ISLAMABAD – The Federal Board of Revenue (FBR) has categorically denied reports of imposing a 20.5% tax on cash transactions exceeding Rs. 200,000, calling such claims “incorrect” amid widespread confusion over recent tax amendments.

The clarification comes as businesses grapple with new legislation under the Finance Act 2025 that introduces significant restrictions on expense deductions for large cash transactions.

New Law Affects Business Expense Claims

While no direct tax has been imposed on cash transactions, the Finance Act 2025 has introduced a provision that disallows 50% of claimed business expenditures related to sales where payments exceeding Rs. 200,000 are received in cash or through non-banking channels.

FBR Chairman Rashid Mahmood Langrial told the Senate Standing Committee on Finance that the government cannot withdraw the new legislation, which has already been approved by the National Assembly Standing Committee on Finance. “The legislators have approved the law and not the FBR,” Langrial clarified, adding that changes could only be made in the next Finance Bill for 2026-27.

Political Opposition Emerges

Senator Sherry Rehman of the Pakistan People’s Party (PPP) criticized the amendment, calling it a “draconian law” that her party opposes.

A senior FBR member, speaking to ProPakistani, emphasized that the board “has not declared cash transactions above Rs. 200,000 as high risk,” describing the measure as purely a documentation tool to encourage banking channel transactions.

How the New Rules Work

The amendment, inserted as Section 21(s) in the Income Tax Ordinance 2001, applies to single invoices containing transactions exceeding Rs. 200,000 paid in cash or through non-digital means.

Tax expert Ashfaq Tola from Karachi explained that the disallowance affects business expenditures related to sales, including freight, carriage, commission, and other distribution-related expenses.

Practical Examples:

• Below threshold: A Rs. 199,999 cash sale faces no disallowance
• Above threshold: A Rs. 200,001 cash sale triggers 50% disallowance of related expenses

If a business claims Rs. 30,000 in expenses for such a sale, Rs. 15,000 would be disallowed under the new provision.

Implementation Challenges

The amendment faces significant practical hurdles, as tax experts note there is no prescribed method to determine which expenses are “directly attributable” to specific sales. This ambiguity could allow taxpayers to minimize the impact by claiming lower attributable expenses, potentially undermining the amendment’s revenue goals.

Additional complications arise from the fact that individuals and smaller businesses (with turnover below Rs. 300 million) are not required to undergo statutory audits, making it difficult to verify expense attributions.

The new rules represent the government’s latest effort to encourage digital transactions and improve tax documentation, though their practical implementation remains uncertain as businesses adapt to the changed regulatory landscape.