured Second Schedule divided into three parts:
- Part I: Services subject to the standard rate of sales tax/other rates;
- Part II: Services subject to fixed tax rates; and
- Part III: Services taxed at reduced rates.
Under this revised structure, the rent of commercial (non-residential) properties is not included in the First Schedule (which contains tax-free services) and therefore falls within the category of taxable services under Section 3 of the Act. Since commercial property rental is not assigned a reduced or fixed rate in Part II or Part III of the Second Schedule, it is subject to the standard rate of 16%.
In practice, this means that rental income from the lease or license of shops, offices, warehouses, factories, malls, commercial buildings, and similar non-residential premises is now subject to Punjab sales tax on services at 16%, effective from the date the amended law comes into force. It is the responsibility of the service provider – in this case, the landlord or property manager – to charge, collect, and deposit the tax with the Punjab Revenue Authority. Section 11 of the Act states:
11.Person liable to pay tax.–
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Where a service is taxable by virtue of sub-section (1) of section 3, the liability to pay the tax shall be on the registered person providing the service.
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Where a service is taxable by virtue of sub-section (2) of section 3, the liability to pay the tax shall be on the person receiving the service.
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The Authority may, by notification in the official Gazette, specify the service or services in respect of which the liability to pay tax shall be on any person, other than the person providing the taxable service, or the person receiving the taxable service.
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Nothing contained in this section shall prevent the collection of tax from a different person if that person is made separately or jointly or severally liable for the tax under section 19.
This means that, in the case of taxable commercial property rentals, the landlord or property manager – as the registered service provider – is primarily responsible for charging, collecting, and paying the tax to the Punjab Revenue Authority. This stands in contrast to situations involving imported services or notified services under reverse charge, which fall under Section 11(2), where the recipient bears the liability.
Further, Section 11A reinforces this framework by introducing the concept of joint and several liability. It provides that if the registered service recipient (i.e., the tenant) fails to pay the invoiced tax within 180 days and the service provider also fails to deposit the tax within the prescribed due date, both parties become jointly and severally liable for the outstanding tax. This provision is designed to ensure compliance and prevent tax evasion through delayed invoicing or mutual inaction. The section states:
11A. Liability of a registered person.– Subject to the provisions of subsection (1) of section 11, where a registered person receiving the taxable service fails to make payment of the tax to a service provider within one hundred and eighty days from the date of the tax invoice and such service provider has also not made the payment thereof within the prescribed due date, the person providing and the person receiving taxable service shall, jointly and severally, be liable for payment of such tax.
Thus, the combined effect of these provisions is that the burden of compliance squarely rests on the service provider, unless specific withholding or reverse charge notifications apply. For commercial landlords in Punjab, this creates a statutory obligation to ensure that all rental invoices for non-residential properties include 16% sales tax on services and that the amount is duly deposited with the PRA in accordance with the Act and applicable rules.
3. Treatment of Unregistered Service Providers and Withholding Regime
While the liability to pay sales tax on services on commercial rentals ordinarily falls on the registered service provider under Section 11(1) of the Act, the law also explicitly addresses scenarios where the service provider is not registered with the Punjab Revenue Authority but is nevertheless providing taxable services. In such cases, the tax liability still arises – because the provision of a taxable service, not registration status, triggers the chargeability under Section 3.
Under Section 25 of the Act, any person who provides a taxable service is legally required to register with PRA. The section reads:
25. Registration.–
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A person shall register under this Act, who–
(a) provides any taxable service from his office or place of business in the Punjab; or
(b) is otherwise required to be registered under any of the provisions of the Act or the rules; or
(c) fulfills any other criteria or requirements which the Authority may prescribe under sub-section (2). -
The registration under this section will be regulated in such manner and subject to such conditions and restrictions as the Authority may, by notification in the official Gazette, prescribe.
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A person who receives a service, which is a taxable service by virtue of sub-section (2) of section 3, and is not a registered person shall be deemed to be a registered person for the purposes of the tax period in which–
(a) such person receives the service;
(b) an invoice for the value of the service is issued or sent to or received by the person; or
(c) consideration for the service is paid by the person – whichever is earlier, and all the provisions of this Act and the rules shall be applicable to such person for that particular tax period and any matters relating to, arising out of, or concerning that tax period as if that person had provided the service. -
The Authority may publish on its website a list of persons registered under this Act.
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It shall be reasonable for a person to believe that another person is registered under this Act if that other person is on the list placed on the website of the Authority.
Thus, a person renting out commercial (non-residential) property is obligated to register with PRA, charge and collect sales tax at the applicable rate (currently 16%), and file periodic returns. Failure to register constitutes non-compliance and triggers a series of administrative and penal consequences under the Act.
