The federal government has proposed to increase limit from Rs. 200,000 to Rs. 2.5 million for disallowing expenditure attributable to cash sales exceeding Rs. 2.5 million per transaction.
The amendment to Section 21 of the Income Tax Ordinance 2001, which prohibits the deduction of expenses for cash sales exceeding Rs. 200,000 has generated considerable concern within the business community.
The government has now proposed to implement this law in a phased manner to protect the revenue collection as well as ensure documentation, sources said.
Under the proposed revised law, the law would be fully implemented in three years period in phases. In the first year, the amount of Rs. 200,000 has been proposed to be increased to Rs. 2.5 million for disallowing expenditure per transaction. In the second year, the amount would be decreased from Rs. 2.5 million to Rs. 1.5 million and subsequently to Rs. 0.5 million.
The percentage of disallowance would be decreased from 50 percent to 20 percent, which would be gradually increased in three years, the new proposal said.
According to the details, 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 provision disallows 50 percent of expenditure attributable to cash sales exceeding Rs. 200,000 per transaction as per Finance Act 2025.
Hence, the restriction applies solely to business income and is not applicable to individuals or entities earning income under any other head.