Govt to Revise Policy on Tax Deduction on Cash Sales

The federal government has proposed a major change to the policy governing tax deduction on cash sales, raising the limit from Rs200,000 to Rs2.5 million per transaction. The proposed revision to Section 21 of the Income Tax Ordinance 2001 aims to address concerns from the business community while balancing documentation and revenue goals.

Previously, Section 21 disallowed 50 percent of expenditure related to any cash sale exceeding Rs200000 per transaction. This restriction, applicable only under the “Income from Business” head as defined in Section 18 of the ordinance, drew criticism for being too stringent and impractical for certain sectors.

Now, the government has decided to implement the revised rule in a phased manner over three years. In the first year, the threshold for disallowance will be raised to Rs2.5 million. By the second year, the cap will be reduced to Rs1.5 million and then further lowered to Rs0.5 million in the third year. Simultaneously, the disallowance percentage will begin at 20 percent and gradually return to the original 50 percent level over the same period.

Sources familiar with the matter said the phased approach will support documentation efforts while protecting revenue collection and easing the burden on businesses. Importantly, the provision continues to apply solely to business income and not to individuals or entities earning under other income heads.

The revised tax deduction on cash sales policy reflects a calibrated strategy to enhance transparency in business transactions without causing immediate disruption in trade practices.