ISLAMABAD: The government has introduced significant amendments to Section 21 of the Income Tax Ordinance. These new tax regulations are set to profoundly impact businesses, particularly dealers, by imposing stringent conditions and additional taxes on large cash transactions and disallowing a portion of expenses incurred from non-National Tax Number (NTN) holders.
The new directives aim to promote documented transactions through banking and digital channels, curbing the prevalence of cash-based dealings and expanding the tax net.
Key Amendments to Income Tax Ordinance (Section 21)
The recent amendments to Section 21 introduce two critical changes that will directly affect businesses’ deductible expenses and recognized income:
Disallowance for Purchases from Non-NTN Holders: A new provision states thatten percent (10%) of any claimed expenditure attributable to purchases made from persons who are not National Tax Number (NTN) holders will now be inadmissible for tax purposes. This means businesses will not be able to claim the full expense if their suppliers lack an NTN.
Exception for Agricultural Produce: A crucial proviso clarifies that this clause will only apply to the purchase of agricultural produce made from a middleman, not directly from farmers.
FBR’s Exemption Power: The Board may, by notification in the official Gazette, exempt certain persons or classes of persons from this clause, subject to specified conditions and limitations. This provides the FBR with flexibility to address specific industry needs.
Reduced Admissibility for Large Cash Receipts: This amendment targets the receipt of large cash payments. If a taxpayer receives a payment exceedingRs. 200,000 otherwise than through a banking channel or digital means against a single invoice (which may contain one or more transactions of supply of goods or provisions of services), only fifty percent (50%) of that expenditure will be admissible for tax purposes.
This means that if a business receives Rs. 200,001 or more in cash against an invoice, only half of that amount will be recognized as legitimate for tax calculations, effectively leading to a significant additional tax burden on the gross amount received in cash. This effectively translates to an overall20.5 percent additional tax on the gross amount received in cash.
Impact on Dealers and Businesses
These new regulations are set to significantly impact businesses, particularly dealers, by imposing stringent conditions and additional taxes on large cash transactions and disallowing a portion of expenses incurred from non-NTN holders.
Businesses are being strongly advised against depositing or receiving large amounts of cash into any company account. The new regulations explicitly state that receipts for such cash deposits willnot be acceptable for tax purposes beyond the 50% admissibility rule. If an amount is deposited in cash, only79.5 percent of the total cash deposited will be considered admissible, with the remaining20.5 percent being adjusted as tax. This punitive measure is designed to heavily penalize non-compliance with the new digital transaction mandate.
Responsibility for Non-Compliance
The government has made it clear that businesses and individuals failing to adhere to these new rules will be solely responsible for any financial losses incurred. This emphasizes the seriousness of the new tax regime and the government’s commitment to enforcing it.
These changes are part of a broader strategy to enhance tax collection, formalize the economy, and reduce the scope for undocumented transactions. Businesses are urged to take this matter seriously and ensure full compliance to avoid significant financial penalties.
