Category: Finance Act 2025

The provided text offers an overview and critical analysis of the Finance Act 2025’s amendments to the Income Tax Ordinance in Pakistan. The speaker, Tahir Mahmood Butt, discusses the government’s push towards digitalization and automation of the tax system, highlighting new definitions for e-commerce and digitally delivered services. He examines specific changes like the taxation of online transactions, adjustments to pension income, and the introduction of disallowances for purchases from unregistered National Tax Number holders. Furthermore, the speaker raises concerns about the practicality of these amendments, their potential impact on taxpayers, and the need for a shift in mindset from both taxpayers and tax authorities. The discussion also touches upon changes in tax rates, audit selection criteria, and recovery procedures, emphasizing the broader implications for the nation’s tax framework.

Pakistan’s Finance Act 2025: A Tax Policy Overhaul

The Finance Act 2025 introduces what is described as a “huge shift in policy” for income tax in Pakistan, with the government aiming to move towards a more automated and technology-driven taxation system. The overall effort is to integrate technology for tax collection and base the structure of the taxation system on proper use of technology.

However, the speaker, Tahir Mahmood Butt, a former Senior Vice President of the Pakistan Tax Bar Association, expresses a fundamental concern: while taxpayers and consultants are urged to change their mindset from individuality to teamwork, he questions if the tax board is ready to change its mindset to fulfill the intent of the new laws. He emphasizes the need for a clear policy line for the future rather than just focusing on daily income or transactional-based collection through withholding systems. He believes there isn’t a proper policy for developing a sustainable taxation system, suggesting the focus is solely on increasing recovery rather than facilitating taxpayers or building a foundational system with continuity.

Here are some of the key amendments and changes introduced by the Finance Act 2025:

• Changes in Definitions (Section 2):
• The definition of a banking company will now align with its meaning in the Banking Company Ordinance.
• Digitally delivered services (Clause 17C) and e-commerce (Clause 19A) have been defined, reflecting the shift towards digital taxation.
• The online marketplace has also been defined.
• Recreational Clubs: Clubs with membership up to ₹1 lakh have been removed from non-profit organization status and their income will now be assessed as normal business income under Section 18, meaning they will no longer receive non-profit credit.
• Tax on Digital Transactions (New Section 6A):
• A new charging section provides for tax on payments received for digitally ordered goods or services delivered from within Pakistan via locally operated online platforms, including online marketplaces and websites.
• Special tax rates are defined: 1% if payment is made through banking channels/digital means, and 2% for cash on delivery transactions.
• This tax is to be collected by the person delivering the goods and is declared as a final tax under Section 8. The speaker notes a potential flaw here, as Section 8 typically implies finality for income arising from the transaction, whereas here it’s on the transaction value, leading to ambiguity for traders who also do counter sales and need to apportion profit and expenses between final and normal tax categories.
• Withholding Tax for Courier Services (Section 153):
• New sub-sections (2A, M, and N) have been inserted in Section 153, making courier organizations and payment intermediaries prescribed persons for withholding tax purposes.
• These entities will deduct tax (at 1% or 2%) from payments received for goods delivered through online platforms and remit the balance to the seller, with this tax being finalized.
• A concern is raised regarding Section 111, sub-section 4, which might impose a condition of audited accounts if taxable income exceeds imputable income, potentially affecting those whose digital sales are subject to final tax.
• Furnishing Information on Online Platforms (New Section 165C): A new section specifically details the procedure for courier service providers and online platform operators to furnish information and file withholding statements.
• Tax Rates and Reliefs:
• Salary Income Tax: The tax rate for salary income has been reduced from 10% to 9%.
• Super Tax: Rates have been reduced by 0.5% in most categories for the tax year 2026.
• Tax Credit for Property Sale (New Class 104A, Second Schedule): A new concession provides a tax credit for gains from the sale of personal-use property that has been owned and declared in the balance statement (under Section 116) for the last 15 years, and whose address has appeared in the taxpayer’s profile. This credit is available only once in 15 years. The speaker points out that current societal structures might make it difficult for many to benefit from this condition.
• Pension Income (Section 12 Amendment):
• Pension income has been moved from direct exemption and is now treated as a separate block of income under Section 12.
• There will be no tax on pension up to ₹1 crore.
• A 5% tax will be levied on pension income exceeding ₹1 crore.
• Crucially, this concession only applies to individuals above 70 years of age; for those under 70, pension income will be part of their salary income and taxed at normal salary rates.
• Disallowance of Expenses (Section 21 – Amendments):
• New Clause U: This clause dictates that 10% of expenses attributable to purchases made from a person who is not a “holder of National Tax Number (NTN)” will be disallowed and added back to taxable income. The speaker critiques the wording “Holder of National Tax Number” as ambiguous, noting that since 2015, a CNIC can be treated as an NTN for individuals, potentially allowing non-filers to escape this provision if they simply provide their CNIC.
• New Clause R: This is a significant amendment, providing for 50% disallowance of expenditure claimed against sales where the taxpayer has received payment of more than ₹200,000 otherwise than through a banking channel or digital means against a single invoice. The speaker strongly criticizes this provision, citing:
• Unrealistic limit: ₹200,000 is considered too low in the current inflationary environment and for everyday business transactions, potentially impacting small shopkeepers, manufacturers, and traders.
• Ground realities: The speaker argues that the policy makers, sitting in urban centers, do not understand the practical difficulties faced by common people and businesses in adopting digital payments, given the literacy rate and the manual nature of many transactions.
• Impact on theft/compliance: He suggests that such restrictions might drive businesses towards the “auto book” (unofficial economy) rather than reducing theft.
• Single Invoice: The wording “single invoice” (as opposed to “aggregate” sales) is noted, implying that businesses might simply issue multiple invoices below the ₹2 lakh limit to circumvent the rule.
• Digital Means definition: The definition of “digital means” includes “over the counter digital payment services or facilities,” which raises questions about whether cash deposits by a buyer into a seller’s bank account via a bank counter would count as a digital payment, potentially providing a loophole.
• Depreciation Allowance (Section 22): If tax is not deducted at the time of purchasing a new asset, the depreciation allowance for that asset will not be available.
• Intangibles (Section 24): The life span for intangibles has been restricted to 25-50 years, compared to up to 25 years previously.
• Gift, Loan, Advance (Section 39): Besides banking channels and cross cheques, digital means are now also validated for receiving gifts, loans, or advances.
• Business Loss Adjustment (Section 56): Business losses can no longer be adjusted against property income.
• Group Companies (Section 59B): A unit within group companies will not be part of the common taxable income if its taxation is based on a final tax regime rather than the normal tax rate (e.g., 29% for companies).
• Tax Credit for Low-Cost Investment (Section 63A): A new tax credit is offered for investment in low-cost housing built with loans.
• Mining Project Tax Credits (Class 65): Tax credits for mining projects, previously without income reference, are now linked with income.
• Asset Purchase (Section 75): The facility of digital means is extended for purchasing assets beyond a certain amount.
• Second Schedule Part One (Section 100C): The two parts of Second Schedule Part One (which provided state exemption or required fulfilling conditions) have been merged into one. This means all categories now must fulfill the conditions of Section 100C, which involves fresh registration and reports from four to five agencies for entitlement.
• Tax Credit for Turnover (Section 113): The period for adjusting tax on turnover (when it’s higher than tax on taxable income) has been reduced from three years to two years.
• Restrictions on Ineligible Persons (New Section 114C):
• This section restricts ineligible persons from purchasing property above ₹100 million, motor vehicles above ₹7 million, opening bank accounts above ₹50 million, or withdrawing cash above a certain amount.
• Eligible persons are defined as those who file returns and explain their sources of investment.
• A new condition states that for any investment, the taxpayer must have 130% of the investment amount available, which includes cash and other liquid or immovable assets.
• A non-resident person will still be eligible to buy a car or property, open a bank account, but cannot withdraw cash more than a certain amount if they are not in the eligible category.
• Assessment Order (Section 120, Section 2A): Section 2A states that an assessment order under Section 120 is deemed complete only after maximum possible verifications of declarations. However, this provision is not yet operational because the board has not notified it in the official gazette, and issues exist with government departments not inputting data into the online system for verification.
• Limitation Period (Section 122): The limitation period for notices has been extended from 180 days to one year, effective from July 1, 2025.
• Appeal Effect Orders (Section 124): If an officer’s order is amended by the Commissioner of Appeal or High Court, the officer is mandated to issue an appeal effect order; recovery cannot proceed until this order is issued.
• Recovery Proceedings (Sections 138, 140): Recovery proceedings can now only commence after the decision of at least three forums (Commission, Tribunal, and High Court) has gone against the taxpayer.
• Information Sharing by Financial Institutions: Banking companies and other financial institutions are now restricted and mandated to share details of every taxpayer directly with the relevant tax authorities. This means taxpayers will have to manage their banking activities carefully.
• Officer Posting (Section 56C): An officer can be posted to monitor specific areas like production, supply of goods, renting of services, and stock of goods, but their jurisdiction is limited to these four aspects.
• Online Marketplace Registration (Section 181): Courier companies and delivery services are now prohibited from working with any person who is not registered for income tax. Heavy penalties are imposed on courier companies that transport goods for unregistered individuals.
• Audit Selection (Section 105A): The criteria for audit selection have changed; a person will not be selected for audit if their income tax case has been selected for audit in the last three years (previously four years).

