The business community is grappling with significant compliance challenges following the introduction of a new income tax provision that disallows 50 percent of expenditure related to cash sales exceeding Rs. 200,000 per transaction.

The measure, implemented through the Finance Act 2025 and effective from July 1, 2025, was introduced under Section 24 of the Income Tax Ordinance, 2001. It specifically targets income categorized as “Income from Business” under Section 18, and does not impact other income heads such as rental income, capital gains, or income from other sources.

According to tax experts, the new rule means that if a business records a cash sale above Rs. 200,000 in a single transaction, half of the related expenditure will be disallowed for tax deduction purposes. This restriction is designed to encourage transparency and reduce the use of untraceable cash transactions in the business sector.

The provision does not apply to individuals or entities earning income under other heads, such as property income (Section 15), capital gains (Section 37), or income from other sources (Section 39). Similarly, Section 21 of the Ordinance disallows 10 percent of admissible business expenditure if paid to non-NTN (National Tax Number) holders, but this too is limited to business income.

Both disallowance provisions—Section 24 for large cash sales and Section 21 for payments to non-NTN holders—are strictly confined to business income and do not affect deductions claimed under salary, rental, capital gains, or other non-business income streams.

Tax experts emphasize that, unless a statutory provision states otherwise, these restrictions apply solely to business taxpayers, leaving other income categories unaffected. The business community has called for further clarification and support to ensure smooth compliance with the new regulations.