The business community is facing serious problems in complying with a new income tax provision for disallowing 50 percent of expenditure attributable to cash sales exceeding Rs. 200,000 per transaction.
This new provision introduced through the Finance Act 2025 has been implemented from July 1, 2025.
The disallowance introduced via Section 21 of the Income Tax Ordinance, 2001 pertains exclusively to the head “Income from Business”.
This provision disallows 50 percent of expenditure attributable to cash sales exceeding Rs. 200,000 per transaction.
By legislative design and placement, this disallowance has no bearing on other income heads such as Rental income (Section 15 Income from Property); Capital Gains (Section 37), and Income from Other Sources (Section 39).
Hence, the restriction applies solely to business income and is not applicable to individuals or entities earning income under any other head. Similarly, Section 21 disallows 10% of admissible business expenditure if paid to non-NTN holders.
This provision also resides within the framework of “Income from Business” and does not extend to non-business income. The disallowance under Section 21 does not affect deductions claimed under:
- Section 15 (Property Income); Section 12 (Salary); Sections 37 / 37A (Capital Gains) and Section 39 (Other Sources).
- Both disallowance provisions—Section 24 (cash sales) and Section 21 (non-NTN payments)—are categorically limited to income assessed under the head “Income from Business”.
They have no application to rental income, capital gains, salary, or other non-business income streams. Absent any statutory deeming provision to the contrary, their scope remains confined to business taxpayers only, tax expert added.
It would’ve been nice if the writer had taken the time to simplify this for readers.
Had government been serious to curb undocumented transactions it would have banned Rupees 5000 currency notes which are main tool for illicit transactions.