The speaker frequently highlights the disconnect between the policy intentions and the ground realities of Pakistan, criticizing the government’s approach of taxing businesses heavily while labeling them as “thieves” and expressing concerns that overly restrictive policies could push businesses into the unofficial economy or even out of the country. He consistently calls for the tax board to clarify ambiguous provisions through circulars.

Pakistan’s Finance Act 2025: Taxation Shift and Reforms

The Finance Act 2025 introduces significant amendments to the Income Tax Ordinance, signaling what is described as a “huge shift in policy” towards a more automated and technology-driven taxation system in Pakistan. The government’s objective is to build the structure of the taxation system on the proper use of technology.

However, Tahir Mahmood Butt, former Senior Vice President of the Pakistan Tax Bar Association, expresses a fundamental concern: while taxpayers and consultants are urged to adapt to this change and move from individuality to teamwork, he questions if the tax board is ready to change its mindset to align with the intent of the new laws. He emphasizes the lack of a clear, foundational policy line for the future, suggesting the focus remains on daily income or transactional-based collection through withholding systems, rather than developing a sustainable taxation system that facilitates taxpayers.

Here are the key amendments and changes introduced, along with expert commentary:

• Definitions (Section 2):
• The definition of a banking company will now align with its meaning in the Banking Company Ordinance, replacing the previous income tax specific definition.
• New definitions have been introduced for digitally delivered services (Clause 17C), e-commerce (Clause 19A), and online marketplace, reflecting the shift towards digital taxation.
• Recreational Clubs: Clubs with membership up to ₹1 lakh have been removed from non-profit organization status. Their income will now be assessed as normal business income under Section 18, losing non-profit credit.
• Tax on Digital Transactions (New Section 6A):
• A new charging section levies tax on payments received for digitally ordered goods or services delivered from within Pakistan via locally operated online platforms, including online marketplaces and websites.
• Special tax rates apply: 1% if payment is made through banking channels or digital means, and 2% for cash on delivery transactions.
• This tax is to be collected by the person delivering the goods and is declared as a final tax under Section 8.
• Critique: Tahir Mahmood Butt notes a potential flaw: Section 8 typically implies finality for income arising from a transaction, but here it’s on the transaction value. This creates ambiguity for traders with both online and counter sales, as they face challenges in apportioning profit and expenses between final and normal tax categories in their returns. He hopes the Board will issue an explanatory circular for clarification.
• Withholding Tax for Courier Services (Section 153):
• New sub-sections (2A, M, N) make courier organizations and payment intermediaries “prescribed persons” for withholding tax. These entities will deduct tax (1% or 2%) from payments received for goods delivered through online platforms and remit the balance to the seller, with this tax being finalized.
• Concern: This might interact with Section 111, sub-section 4, potentially requiring audited accounts if taxable income exceeds imputable income, even for those whose digital sales are subject to final tax.
• Furnishing Information on Online Platforms (New Section 165C): This new section outlines the procedure for courier service providers and online platform operators to furnish information and file withholding statements.
• Tax Rates and Reliefs:
• Salary Income Tax: The tax rate for salary income has been reduced from 10% to 9%. Tahir Mahmood Butt questions the government’s approach of consistently favoring salary class taxpayers while labeling business class as “thieves,” imposing higher rates and surcharges on them.
• Super Tax: Rates have been reduced by 0.5% in most categories for the tax year 2026.
• Tax Credit for Property Sale (New Class 104A, Second Schedule): A new concession provides a tax credit for gains from the sale of personal-use property. To qualify, the property must have been:
• In the personal use of the taxpayer and owned for the last 15 years.
• Declared in the taxpayer’s last balance statement (under Section 116) for the last 15 years.
• Its address must have appeared as the taxpayer’s address in their profile.
• This credit is available only once in 15 years.
• Critique: The speaker notes that current societal structures might make it very difficult for many to meet the 15-year ownership and declaration conditions, making the benefit largely inaccessible.
• Pension Income (Section 12 Amendment):
• Pension income has been moved from direct exemption and is now treated as a separate block of income under Section 12.
• There will be no tax on pension up to ₹1 crore.
• A 5% tax will be levied on pension income exceeding ₹1 crore.
• Crucially, this concession only applies to individuals above 70 years of age; for those under 70, pension income will be part of their salary income and taxed at normal salary rates.
• Disallowance of Expenses (Section 21 – Amendments):
• New Clause U (Purchases from non-NTN holders): 10% of expenses attributable to purchases made from a person who is not a “holder of National Tax Number (NTN)” will be disallowed and added back to taxable income.
• Critique: Tahir Mahmood Butt highlights ambiguity, noting that since 2015, a CNIC can be treated as an NTN for individuals, potentially allowing non-filers who provide their CNIC to escape this provision. He suggests the word selection is “poor”.
• New Clause R (Cash Payments): This is a significant amendment, providing for 50% disallowance of expenditure claimed against sales where the taxpayer has received payment of more than ₹200,000 otherwise than through a banking channel or digital means against a single invoice (containing one or more transactions).
