ISLAMABAD:
In a significant move to widen the tax net and boost revenue collection, the Federal Board of Revenue (FBR) has imposed a steep 20.5% additional tax on cash transactions exceeding Rs200,000 — a decision that has sent ripples through the business community.
The measure, part of the recently enacted Finance Act 2025, came into effect on July 1, marking the beginning of the new fiscal year 2025–26. It specifically targets non-filers and aims to discourage undocumented cash dealings that evade the formal economy.
According to the new amendments under Section 21 of the Income Tax Ordinance, 2001, businesses can no longer claim more than 50% of expenses for cash sales exceeding the Rs200,000 threshold. In practice, this means that such transactions will be subject to a 20.5% disallowance, effectively reducing their deductibility and increasing the tax burden on businesses failing to document their deals through proper banking channels.
Business circles have responded with concern, saying the abrupt implementation has created confusion, particularly among small and medium enterprises (SMEs) who rely heavily on cash-based transactions. Many firms have begun issuing advisories to clients, urging them to adopt formal payment methods to avoid penalties.
As per Mettis Global, for every cash transaction above Rs200,000, the FBR will claim Rs41,000 in additional tax — leaving only Rs159,000 of the original amount effectively claimable. This move is part of broader efforts to restrict informal cash flows and enhance traceability in the economy.
Notably, the provision exempts income from capital gains, property, salaries, and agricultural produce directly bought from farmers. The focus remains squarely on business-to-business cash dealings.
While the rule doesn’t technically ban large cash transactions, it creates a powerful disincentive for conducting high-value sales outside the formal banking system. However, experts caution that loopholes still exist — businesses could split a large transaction into smaller payments under Rs200,000 to bypass scrutiny, though such practices would be illegal and expose them to audit risks.
In addition to the cash transaction clause, the Finance Act 2025–26 also introduces a new hurdle for companies dealing with non-NTN holders (non-filers). Businesses will now face a 10% disallowance on expenses incurred through transactions with such individuals — another step aimed at forcing wider registration in the tax net.
According to insiders, these aggressive policy shifts come amid mounting pressure on the FBR, which missed its revenue target for FY 2024–25 by over Rs1 trillion. With a record shortfall of Rs1.008 trillion, the government is now doubling down on compliance enforcement and tax base expansion as it eyes recovery in the current fiscal year.
Financial analysts warn that while the intention behind the reforms is sound, proper implementation, awareness, and technological support will be key to avoiding market disruption. Without those, they say, businesses might simply shift to informal tactics, further complicating enforcement.
