In response to significant concerns from the business community, the federal government has proposed a phased implementation of the controversial amendment under Section 21 of the Income Tax Ordinance, 2001. This section currently disallows expenditure attributable to cash sales exceeding Rs. 200,000 per transaction. The new proposal suggests a substantial increase in this limit to Rs. 2.5 million for the initial phase, alongside a reduced disallowance percentage.
The original amendment, introduced via the Finance Act 2025, which prohibits the deduction of 50% of expenses for cash sales exceeding Rs. 200,000, had generated considerable apprehension among businesses due to its immediate and broad impact. Sources indicate that the government now aims to implement this law in a more gradual manner, seeking to balance the objectives of revenue collection and economic documentation with the practical realities faced by businesses.
Phased Implementation Over Three Years
Under the proposed revised law, the new cash sales limit and disallowance percentage would be fully implemented over a three-year period:
- Year 1 (Initial Phase): The current Rs. 200,000 limit for disallowing expenditure per cash transaction is proposed to be significantly increased to Rs. 2.5 million. Concurrently, the percentage of disallowance would be decreased from 50% to 20%.
- Year 2 (Intermediate Phase): The transaction limit would then be decreased from Rs. 2.5 million to Rs. 1.5 million. The disallowance percentage is expected to be gradually increased from 20%.
- Year 3 (Final Phase): The limit would be further reduced to Rs. 0.5 million (Rs. 500,000), and the disallowance percentage would be fully implemented, likely reverting to 50% or a similar higher rate.
Scope of Application: “Income from Business” Only
The government reiterated that the disallowance introduced via Section 21 of the Income Tax Ordinance, 2001, pertains exclusively to the head “Income from Business,” as defined under Section 18. This means the restriction on expense deductibility applies solely to business income and is not applicable to individuals or entities earning income under any other head (e.g., salary, property income, capital gains).
This proposed phased approach is expected to provide businesses with more time to adapt to the new regulations and transition towards documented, digital payment methods. It also reflects the government’s acknowledgment of the operational challenges posed by an immediate and drastic reduction in the cash transaction limit. The move aims to foster greater compliance without unduly disrupting economic activity, allowing for a smoother shift towards a more formalized economy.
