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The Federal Board of Revenue (FBR) has formally dismissed claims of a 20.5% tax on cash-based transactions exceeding Rs. 200,000. According to senior FBR officials, no such tax exists, and the circulating reports are inaccurate.
The confusion stems from an amendment in the Finance Bill 2025, which introduces a disallowance of 50% of business expenditure if payments are made in cash or non-digital modes for sales over Rs. 200,000 per invoice. This is not a direct tax, but rather a restriction on tax-deductible expenses—a distinction that many businesses misunderstood.
What the Law Actually Says – Section 21(s) Explained
As per the new clause (s) added to Section 21 of the Income Tax Ordinance, 2001, the law states:
“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 against a single invoice containing one or more than one transactions of supply of goods or provisions of services shall be disallowed.“
This clause intends to discourage cash-based transactions and promote financial documentation and transparency.
Practical Examples
- Example 1 – No Disallowance:
A business sells goods worth Rs. 199,999 and receives payment in cash. Since it is below the threshold, no expenditure will be disallowed. - Example 2 – Disallowance Applies:
A business sells goods for Rs. 200,001 in a single invoice and receives cash payment. If it claims Rs. 30,000 as related business expenses, Rs. 15,000 (50%) will be disallowed from tax deduction.
Ambiguity and Concerns
The biggest issue lies in the lack of a formula to determine what constitutes “expenditure directly attributable” to such sales. This leaves room for subjective interpretation, allowing taxpayers to underreport linked expenses to reduce the disallowance.
Experts warn this ambiguity could:
- Undermine enforcement of the rule
- Lead to revenue leakage
- Encourage creative accounting among businesses
Who Will Be Affected?
The rule applies to all taxpayers except:
- Individuals not required to maintain audited accounts
- AOPs (Associations of Persons) with turnover below Rs. 300 million
This could make implementation difficult, as non-audited businesses are not legally bound to prove the breakdown of expenditure.
Government Stance: No Going Back (Yet)
FBR Chairman Rashid Mahmood Langrial stated that while the new law cannot be withdrawn now, changes may be considered in the next Finance Bill (2026-27).
He emphasized:
“This measure was approved by the National Assembly Standing Committee on Finance, not unilaterally introduced by the FBR.”
Despite opposition, the legislation has been formally passed and is already in effect.
Political Response & Industry Reaction
- Senator Sherry Rehman (PPP) criticized the measure, calling it a “draconian law.”
- Tax expert Ashfaq Tola stated that the amendment is part of a wider set of new documentation-focused reforms that affect operational costs for many businesses.
Purpose: A Push Toward Digital Economy
FBR officials reiterate that the move is not punitive, but rather a documentation incentive:
“We are not declaring cash transactions as high-risk, but want to promote banking and digital channels,” said an FBR Member.
Summary: Key Takeaways
- No 20.5% tax exists on cash transactions.
- New rule disallows 50% of claimed expenditure if Rs. 200,000+ sales are made in cash per invoice.
- The intent is to drive digitization and transparency in business dealings.
- Ambiguities remain around enforcement and attribution of expenses.
- FBR and Parliament are standing firm on the amendment—at least for now.
