Finance Act 2025 tightens tax rules for businesses, filers

LAHORE: The Finance Act 2025 has brought significant amendments to the Income Tax Ordinance, 2001, impacting businesses and taxpayers. However, the Federal Board of Revenue has incorporated these changes with an aim to broaden the tax base, increase revenue generation, and promote transparency in the tax system.

Key amendments included disallowance of business expenditure, purchases from non-NTN holders and tax on cash withdrawals.

A new clause has been inserted in Section 21 of the Income Tax Ordinance, disallowing 50% of claimed expenditure related to sales exceeding Rs 200,000, where payment is received in cash or through non-banking channels. This may apply to expenses like freight, carriage, and commission.

Similarly, 10% of claimed expenditure attributable to purchases from non-NTN holders will be disallowed, except for purchases of agricultural produce directly from growers. The FBR can exempt certain persons or classes from this clause. So far as tax on cash withdrawals is concerned, the withholding tax rate on cash withdrawals by non-ATL persons has been increased from 0.6% to 0.8%, aiming to encourage a broader tax base. While mentioning implications of these changes in the Ordinance, tax expert Ashfaq Yusuf Tola said it would lead to ambiguity in expenditure calculation, difficulty in identifying middlemen and increased cost for non-filers.

He said the lack of a prescribed method to determine expenditure directly attributable to sales may lead to disputes and potential revenue loss. There is a risk that the FBR may misconstrue purchases as business expenditure for the purposes of this provision. Such an interpretation would be legally flawed, as purchases form part of the cost of sales rather than deductible business expenditure under Section 21. Any such misapplication could result in arbitrary disallowances and unwarranted tax exposure for taxpayers.

Also, he said, accurately identifying and verifying middlemen in agricultural produce purchases might be challenging for the FBR. Furthermore, Tola added, the increased withholding tax rate may discourage non-filers from using banking channels, potentially undermining economic documentation goals. He said the increased withholding tax rate on cash withdrawals by non-filers from 0.6% to 0.8%, raises the cost of remaining outside the tax net. This amendment may be contradictory to the aim of documentation of the economy as it may discourage use of banking channels altogether, as non-filers may deal in cash to avoid the tax, thereby undermining the goal of economic documentation.

Copyright Business Recorder, 2025