Federal Board of Revenue (FBR) has introduced significant amendments to the Income Tax Ordinance, 2001, through the Finance Act, 2025, specifically targeting undocumented business transactions and capital asset acquisitions. The changes, detailed in a new circular, aim to formalize the economy and ensure tax compliance.
The new rules, which will impact businesses across the country, introduce three key disallowances for expenditures:
1. Disallowance on Purchases from Non-NTN Holders
A new clause, 21(q), has been inserted into the Income Tax Ordinance, 2001, which states that 10% of the expenditure on purchases from individuals or entities that do not hold a National Tax Number (NTN) will be disallowed. The FBR’s goal is to encourage businesses to transact with registered suppliers, thereby expanding the formal sector and a broader tax base.
This provision includes a crucial exemption: it will not apply to purchases of agricultural produce unless the sale is made by a middleman. The FBR has also retained the authority to grant exemptions to other specific classes of persons, subject to certain conditions.
2. Disallowance on Non-Banking Channel Payments
In a move to push for digital and banking transactions, a new clause, 21(s), has been added. This clause dictates that if a business makes a sale of Rs. 200,000 or more on a single invoice and the payment for that sale is not received through a banking channel or digital means, then 50% of the proportionate business expenditure attributable to that sale will be disallowed.
To clarify, the FBR has specified that a payment will be considered to have been made through a banking channel if a person, even a non-NTN holder, deposits cash against the invoice directly into the seller’s bank account. This clarification aims to prevent the disallowance of expenditure in such cases.
3. Depreciation Disallowed on Un-withheld Payments
The new legislation also addresses the acquisition of capital assets. Under an amendment to section 22 of the Ordinance, a business will no longer be able to claim a depreciation expense on a capital asset if the withholding tax obligations on the payments made for its acquisition were not discharged.
This means that any amount paid to a supplier for a capital asset where the required tax was not withheld and deposited will not be considered part of the asset’s cost for the purpose of computing tax depreciation for that tax year. This measure is designed to strictly enforce withholding tax obligations and enhance tax collection at the source of transactions.
