The federal government has proposed a significant change to Section 21 of the Income Tax Ordinance 2001, raising the threshold for disallowing expenditure on cash sales from Rs. 200,000 to Rs. 2.5 million per transaction. The move aims to address concerns within the business community while balancing revenue collection and documentation requirements.

Currently, the law prohibits businesses from deducting expenses related to cash sales exceeding Rs. 200,000 per transaction, with 50 percent of such expenditure being disallowed. The proposed amendment will see this limit increased to Rs. 2.5 million in the first year, then reduced to Rs. 1.5 million in the second year, and finally to Rs. 0.5 million in the third year, as part of a phased implementation plan.

Additionally, the percentage of disallowance will initially be reduced from 50 percent to 20 percent, with a gradual increase over the three-year period.

The disallowance provision, introduced under Section 21 and applicable only to “Income from Business” as defined in Section 18, does not affect individuals or entities earning income under other categories.