KARACHI: A new provision - Section 21 (s) of Income Tax Ordinance 2001 introduced through the Finance Act 2025 is facing serious implementation challenges as the Federal Board of Revenue (FBR) has failed to issue necessary guidelines 11 days after the law came into effect (July 1, 2025), raising concerns among tax experts about its practical enforcement.
The Finance Act 2025 has inserted Section 21(s) into the Income Tax Ordinance 2001 to broaden the tax base and promote a documented economy.
Tax experts; however, said that the provision wouldn’t be implemented effectively, as the FBR has no mechanism to assess expenditure pertaining specifically to sales made through invoices exceeding Rs 200,000 with cash payments.
They said the amendment specifically targets expenditure related to sales activities, including freight charges, carriage costs, commission payments, and other distribution-related expenses. The threshold-based system creates a clear distinction between acceptable and penalized transactions.
Under the new framework, transactions remain unaffected when payments stay below Rs 200,000. For example, a taxpayer selling goods worth Rs 199,999 through a single invoice and receiving cash payment would face no disallowance since the amount does not exceed the prescribed threshold.
However, the penalty mechanism activates when transactions cross the Rs 200,000 mark. In cases where a taxpayer sells goods worth Rs 200,001 through a single invoice and receives cash payment, 50 percent of the claimed expenditure related to that specific sale faces disallowance. If the taxpayer has claimed Rs 30,000 as expenditure directly attributable to such a sale, Rs 15,000 would be disallowed under the provision.
“This section disallows 50 percent of claimed expenditure related to sales where payments exceeding Rs 200,000 are received in cash or through non-banking channels for a single invoice, regardless of whether it covers single or multiple transactions. However, it provides no prescribed method, ratio, or formula to determine the portion of expenditure directly attributable to specific sales exceeding the threshold,” tax experts said.
“The ambiguity opens the door for taxpayers to argue that minimal directly attributable expenditure has been incurred for such sales, potentially undermining the amendment’s objectives and leading to revenue loss,” they added.
“Without clear attribution guidelines, businesses may manipulate their expense allocation to minimize the impact of the disallowance provision,” they added.
Moreover, they said individuals operate under no statutory obligation to have their accounts audited by certified auditors, while associations of persons with turnover below Rs 300 million are not legally required to undergo professional audits. Therefore, this regulatory gap may create significant practical difficulties in certifying and verifying expenditure attributable to specific sales transactions, they said.
“These enforcement challenges could render the provision ineffective and potentially counterproductive and may inadvertently incentivize businesses to conceal sales transactions rather than comply with documentation requirements, which may contribute to the expansion of the informal economy rather than achieving the intended goal of economic documentation,” tax experts said. Rehan Jafferi, former president of the Karachi Tax Bar Association, delivered sharp criticism of the FBR’s approach, describing the introduction of Section 21(s) as constituting ‘undue harassment’ of existing taxpayers.
He said the provision would fail to impact businesses operating outside the tax system, which exclusively deal in cash transactions and maintain no banking relationships.
“This section would not affect those who are out of tax ambit because they deal in cash and have nothing to do with banks,” Jafferi said, adding that the measure did not represent a positive step for the formal economy. He stressed upon systemic reforms rather than punitive measures, suggesting FBR to modernize its monitoring and tracking systems for sales transactions.
Copyright Business Recorder, 2025
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