• Strong Criticism: The speaker vehemently criticizes this provision, citing:
• Unrealistic limit: ₹200,000 is deemed too low in the current inflationary environment and for everyday business transactions, impacting small shopkeepers, manufacturers, and traders.
• Ground Realities: Policy makers are criticized for not understanding the practical difficulties and low literacy rates in adopting digital payments, suggesting such restrictions might drive businesses towards the “auto book” (unofficial economy) rather than reducing “theft”.
• “Single Invoice” vs. “Aggregate”: The wording “single invoice” is noted, implying that businesses might simply issue multiple invoices below the ₹2 lakh limit to circumvent the rule.
• “Over the Counter Digital Payment Services”: The definition of “digital means” includes this, raising questions about whether cash deposits by a buyer into a seller’s bank account via a bank counter would count as a digital payment, potentially providing a loophole.
• Depreciation Allowance (Section 22): If tax is not deducted at the time of purchasing a new asset, the depreciation allowance for that asset will not be available.
• Intangibles (Section 24): The life span for intangibles has been restricted to 25-50 years (previously up to 25 years).
• Gift, Loan, Advance (Section 39): In addition to banking channels and cross cheques, digital means are now also validated for receiving gifts, loans, or advances.
• Business Loss Adjustment (Section 56): Business losses can no longer be adjusted against property income.
• Group Companies (Section 59B): A unit within group companies will not be part of the common taxable income if its taxation is based on a final tax regime rather than the normal tax rate (e.g., 29% for companies).
• Tax Credit for Low-Cost Investment (Section 63A): A new tax credit is offered for investment in low-cost housing built with loans.
• Mining Project Tax Credits (Class 65): Tax credits for mining projects, previously without income reference, are now linked with income.
• Asset Purchase (Section 75): The facility of digital means is extended for purchasing assets beyond a certain amount.
• Second Schedule Part One (Section 100C): The two parts of Second Schedule Part One (which provided state exemption or required fulfilling conditions) have been merged into one. This means all categories now must fulfill the conditions of Section 100C, which involves fresh registration and reports from four to five agencies for entitlement.
• Tax Credit for Turnover (Section 113): The period for adjusting tax on turnover (when it’s higher than tax on taxable income) has been reduced from three years to two years.
• Restrictions on Ineligible Persons (New Section 114C):
• This section restricts ineligible persons from purchasing property above ₹100 million, motor vehicles above ₹7 million, opening bank accounts above ₹50 million, or withdrawing cash above a certain amount.
• Eligible persons are defined as those who file returns and explain their sources of investment.
• A new condition states that for any investment, the taxpayer must have 130% of the investment amount available, which includes cash and other liquid or immovable assets.
• A non-resident person will still be eligible to buy a car or property, open a bank account, but cannot withdraw cash more than a certain amount if they are not in the eligible category.
• Assessment Order (Section 120, Section 2A): Section 2A states that an assessment order under Section 120 is deemed complete only after maximum possible verifications of declarations. However, this provision is not yet operational because the board has not notified it in the official gazette, and issues exist with government departments not inputting data into the online system for verification.
• Limitation Period (Section 122): The limitation period for notices has been extended from 180 days to one year, effective from July 1, 2025.
• Appeal Effect Orders (Section 124): If an officer’s order is amended by the Commissioner of Appeal or High Court, the officer is mandated to issue an appeal effect order; recovery cannot proceed until this order is issued.
• Recovery Proceedings (Sections 138, 140): Recovery proceedings can now only commence after the decision of at least three forums (Commission, Tribunal, and High Court) has gone against the taxpayer.
• Information Sharing by Financial Institutions: Banking companies and other financial institutions are now restricted and mandated to share details of every taxpayer directly with the relevant tax authorities. Taxpayers are advised to manage their banking activities carefully.
• Officer Posting (Section 56C): An officer can be posted to monitor specific areas like production, supply of goods, renting of services, and stock of goods, but their jurisdiction is limited to these four aspects.
• Online Marketplace Registration (Section 181): Courier companies and delivery services are now prohibited from working with any person who is not registered for income tax. Heavy penalties are imposed on courier companies that transport goods for unregistered individuals.
• Audit Selection (Section 105A): The criteria for audit selection have changed; a person will not be selected for audit if their income tax case has been selected for audit in the last three years (previously four years).

Overall, while the Finance Act 2025 aims to modernize Pakistan’s tax system through technology, Tahir Mahmood Butt consistently highlights a disconnect between the policy intentions and the ground realities of the country. He criticizes the government’s perceived tendency to view businesses as “thieves” and expresses concerns that overly restrictive policies could push businesses into the unofficial economy or even out of the country, rather than fostering compliance and growth. He frequently calls for the tax board to clarify ambiguous provisions through circulars.

