The Finance Act 2025 has introduced major changes to the Income Tax Ordinance, 2001, aimed at expanding the tax base, increasing revenue collection, and promoting transparency in the tax system.

These amendments, implemented by the Federal Board of Revenue (FBR), carry significant implications for businesses and taxpayers.

Among the key changes is a new provision under Section 21 of the Ordinance, which disallows 50% of business expenditures linked to sales exceedingRs 200,000 if payment is made in cash or through non-banking channels.

This disallowance may affect expenses such as freight, carriage, and commissions.

Additionally, the law now disallows 10% of expenses related to purchases from suppliers who are not registered with the FBR through a National Tax Number (NTN).

However, an exemption is provided for direct purchases of agricultural produce from growers.

The FBR also retains the authority to exempt specific individuals or groups from this clause.

Moreover, the Finance Act also increases the withholding tax on cash withdrawals by non-filers (those not on the Active Taxpayers List) from 0.6% to 0.8%, in a move to discourage cash-based transactions and push for a more documented economy.

Tax expert Ashfaq Yusuf Tola, commenting on the implications, warned that these changes could create ambiguity in calculating allowable expenses and increase compliance difficulties for businesses.

He pointed out the absence of a clear method to determine which expenditures are directly tied to sales, which could lead to disputes and possible revenue losses.

Tola also cautioned that the FBR might misinterpret purchases as deductible business expenses under Section 21, which would be legally incorrect since purchases are typically classified as cost of sales, not deductible expenses.

Regarding agricultural transactions, Tola noted that identifying and verifying middlemen in the supply chain could be particularly challenging.

He also expressed concern over the hike in the withholding tax on cash withdrawals by non-filers, arguing that it might discourage the use of banking channels, contradicting the government’s aim to document the economy.

Instead of encouraging compliance, he warned, the higher tax could incentivize more cash-based dealings, further complicating tax enforcement and transparency efforts.