It is worth noting that, although, the primary liability to pay Punjab Sales Tax on commercial rentals lies with the registered service provider, as per Section 11(1) of the Act, the law also provides for mechanisms to ensure tax enforcement when the service provider is unregistered or when PRA considers it appropriate to assign the tax burden differently. These mechanisms are set out in Section 14 (Special procedure and tax withholding provisions) and Section 14A (Special procedure for collection of tax, etc.), which empower the Punjab Revenue Authority to appoint other persons – including recipients or even third parties – to withhold, collect, and deposit sales tax on taxable services.
Section 14(1) authorizes the PRA to prescribe, through notification in the official Gazette, special procedures governing registration, invoicing, billing, return filing, and payment for any service or class of services. This gives PRA flexibility to tailor compliance mechanisms based on industry or service-specific risk assessments. It states:
14. Special procedure and tax withholding provisions. –
(1) Notwithstanding anything contained in this Act, the Authority may, by notification in the official Gazette, prescribe a special procedure for the payment of tax, registration, book keeping, invoicing or billing requirements, returns and other related matters in respect of any service or class of services, as may be specified.
Section 14(2) is particularly important in the context of commercial rentals, especially when the landlord or service provider is not registered. It states:
(2) Notwithstanding other provisions of this Act, the Authority may require any person or class of persons whether registered or not for the purpose of this Act to withhold full or part of the tax charged from such person or class of persons on the provision of any taxable service or class of taxable services and to deposit the tax so withheld, with the Government within such time and in such manner as it may, by notification in the official Gazette, specify.
This effectively enables PRA to designate tenants or service recipients as withholding agents, requiring them to withhold the applicable tax from rent paid to unregistered landlords and deposit it directly with the government. The term “charged” used in this subsection means and includes the tax liable to be charged under this Act or the rules made thereunder.
Further, Section 14(3) makes it clear that any person required to withhold tax but failing to do so (or to deposit it) becomes personally liable for the tax:
(3) Where a person or class of persons is required to withhold or deduct full or part of the tax on the provision of any taxable service or class of taxable services and either fails to withhold or deduct the tax or having withheld or deducted the tax, fails to deposit the tax in the Government treasury, such person or class of persons shall be personally liable to pay the amount of tax to the Government in the prescribed manner.
This provision is applied in practice when commercial tenants (especially corporate entities) pay rent to unregistered landlords. If the tenant fails to withhold and deposit the tax, they can be directly assessed and penalized by PRA.
Complementing this is Section 14A, which provides PRA even broader authority. It permits PRA to require third parties – not even directly involved in the service transaction – to collect and deposit tax. Section 14A (1) states:
14A. Special procedure for collection of tax, etc.–
(1) Notwithstanding anything contained in this Act, the Authority may require any other person or class of persons, not necessarily being a service provider or a service recipient in a particular transaction, to collect full or part of the tax charged from another person or class of persons on the provision of any taxable service or class of taxable services and to deposit the tax so collected, in the Government treasury within such time and in such manner as the Authority may, by notification in the official Gazette, specify.
Section 14A (3) also creates personal liability for any third party who fails to collect or deposit such tax. It states:
(3) Where a person or class of persons is required to collect full or part of the tax on the provision of any taxable service or class of taxable services and either fails to collect the tax or having collected the tax, fails to deposit the tax in the Government treasury, such person or class of persons shall be personally liable to pay the amount of tax to the Government in the prescribed manner.
In essence, registration with PRA is not merely procedural – it is central to legal compliance. A failure to register does not shield a landlord from tax liability. Nor does it release the recipient of the service from responsibility, especially if they fall within the withholding regime. The PRA may, at its discretion, pursue enforcement, impose penalties under Section 48 of the Act.
Therefore, all commercial property owners, whether individuals or corporate entities, who lease out non-residential premises in Punjab are strongly advised to register with PRA, issue compliant tax invoices, and fulfill all obligations under the Act to avoid exposure to legal and financial risks.
Conclusion
The reforms introduced through the Punjab Finance Act 2025 represent a landmark shift in the taxation of services in Punjab, transitioning from a positive list-based model to a negative list regime. This restructuring, implemented through amendments to the Act, has significantly broadened the scope of taxable services, with direct implications for the rental of commercial (non-residential) properties.
Under the revised legal framework, all services are presumed to be taxable unless expressly exempted under the newly substituted First Schedule. While the renting of personal dwellings for residential use is explicitly listed as a tax-free service, commercial property rentals are not, and therefore now fall within the category of taxable services under Section 3, read with the new Second Schedule. The standard rate of tax applicable to such services remains 16%.
Having said that, it is likely that this imposition will attract a constitutional challenge as there is essentially no provision of a service. It is unclear if under the federal scheme of the Constitution, a province can impose a tax on mere provision of rental space without providing any corresponding service such as building management and common areas maintenance. This issue has already been decided in Sindh in Young’s Pvt. Ltd v. Province of Sindh and others (2019 PTD 389) which was also upheld by the Supreme Court of Pakistan.
However, till such time that the law is not set aside, residents in Punjab must comply with the provisions of the Punjab Sales Tax on Services Act, as amended in 2025.