Pakistan’s Digital Tax Shift: Finance Act 2025 Implications

The Finance Act, 2025, signifies a significant policy shift towards a digital taxation system in Pakistan, focusing on e-commerce and online platforms. This shift aims to automate the taxation system through proper use of technology.

Here are the key aspects of the digital taxation system as discussed in the sources:

• Policy Shift and Automation
• The government’s effort indicates a major policy change, requiring taxpayers, tax consultants, and even the tax board to change their mindset and move towards teamwork.
• The entire focus of the budget is on digitally delivered services through e-commerce and online platforms, aiming to set up the taxation system through technology and automation.
• The speaker notes that for 38 years in the profession, they have been waiting for a Finance Act that draws a proper policy line for the future, suggesting a move away from a daily basis income or transactional-based tax system. However, the current approach seems to prioritize recovery/collection over developing a foundational and continuous taxation system.
• New Definitions and Sections for Digital Transactions
• Section 2 of the Income Tax Ordinance has been amended to include new definitions relevant to digital services.
• Digitally delivered services are defined in Clause 17C.
• E-commerce is defined in 19A.
• The online marketplace was also defined.
• Section 6A is a new section providing for tax on payments for digital transactions on e-commerce platforms.
• This tax is to be imposed on every person who receives payment for the supply of digitally ordered goods or services delivered from within Pakistan using locally operated online platforms, including online marketplaces and websites.
• Special rates for this tax are 1% if payment is made through banking channels on digital means, and 2% if it is cash on delivery.
• This tax is collected by the person delivering the goods and is declared as a final tax under Section 8.
• A point of concern raised is that while the tax is collected on the transaction value, Section 8 typically declares final tax in respect of income arising from the transaction, not just the transaction itself. This could lead to issues in attributing profit to final tax and normal tax when a trader engages in both online and counter sales.
• Withholding and Information Furnishing
• Section 153 has added new provisions (two A sections) making courier organizations that sell goods through online platforms “prescribed persons”.
• These prescribed persons will deduct tax from payments received for supplied goods and remit the balance, and this tax will be finalized.
• Section 165C is a new section specifically defining the procedure for furnishing information on online platforms. This includes how and when courier service providers and online platform operators are to file withholding statements, detailing their particulars.
• Payment intermediaries are also semi-defined as prescribed persons for withholding purposes under Section 153.
• Restrictions and Compliance for Digital Transactions
• Section 21R states that 50% of expenditure claimed for sales will be disallowed if the payment received exceeds ₹200,000 and is not through a banking channel or digital means against a single invoice.
• The speaker critically questions the practicality of this ₹200,000 limit, especially for small businesses and in the context of “ground realities” like low literacy rates and traditional business practices in Pakistan.
• The definition of “digital means” as including “over the counter digital payment services or facilities” also raises ambiguity regarding cash deposits via banking channels.
• The speaker suggests that this restriction might lead to businesses issuing multiple invoices to stay below the ₹200,000 limit, similar to practices seen with sales tax regulations.
• Section 39 now allows gifts, loans, and advances to be valid if received through digital means, in addition to banking channels or cross cheques.
• Section 75 provides for the facility of digital means for asset purchases above a certain amount.
• Courier companies and delivery persons are restricted from working with individuals not registered for income tax, with heavy penalties for non-compliance, pushing for digital registration verification.
• Data Sharing and Digital Audits
• Banking companies and other financial institutions are now restricted to share details of every taxpayer directly with the relevant concern authority (presumably, the revenue authority). This implies a digital sharing of financial data.
• The source suggests that the Federal Board of Revenue (FBR) is engaging thousands of chartered accountants to audit digital transactions, with assignments given to auditors to perform matching activities from their homes, leading to actions against taxpayers based on this digital monitoring. This refers to section 177D and 214.
• Concerns and Flaws
• The speaker expresses concerns about the intent of the law makers and whether the board is ready to change its mindset to fulfill that intent.
• A significant flaw is noted in Section 6A regarding the finality of tax on transaction value versus income, which needs clarification from the board.
• The strict application of Section 21 (including 21R) on small businesses and the general population is seen as potentially discouraging work and leading to non-compliance if legal formalities are too difficult to meet.
• The speaker questions the government’s approach of imposing high taxes on business income, implying that it treats business class as “thieves” compared to the salaried class, which could encourage tax evasion.
• The speaker highlights the disconnect between policy-making (based on systems in developed countries) and ground realities in Pakistan, where digital literacy and infrastructure may not be sufficient for universal adoption of online and computerized invoicing.

Pakistan’s Digital Tax: Compliance Challenges and Realities

The digital taxation system in Pakistan, as outlined in the Finance Act, 2025, aims to automate tax collection through technology, particularly for e-commerce and online platforms. However, the sources highlight several significant taxpayer compliance issues stemming from policy design, practical implementation, and underlying societal realities:

• Mindset and Systemic Readiness: A fundamental concern is whether the Federal Board of Revenue (FBR) is ready to change its mindset to align with the new policy shift, requiring teamwork and a move away from an individualistic approach. The speaker questions if the intent of the law makers can be fulfilled given the existing “mindset” of the board and its field formations. There’s also an ongoing debate about whether the focus is on “developing a foundational and continuous taxation system” or merely on “increasing recovery/collection”, which could impact long-term compliance.
• Conceptual Flaws and Lack of Clarity in New Provisions:
• Section 6A’s Final Tax on Transactions: The new Section 6A imposes a tax on digitally ordered goods or services based on transaction value (1% for digital payments, 2% for cash-on-delivery), declared as a “final tax”. A significant flaw identified is that while final tax typically applies to income arising from a transaction, Section 6A applies it to the transaction itself. This creates complexity for traders who engage in both online and counter sales, making it difficult to attribute profit between final tax and normal tax regimes when filing returns. This ambiguity requires clarification from the board.
• Disconnection with “Ground Realities” and Practical Challenges:
• Section 21R – Disallowance for Non-Digital Payments: This is a major point of contention. The provision states that 50% of claimed expenditure will be disallowed if payment received exceeds ₹200,000 and is not through a banking channel or digital means against a single invoice.
• Impracticality of the Limit: The ₹200,000 limit is seen as too low in the current inflationary environment and is applied universally, including to small businesses and kiosk owners, which is considered impractical.
• Digital Literacy and Infrastructure Gap: The sources strongly emphasize the disconnect between policy-making (based on systems in developed countries like Australia, Europe, America) and Pakistan’s “ground realities”. Many citizens and small business owners lack the digital literacy and infrastructure (e.g., for computerized invoicing, QR codes) necessary for universal adoption of online transactions and digital payments.
• Discouragement and Evasion: The speaker fears that such strict and difficult legal formalities will “discourage people from working” and push businesses towards the informal economy, potentially leading to increased tax evasion rather than compliance. The concern is that if compliance becomes too hard, businesses will “go auto book” and “start stealing more”.
• Loophole Exploitation: The rigid ₹200,000 limit might lead to businesses issuing multiple invoices for a single transaction to circumvent the rule, a practice previously observed with sales tax regulations.
• Ambiguity of “Digital Means”: The definition of “digital means” as including “over the counter digital payment services or facilities” is ambiguous, raising questions about whether cash deposits via banking channels would be considered digital payments, leading to uncertainty for taxpayers.
• Section 21 – Disallowance for Purchases from Non-NTN Holders: This provision disallows 10% of expenses attributable to purchases made from individuals not holding a National Tax Number (NTN). This places a significant burden on the buyer to verify the seller’s tax registration status. The ambiguity of a CNIC being treated as an NTN for individuals (as per Section 181(4)) further complicates compliance, as it might not be clear if a CNIC holder is truly “registered” in the active taxpayer sense.
• Perception of Business Class: The speaker critically notes the government’s perceived notion that the salaried class is “honest” while the “business class are thieves,” reflected in significantly higher tax rates for business income (almost 50% including surcharge and super tax) compared to a maximum of 35% for salary income. This perception and heavy taxation are viewed as drivers for tax-saving behavior or evasion among businesses.
• Burden on Service Providers: New provisions in Section 153 and 181 impose heavy penalties on courier organizations and delivery persons who work with individuals not registered for income tax. This shifts the burden of verifying tax registration onto courier companies, making it difficult for unregistered individuals (e.g., small online sellers) to utilize formal delivery services, potentially forcing them into less formal channels.
• Data Sharing and Digital Audits: While aimed at increasing compliance, the restriction on banking companies and financial institutions to directly share details of every taxpayer with the revenue authority signifies a significant increase in digital monitoring. The FBR’s plan to engage thousands of chartered accountants to conduct digital audits and matching activities from home (referring to sections 177D and 214) implies a stringent enforcement mechanism based on digital monitoring, which could lead to increased actions against taxpayers. However, concerns remain about the FBR’s own internal data integration and cross-verification capabilities.

Income Tax Audit Selection Rules: Section 105A Explained

Based on the sources, the discussion on Audit Selection Rules primarily revolves around Section 105A of the Income Tax Ordinance. This section dictates the conditions under which a person’s income tax case cannot be selected for audit.

Here’s a breakdown of the rules and their amendments:

• Previous Rule (before amendment):
• **Prior to the recent changes, Clause 105A stipulated that a person’s case would not be selected for audit if their income tax had been audited in any of the preceding four years.
• The speaker noted that for a taxpayer to benefit from this limitation, it was necessary for their case to have been audited previously, not just selected for audit.
• New Amendment and Current Rule:
• A new amendment has been made to Section 105A.
• The updated rule now states that the selection for audit shall not apply to a person whose income tax case has been selected for audit in any of the last three years.
• This is a significant change: the period has been reduced from four years to three years.
• More importantly, the condition has shifted from having been audited to merely having been selected for audit. This means if a taxpayer’s case was selected for audit in any of the last three years (regardless of whether the audit was completed or not), their case for the next year cannot be selected for audit.

In essence, the amendment to Section 105A provides a relief for taxpayers by reducing the look-back period for audit selection and changing the trigger from an actual audit to just a selection for audit. This means if a taxpayer’s file has recently been put through the selection process, it provides a temporary shield against further audit selections for the subsequent year, provided it falls within the three-year window.

By Amjad Izhar
Contact: amjad.izhar@gmail.com
https://amjadizhar.blog

Affiliate Disclosure: This blog may contain affiliate links, which means I may earn a small commission if you click on the link and make a purchase. This comes at no additional cost to you. I only recommend products or services that I believe will add value to my readers. Your support helps keep this blog running and allows me to continue providing you with quality content. Thank you for your support!

The provided text offers an extensive discussion on the Finance Act, 2025, primarily focusing on its impact on taxation, e-commerce, and business regulations. Speakers address new provisions such as withholding tax for online marketplaces, the use of AI for input tax credit verification, and changes to assessment procedures and audit selections. Significant attention is given to penalties for non-compliance, the suspension and blacklisting of businesses, and restrictions on cash transactions. The dialogue also explores amendments to income tax definitions, super tax rates, pension income, and asset purchases, emphasizing the government’s push for digitalization and broader tax base collection.

Digitalization and Evolution of Taxation Mechanisms

The sources discuss several key aspects of the taxation mechanism, highlighting changes, new systems, and enforcement measures introduced, particularly with a focus on digitalization and broadening the tax base.

Here’s a breakdown of the taxation mechanisms:

• Withholding Taxation on Online Marketplaces (Section 11):
• A 2% withholding tax is applied to sales made in online marketplaces.
• This 2% is not an additional tax but rather reduces the output liability of the seller.
• The online marketplace or courier service acts as the holding agent, deducting the tax and automatically reducing the seller’s output tax on their portal.
• This mechanism is part of the broader effort to tax e-commerce.
• The tax collected by online marketplaces will be inserted into a monthly statement, which will automatically appear on the seller’s portal, allowing for easy credit of the holding tax.
• For online platforms, a special rate of 1% applies if payment is made via bank channel, and 2% if it’s cash on delivery.
• This is generally declared as a final tax declaration under Section 7A. However, there is ambiguity regarding how this final tax on transaction value impacts overall taxable income and how it’s reflected in returns, potentially requiring clarification from the C Board.
• Automated Risk Management System for Input Tax Credit (AI-based):
• A new system has been developed to check input tax credit using AI.
• This system, like an “MRI machine,” will verify if the claimed input tax aligns with the business’s line of business or the product being sold. For example, if a mineral water supplier claims to have used iron or wood not typically used in that business, the system will flag it.
• If the system stops an input tax credit, a registered person can submit an application to the commissioner within 30 days to justify their claim. If the commissioner remains silent, the restriction is removed; otherwise, the person may need to go to court.
• Tax consultants are advised to understand their clients’ business models and product recipes to effectively deal with these restrictions.
• Best Judgment Assessment:
• This power is given to the commissioner to assess tax when there is non-compliance, such as unpaid taxes (e.g., under 236G) or unfiled returns. It has been a provision in earlier cases as well.
• Commissioner’s Powers regarding Business Operations:
• Commissioners have been granted three types of powers:

1. Suspension of bank accounts operations for three days, renewable for another three days, and then permanent closure if commitment is not fulfilled.
2. Suspension/Blacklisting of business operations: This power, previously lost, has been restored. Direct suspension can occur without notice, despite court orders requiring an opportunity for explanation. The commissioner must decide whether to blacklist or restore within 10 days. Blacklisting affects the right to appeal under Section 21.
3. Ban on property transfer.

