FBR Denies 20.5% Tax on Cash Transactions Over Rs 200,000

The Federal Board of Revenue (FBR) has officially denied imposing any 20.5% tax on cash transactions exceeding Rs 200,000, clearing the air after widespread confusion and misleading reports went viral on social and mainstream media.

The confusion began after changes introduced in the Finance Act 2025, particularly amendments made to Section 21(s) of the Income Tax Ordinance. As per the updated law, if a business sale of Rs 200,000 or more is made in cash, then only 50% of directly attributable expenses—like commission, transport, and carriage—can be claimed as tax-deductible.

This led to speculation that the government was imposing a new 20.5% tax on cash transactions, a figure derived from half of the corporate tax rate (41%), which would be disallowed in deductions. However, this calculation is theoretical and not stated anywhere in the law.

According to the official statement from the FBR, the policy does not impose any new tax but aims to discourage undocumented cash transactions and promote digital and banking channels. Businesses can still transact in cash, but if they cross the Rs 200,000 threshold, only 50% of related expenses will be allowed for tax deductions.

This means companies won’t be taxed an additional amount directly. Instead, they might end up paying more tax due to reduced deductible expenses—but that’s not the same as a 20.5% tax on the transaction itself.

Many businesses, especially retailers, wholesalers, and distributors, are now facing practical challenges in adapting to the change. They are being forced to:

• Reconfigure their billing systems

• Discourage customers from paying large amounts in cash

• Educate staff and clients about the updated policy

Some industry experts have raised concerns that the term “directly attributable expense” is vague and may cause confusion during tax audits, especially for small traders and cash-heavy sectors.

Several media platforms and social media pages misinterpreted the amendment. They incorrectly concluded that the disallowance of 50% of expenses equates to a 20.5% tax on cash sales. However, this figure was a mathematical estimate, not an actual tax rate introduced by FBR.

Even ProPakistani, one of the country’s leading tech and business news portals, confirmed through FBR officials that no such tax has been enforced and that the public should rely only on official notifications and verified sources.

• No 20.5% tax has been imposed on cash transactions.

•  If you make a cash sale over Rs 200,000, you can now only deduct 50% of related expenses.

•  Payments made via bank transfers or digital methods are not affected by this rule.

•  The policy is designed to reduce undocumented transactions and expand the tax base.

•  Misleading posts and miscalculations led to public confusion, which FBR has now addressed.

This latest move is part of the government's broader efforts to formalize the economy and increase documentation of business transactions. While there is no direct tax penalty, the change is likely to push businesses toward adopting non-cash payment methods and improving record-keeping.

Businesses are encouraged to consult tax professionals and adjust their sales practices accordingly to avoid financial complications and ensure compliance with the new rules.

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