The current tax regimen of the Sindh Revenue Board (SRB) related to Islamic leasing has created a serious roadblock in the way of Shariah-compliant finance. While the intention behind tax collection is understandable, SRB’s approach appears overwhelmingly driven by revenue generation, with little regard for the unique structure of Islamic finance or the adverse consequences this creates for the industry.
At the heart of the issue lies Ijarah Muntahia Bittamleek — a widely accepted Islamic financing structure in which ownership of the asset transfers to the customer at the end of the term. Economically and commercially, this arrangement is equivalent to a finance lease. However, SRB continues to tax the entire rental stream, both principal and profit, exactly as it taxes an operating  Ijarah, which is a very different structure.
This misclassification has resulted in Sindh sales tax being applied not only to the income component, but also to the principal recovery — an approach unheard of in conventional finance. The outcome is a tax burden that, in many cases, exceeds the profit earned on the financing itself.
What is most concerning is that this distortion affects only the Islamic mode. Conventional finance leases do not face this unjust burden. In its determination to maximise tax collection, SRB has not fully considered the implications of treating two fundamentally different structures as identical. The sector-wide impact is undeniable: non-banking finance companies (NBFCs), modarabas and Islamic financial institutions (IFIs) have been forced to dis-continue Islamic leasing operations simply because the product is no longer commercially viable under SRB’s tax regime. This does not impact just the institutions. It affects the country’s broader goal of expanding Islamic finance, encouraging financial inclusion, and offering Shariah-compliant options to consumers who prefer them. SRB must reconsider its approach not for the benefit of a single industry, but for the sustainability of Islamic finance itself.
MAHFUZ UR REHMAN PASHA
KARACHI