• These powers allow control over businesses that might not have bank accounts or are running factories without them.
• E-Billing and Digital Device Integration:
• The system now requires the use of digital devices with QR codes for e-billing.
• Consignments of goods transported by vehicles must be registered in the system, and particulars must be inserted into invoices, which will be integrated for FBR to monitor goods movement.
• Tax on Digital Transactions in E-Commerce (Section 11J):
• This new section imposes tax on payments received for supplies digitally delivered within Pakistan using online platforms, including marketplaces and websites.
• The tax rate is 1% for bank channel payments and 2% for cash on delivery.
• This tax is declared as a final tax.
• Courier companies or online marketplaces are now designated as “prescribed persons” under Section 153, meaning they will deduct tax from payments to suppliers and deposit it, making it final tax.
• If a person’s taxable income becomes greater than their immutable income, they are required to provide audited accounts.
• This measure aims at broadening the tax base by bringing the e-commerce sector into the tax ambit.
• Tax on Digital Presence (for Non-residents):
• A separate law has been introduced for tax on digital presence, primarily targeting foreign vendors who provide goods or services in Pakistan online.
• A 5% tax rate is charged on such transactions.
• This mechanism differentiates between resident and non-resident online suppliers.
• Restrictions on Input Tax and Expenses (Section 21 & 73):
• Section 21 (R): If a sale exceeds two lakh rupees and payment is not received through a banking channel or digital means (for a single invoice or multiple transactions in one invoice), 50% of the expenditure attributable to that sale will be disallowed. This applies broadly, even to small shops and manufacturers, and aims to discourage cash transactions.
• Section 21 (purchase disallowance): 10% of expenses attributable to purchases are disallowed if the purchase is made from a person who is not a holder of a national tax number (NTN). This is a new board of revenue collection mechanism.
• Section 73 (Sales Tax): The source mentions Section 73 (in sales tax) dealing with a limit of 5000 units with one supplier annually. Also, if a buyer does not deposit money into a digital bank account, the input for the supplier may be finished. There is a debate on the interpretation of Section 73(4) regarding unregistered persons selling up to Rs. 10 crore.
• There is no clash between Section 21 (Income Tax) and Section 73 (Sales Tax) as they use different criteria (single invoice vs. single account/party).
• New Assessment Order Verification (Section 120):
• Assessment orders will be completed by verifying declarations against maximum possible data. The operation of this section is contingent on official notification by the board, which has not yet occurred.
• The system is intended to check returns against available data, but limitations exist due to the lack of integration of government department data (e.g., from mobile companies, judges’ CPR).
• Recovery Proceedings (Sections 138 & 140):
• These recovery proceedings will not be initiated until a decision has been made by at least three forums (e.g., commissioner appeal, tribunal, high court). This is seen as a positive development, preventing immediate recovery until higher forums have decided.
• Data Sharing (Banking and Financial Institutions):
• Banking companies and financial institutions are now required to share details of every taxpayer with FBR. This means tax information is transparent and easily accessible, reducing the ability to hide transactions.
• Officer Posting for Monitoring (Section 175(6)C):
• FBR officers can be posted to monitor production, supply of goods, rendering of services, and stock of goods. Their scope is limited to these four areas and they cannot question anything else.
• Audit Selection Criteria (Section 105A):
• A person’s case will not be selected for audit if their income tax returns have been audited in the last four years. This is a significant relief for compliant taxpayers.
• E-Commerce Registration Requirement:
• Courier companies and online marketplaces are now required to ensure that any person they deal with (e.g., for picking up goods) is registered for income tax. Failure to do so incurs heavy penalties.
• Restrictions on Ineligible Persons (Section 114C):
• A new section restricts “ineligible” persons from buying property or cars above a certain value, opening bank accounts above a certain limit (e.g., 50 million rupees), or withdrawing cash above a certain amount.
• To be “eligible,” a person must have consistently filed returns and statements, and they must explain the sources of investment before investing. These restrictions do not apply to non-residents.
• Depreciation Allowance Disallowance (Section 22):
• If tax is not deducted at the time of purchasing a new asset, the depreciation allowance for that asset will not be granted.
• Changes in Appeal System:
• The old appeal arrangement has been reinstated.
• Taxpayers now have two rights of appeal: either directly to the tribunal or first to the Commissioner Appeals.
• It is generally advised to access the Commissioner Appeal Forum first as it offers more flexibility, time to explain the case, and a friendly environment compared to the tribunal, which has less margin for discretion and limited time for arguments.
• Previously, the right of appeal under the Black Act was withdrawn but has been restored.
• Other Noteworthy Changes/Discussions:
• Broadening of Tax Base: A major focus is shifting to e-commerce to bring a large chunk of previously untaxed businesses into the tax net.
• Shift to Transaction-Based System: The overall policy is moving towards a daily basis income and transaction-based system.
• Tax on Recreational Clubs: Membership income of recreational clubs (over 10 lakh membership) is now treated as normal business income, not non-profit.
• Pension Income (Section 12): Pension income exceeding 1 crore rupees will be taxed at 5%, while up to 1 crore will have a zero rate. A concession is given to those over 70 years of age, where their pension (if less than salary income) is taxed at salary income rates.
• Investment Tax Credit (Section 63): Tax credit is offered for investment in low-cost housing schemes.
• Asset Purchase Restrictions (Section 75): For cash payments for assets (property, vehicles) above a certain amount (e.g., 2 lakh for sales tax, implicitly higher for income tax related to asset purchase), banking channels are mandated.
• Limitation Periods: Changes were made to show cause notice limitation periods, with an extension from 180 days to one year in some cases. However, extensions for tax payers are also requested.
• “In-house” Transactions: The concept of “in-house” transactions, where internal documents of transfer are generated without external movement of goods, is acknowledged.
• Digital Invoicing: A future seminar is planned on digital invoicing.

