Introduction
The new amendment relates to the disallowance of business expenses under section 21s of the Income Tax Ordinance 2001. During assessment proceedings under section 122, if the FBR detects that a cash transaction exceeding Rupees 200,000 has been received against a single invoice, it may disallow 50% of the related business expenses which eventually increases the tax tax liability for the taxpayers who received the cash payment against sales.
What is Section 21(s)?
A new amendment has been introduced in the Income Tax Ordinance, 2001 through the Finance Act, 2025 by inserting a new sub-section 21(s). This new amendment introduced to promote digital payments in Pakistan.
For example, if a business taxpayer sales goods or provide services for amounting to Rupees 650,000 under a single invoice and receives payment in cash. If Rupees 400,000 worth of expenses is claimed against that single invoice, Rupees 200,000 (i.e. 50%) will be disallowed — which will increase the taxable income by the same amount.
Why It Matters to You?
The change will affect all businesses especially:
- Retailers
- Wholesalers
- Service Providers
- SMEs that primarily deal in cash
It is just because if the sale transaction is settled in cash and not through:
- Bank Transfers
- Crossed Cheques
- Mobile Wallets
- Online Payments
How to Stay Compliant of this new amendment?
To avoid disallowance of 50% of business expenses against cash sales of amounting to Rupees 200,000 or more the business should follow these best practices:
- Must receive payments through banking channels / crossed cheques
- maintain complete record of sales receipts and related payments of business expenses
- install point of sales systems (POS) at business premises and that invoicing system records payment methods to avoid cash transactions over Rupees 200,000 against single invoice.
What will be the Consequences of Non Compliance?
If any business person fails to fully comply with section 21s of the Income Tax Ordinance 2001 then it can lead to:
- increase in taxable income due to disallowance of business expenses
- it will lead to increase in further tax liability
- it can charge penalties during audit / assessments
- it can lead to further proceedings by Federal Board of Revenue (FBR)
Conclusion
Section 21s of the Income Tax Ordinance 2001, is really a big tax amendment in Pakistan’s tax compliance landscape. If businesses are receiving cash payments against sale of goods or provision of services then time has come to review the payment methods. Receiving payments through banking channels will not only ensure tax compliance but also reduces audit risk.
