FBR Eases Rules on Large Transactions, Accepts Cash Deposits in Bank Accounts as Valid Payments

In a significant move aimed at promoting tax compliance and bridging the gap between the formal and informal economies, the Federal Board of Revenue (FBR) has clarified that cash deposits made directly into a seller’s bank account will be treated as valid payments through the banking channel. This new directive, outlined in Income Tax Circular No. 1 of 2025-26, provides much-needed clarity following recent amendments to the Income Tax Ordinance, 2001.

Cash Deposits Now a Formal Payment Channel

The FBR’s clarification comes in the wake of a new clause (s) added to Section 21 of the Income Tax Ordinance via the Finance Act, 2025. The new law stipulated that 50% of a business’s expenditure would be disallowed if a single invoice of Rs. 200,000 or more was not paid through a formal banking or digital channel. However, the FBR has now confirmed that a direct cash deposit by a buyer—whether they hold a National Tax Number (NTN) or not—into the seller’s bank account will be accepted as a legitimate payment through the banking system. This measure is designed to prevent the disallowance of expenses in such transactions, thereby minimizing disputes and streamlining business operations.

Addressing the Gap Between Formal and Informal Sectors

This new policy reflects a pragmatic approach by the FBR to recognize real-world business practices while encouraging greater financial documentation. The FBR stated that the move is expected to encourage more individuals and businesses to use the formal banking system, even for cash-based transactions. By accepting these deposits as part of the official financial record, the FBR aims to facilitate smoother integration of the informal sector into the tax net, ultimately promoting a wider culture of compliance.

New Rules for Non-NTN Holders and Depreciation

The FBR circular also sheds light on other important amendments. A new clause (q) in Section 21 introduces a 10% disallowance on expenses related to purchases from non-NTN holders. An exception has been made for agricultural produce, which is exempt from this rule unless sold through an intermediary. The FBR has reserved the right to grant further exemptions for specific classes of people under prescribed conditions.

In a related development, a significant change has been made to Section 22 of the Ordinance concerning capital assets. The FBR has clarified that depreciation on any capital asset will be disallowed if the required tax withholding obligations under Sections 152 or 153 were not met at the time of acquisition. This means that any amount paid to a supplier without the mandatory withholding tax will not be considered part of the asset’s cost for the purpose of calculating depreciation, reinforcing the importance of adhering to tax-withholding laws.

Overall, the FBR’s decision to accept cash deposits as formal payments strikes a crucial balance between regulatory requirements and commercial realities, offering a more flexible framework for businesses while advancing the goal of a more compliant and documented economy.