Overall, the taxation mechanism is moving towards a highly digitalized, automated, and interconnected system aimed at increasing transparency, broadening the tax base, and enhancing compliance, often by imposing strict restrictions and penalties for non-compliance with digital payment and reporting requirements. However, concerns remain regarding the practicality of these rules given the ground reality of the economy.

Digital Evolution of Tax Compliance and Input Tax Credit

The taxation mechanism in the sources provides a detailed overview of the system for input tax credit, emphasizing new digital advancements and stricter compliance measures.

Here’s a comprehensive discussion:

1. Automated Risk Management System (AI-based Check) A significant development in the taxation mechanism is the introduction of an automated risk management system for input tax credit, powered by Artificial Intelligence (AI). This system is designed to verify the legitimacy of claimed input tax credits. It functions like an “MRI machine,” scrutinizing whether the input tax claimed aligns with the business’s specific line of activity or the product being sold. For instance, if a mineral water supplier claims to have used iron or wood, materials not typically associated with their business, the system will flag and stop that input tax credit.

• Resolution Process: If the AI system stops an input tax credit, the registered person has the option to submit an application to the commissioner within 30 days to provide justification for their claim. If the commissioner does not respond within this period, the restriction on the input tax credit is automatically removed. However, if the commissioner upholds the restriction, the person may need to escalate the matter to a court of law.
• Consultant’s Role: Tax consultants are advised to thoroughly understand their clients’ business models and product recipes to effectively address and resolve issues arising from these AI-driven restrictions.

2. Restrictions and Disallowances on Input Tax Credit and Related Expenditures

The sources highlight several provisions designed to restrict input tax credit and disallow certain expenditures, primarily aimed at broadening the tax base and discouraging cash transactions:

• Disallowance for Purchases from Non-NTN Holders (Section 21): A new provision dictates that if a person makes purchases from an individual who does not hold a National Tax Number (NTN), 10% of the expenses attributable to these purchases will be disallowed. This is a new revenue collection mechanism. The speaker notes a potential ambiguity, as Section 181 may treat a CNIC as an NTN for individuals, which could broaden the scope of this disallowance.
• Disallowance for Cash Sales Exceeding Threshold (Section 21R): If a sale exceeds two lakh rupees and the payment is not received through a banking channel or digital means, 50% of the expenditure attributable to that sale will be disallowed. This applies to a single invoice, even if it contains multiple transactions. This measure is intended to discourage large cash transactions across all types of businesses, from small shops to manufacturers. There was initial concern about a clash with Section 73 (Sales Tax), but it was later clarified that Section 21 (Income Tax) and Section 73 (Sales Tax) do not clash as they operate on different criteria (single invoice vs. single account/party).
• Impact of Multiple Disallowances: The cumulative effect of these disallowances (10% on certain purchases and 50% on certain sales) could lead to a significant portion of expenses (potentially 60-70%) being disallowed, raising concerns about the feasibility of doing business.
• Depreciation Allowance Disallowance (Section 22): If tax is not deducted at the time of purchasing a new asset, the depreciation allowance for that asset will not be granted. This links tax deduction at source to the availability of depreciation, an important component of tax credit for assets.
• Digital Payment Mandate for Assets (Section 75): For the purchase of assets like property or vehicles, if the payment exceeds a certain amount, banking channels are mandated. This reinforces the push for digital and traceable transactions.
• Sales Tax Input Disallowance (Section 73): In the context of Sales Tax, if a buyer does not deposit money into a digital bank account, the input tax credit for the supplier may be disallowed. This emphasizes the importance of digital payment channels for maintaining input tax eligibility.

3. General Principles and Considerations The shift in the taxation policy is towards a highly digitalized, automated, and interconnected system. The intent is to make tax information transparent and easily accessible, reducing the ability to hide transactions. This comprehensive approach aims to ensure compliance and broaden the tax base, especially by bringing the e-commerce sector into the tax net. However, the practical implications and ground realities of such stringent rules are also a point of discussion. The overall policy is moving towards a daily basis income and transaction-based system. Compliance with law, whether financial or tax-related, is becoming increasingly critical, as digital systems will make it difficult to hide transactions or avoid tracking.

Digital Tax Revolution: Policy, Mechanisms, and Challenges

The sources indicate a significant shift in taxation policy towards a highly digitalized, automated, and interconnected system, with a strong focus on the digital economy. This move aims to enhance transparency, ensure compliance, and broaden the tax base, especially by bringing the e-commerce sector into the tax net.

Here’s a discussion of the digital economy as presented in the sources:

