The Finance Act 2025—Section 21(s) of the Income Tax Ordinance 2001—is already drawing strong criticism from tax professionals and legal experts, just days after it came into force on July 1, 2025. The Federal Board of Revenue (FBR) has yet to issue any formal guidelines for implementing the new section, raising serious doubts about its enforceability and effectiveness.
The new provision aims to broaden the tax base, encourage a documented economy, and discourage high-value cash transactions by disallowing a portion of expenditures linked to such sales. However, 11 days into the fiscal year, the FBR has failed to provide clarity on how the provision will be practically applied—an omission that could severely undermine its intended impact.
Section 21(s) was added to the Income Tax Ordinance 2001 via the Finance Act 2025 to penalize businesses that conduct cash-based sales exceeding Rs. 200,000 per invoice. The law states that if goods worth more than Rs. 200,000 are sold via a single invoice and paid for in cash (or through non-banking channels), 50% of the expenditure claimed on that sale will be disallowed for tax purposes.
For example:
If a taxpayer sells goods worth Rs. 199,999 in cash via one invoice, the transaction remains unaffected.
The sale amount is Rs. 200,001 and the taxpayer claims Rs. 30,000 as attributable expense, Rs. 15,000 will be disallowed, assuming it’s linked to that particular sale.
Despite its seemingly straightforward premise, tax experts have highlighted significant flaws in the structure and implementation of the law. According to them, the FBR has not yet provided any formula, ratio, or attribution guidelines to determine what portion of a taxpayer’s expenses are directly related to the sales exceeding the threshold.
“This opens the door for creative accounting,” one tax consultant explained. “Without attribution rules, businesses may under-report expenditures linked to high-value cash sales or shift costs around to minimize the disallowance impact.”
Furthermore, the lack of auditing obligations for certain taxpayers compounds the issue. Individuals are not legally required to conduct audits of their books, and associations of persons (AOPs) with turnover below Rs. 300 million are exempt from professional audit requirements. This makes it extremely difficult for tax authorities to verify expense claims, especially for businesses operating in cash-heavy sectors.
Instead of promoting transparency, tax professionals fear the provision might backfire. Rehan Jafferi, former president of the Karachi Tax Bar Association, criticized the FBR’s approach, calling it a form of “undue harassment” of existing taxpayers.
“This amendment targets those who are already in the tax net,” Jafferi remarked. “It doesn’t touch businesses that operate completely outside the system, who don’t use banks or file returns. They will continue cash transactions as usual, unaffected by this provision.”
Jafferi argued that punitive laws without proper enforcement mechanisms only incentivize businesses to remain undocumented. He urged the government to focus on systemic reforms, such as digitized transaction monitoring, instead of relying on blanket disallowance policies.
With no formal audit structure and lack of clear guidelines, many fear that taxpayers will manipulate expense allocations, claiming minimal directly attributable costs for sales that should face disallowance. This would directly undermine the provision’s revenue-generating intent.
“Without clarity, this could result in more litigation and administrative burdens rather than actual gains,” a senior tax advisor warned. “FBR needs to issue a comprehensive SRO or circular to clarify the mechanics of this section.”
Issue implementation guidelines with examples and scenarios
Define what constitutes directly attributable expenditure
Set ratios or caps based on industry types
Expand the audit threshold to include cash-intensive businesses
Digitize transaction reporting for better monitoring
In the absence of these corrective steps, Section 21(s) may remain a theoretical deterrent with little practical impact.
Pakistan has long struggled with a narrow tax base and an expansive informal economy. Efforts to document transactions through tax reforms have often failed due to weak enforcement, lack of taxpayer trust, and inconsistent policies.
Introducing disallowance measures like Section 21(s) without adequate preparation not only leads to taxpayer dissatisfaction, but also diverts focus from wider reforms such as digitization, real-time data sharing, and taxpayer education.
