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The Federal Board of Revenue (FBR) has officially denied imposing a 20.5% tax on cash transactions exceeding Rs. 200,000. This clarification comes amid widespread confusion triggered by amendments introduced through the Finance Act 2025.
FBR officials clarified that no such tax has been levied on these transactions. Instead, the new law simply disallows 50% of business expenditure related to any sale where cash payment exceeds Rs. 200,000 in a single invoice and is not conducted through banking or digital channels.
Section 21(s) of the Income Tax Ordinance, 2001, was amended in the Finance Act 2025. Under this clause:
“Fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means…” will now be disallowed as a deductible business expense.
This move aims to encourage digital payments and improve transaction documentation. It is not a penalty or a direct tax but a regulatory measure to reduce the reliance on undocumented cash sales.
Examples Explained
- No Disallowance: Sale of goods worth Rs. 199,999 in cash = Fully allowable expense.
- Disallowance Applies: Sale of Rs. 200,001 in cash = 50% of related expenditure disallowed.
For instance, if Rs. 30,000 was claimed as related expenditure, Rs. 15,000 will be disallowed under this provision.
However, experts have raised concerns about the ambiguity in determining which expenses are “directly attributable” to such sales. With no formula or ratio provided by the law, the door is open to taxpayer interpretations, which may reduce the law’s intended impact as well as hurt revenue collection.
Political and Professional Pushback
While defending the clause, FBR Chairman Rashid Mahmood Langrial emphasized that it was parliament-approved and can only be revisited in the next Finance Bill 2026-27. Additionally, Senator Sherry Rehman criticized the measure, calling it a “draconian law.”
Tax expert Ashfaq Tola noted that this and other new provisions introduced in the Finance Bill are already impacting businesses, particularly those dealing in cash-heavy sectors.
Not all taxpayers are subject to audit. Individuals and AOPs with turnover below Rs. 300 million are not legally required to be audited. Moreover, this lack of oversight complicates enforcement and weakens the intended transparency outcomes.