• Policy Shift and Intent:
• The government’s policy has fundamentally changed, moving towards a “daily basis income transaction base system”.
• The entire focus of the recent budget is on digital services, e-commerce, and online platforms.
• The intent is to make tax information transparent and easily accessible, making it difficult to hide transactions. This necessitates a change in mindset for both taxpayers and tax consultants, moving “from intimacy to reality”.
• Key Measures and Mechanisms in the Digital Economy:
• Automated Risk Management System for Input Tax Credit: An AI-based system acts like an “MRI machine” to verify the legitimacy of input tax credit claims, checking if they align with the business’s activity or product. If a claim is flagged, the registered person can apply to the commissioner for justification within 30 days.
• Withholding Taxation on E-commerce: A 2% withholding tax is applied to sales made through online marketplaces or courier services. This amount is automatically reduced from the output tax liability. The online marketplace or courier service acts as the withholding agent. Courier companies are now mandated not to work with individuals unregistered for income tax, with heavy penalties for non-compliance.
• Disallowance for Cash Sales (Section 21R): If a sale transaction on a single invoice exceeds two lakh rupees (200,000 PKR) and payment is not received through a banking channel or digital means, 50% of the expenditure attributable to that sale will be disallowed. This applies across all business types and is meant to discourage large cash transactions.
• Digital Payment Mandate for Asset Purchases (Section 75): For the purchase of assets like property or vehicles exceeding a certain amount, banking channels are mandated.
• Sales Tax Input Disallowance (Section 73): In Sales Tax, if a buyer does not deposit money into a digital bank account, the input tax credit for the supplier may be disallowed, further emphasizing digital payments for tax eligibility.
• Consignment Registration via Digital Devices: A new system requires registering consignments of goods transported by vehicles using e-billing and digital devices with QR codes, integrating with the FBR system for monitoring.
• Registration for Courier Companies/Online Marketplaces: Any courier company or online marketplace must register itself and ensure its users are tax-registered before booking consignments.
• Tax on Digital Transactions (Section J-1): A new section applies a tax on payments for digital transactions in e-commerce platforms. For goods delivered within Pakistan using local online platforms (including marketplaces and websites), the rate is 1% if paid through a banking channel and 2% for cash on delivery. This tax is declared as a final tax, meaning no allowances or deductions are given against it, which raises questions about profit allocation for businesses with mixed sales (online and counter).
• Definition of E-commerce and Online Marketplace: The ordinance specifically defines “e-commerce” and “online marketplace” to clearly bring them into the tax net.
• Tax on Digital Presence: A separate law has been introduced for “Tax on Digital Presence,” primarily targeting foreign vendors providing goods or services in Pakistan, with a 5% tax rate on transactions like advertisements in Pakistan.
• Centralized Data and Transparency: The system aims for absolute transparency, with data from various sources (bank accounts, CPR, mobile companies, etc.) becoming readily available at a “single click,” making it difficult to hide transactions or income. FBR officers are also empowered to monitor production, supply of goods, services rendered, and stock.
• Implications and Challenges:
• Broadening of Tax Base: A primary objective is to capture the large e-commerce sector that was previously outside the tax ambit, aiming to expand the client base.
• Compliance and Anti-Fraud: The stringent digital measures are designed to enforce compliance and reduce tax fraud by tracing transactions and making evasion more difficult.
• Feasibility Concerns: The cumulative effect of various disallowances (e.g., 10% on purchases from non-NTN holders, 50% on large cash sales) could lead to a significant portion of expenses being disallowed, raising concerns about the practicality of doing business, especially for smaller entities.
• Adaptation for Businesses: The move requires businesses, including small shopkeepers, to adopt digital transaction methods and maintain meticulous records, which may be challenging given the “ground realities”.
• Equity Issues: Concerns are raised about taxing individuals who may not fall into traditional tax brackets, such as the vast number of mobile users who might not be filers, and the disparity between the documented and undocumented economy.
• Consultant’s Role: Tax consultants are urged to understand their clients’ business models and product recipes deeply to navigate these AI-driven restrictions and new compliance requirements.

In essence, the digital economy is no longer just a sector but has become the backbone of the new taxation regime, with a comprehensive digital framework intended to capture, monitor, and tax transactions on a daily and real-time basis, moving away from traditional, less traceable methods.

Business Model Imperative: AI Tax Compliance

The concept of the business model is critically important in the context of the new taxation mechanism, particularly due to the introduction of advanced digital and AI-powered verification systems.

Here’s why understanding the business model is emphasized:

• Justifying Input Tax Credit Claims: With the implementation of an automated risk management system for input tax credit, powered by Artificial Intelligence (AI), the legitimacy of claimed input tax credits is rigorously checked. This AI system functions like an “MRI machine,” scrutinizing whether the input tax claimed aligns with the business’s specific line of activity or the product being sold.
• Example: If a mineral water supplier claims input tax credit for materials like iron or wood, which are not typically associated with their business or product, the AI system will flag and stop that credit.
• Consultant’s Role: To address such challenges effectively, tax consultants are explicitly advised to deeply understand their clients’ business models and product recipes. This includes knowing the raw materials used and the manufacturing process. Without this detailed knowledge, consultants may struggle to justify flagged input tax claims.
• Navigating Restrictions and Ensuring Compliance: The sources highlight a shift towards a highly digitalized, automated, and interconnected tax system designed for transparency and increased compliance. Understanding one’s business model is crucial for businesses to:
• Face Restrictions: The new systems will intercept input tax claims if they don’t align with the declared business model. A thorough understanding allows businesses to provide the necessary justification to the commissioner if a claim is restricted.
• Equip for System Requirements: The overall advice for tax professionals and taxpayers is to “change from intimacy to reality” and equip themselves to meet the requirements of the new system by understanding the business model and product manufacturing.

In essence, the new tax regime demands a comprehensive and detailed understanding of one’s business operations, moving beyond superficial knowledge. This granular understanding of the business model is presented as a fundamental requirement for successful navigation of and compliance with the evolving digital tax landscape.

Digital Taxation: New Era of Compliance

The sources indicate a significant and concerted push towards enhanced tax compliance within the digital economy, driven by a new taxation mechanism and a fundamental shift in policy. The core intent is to broaden the tax base, increase transparency, and ensure that transactions, particularly those in the rapidly growing e-commerce sector, are brought into the tax net and properly accounted for.

Here’s a detailed discussion of tax compliance as presented in the sources:

• Policy Shift towards Digitalization and Transparency for Compliance:
• The government’s policy has moved towards a “daily basis income transaction base system”. This means a shift from traditional assessment methods to real-time, transaction-based monitoring.
• The entire focus of the recent budget is on digital services, e-commerce, and online platforms.
• The aim is to make tax information transparent and easily accessible, making it difficult to hide transactions. This necessitates a change in mindset for both taxpayers and tax consultants, moving “from intimacy to reality”.
• Key Mechanisms and Tools for Enforcing Compliance:
• Automated Risk Management System for Input Tax Credit (AI-based): An Artificial Intelligence (AI) powered system acts like an “MRI machine” to verify the legitimacy of input tax credit claims. This system checks if the claimed input tax aligns with the business’s activity or product. If a claim is flagged, the registered person can apply to the commissioner for justification within 30 days. This puts the onus on businesses to prove the direct relevance of their input purchases to their declared business model and product recipes.
• Withholding Taxation on E-commerce: A 2% withholding tax is applied to sales made through online marketplaces or courier services. The online marketplace or courier service acts as the withholding agent, deducting this amount, which then reduces the seller’s output tax liability. This mechanism ensures that a portion of the tax is collected at the source of digital transactions.
• Disallowance for Cash Sales (Section 21R): If a sale transaction on a single invoice exceeds two lakh rupees (200,000 PKR) and payment is not received through a banking channel or digital means, 50% of the expenditure attributable to that sale will be disallowed. This measure is designed to discourage large cash transactions across all business types and push for digital payments.
• Digital Payment Mandate for Asset Purchases (Section 75): For the purchase of assets like property or vehicles exceeding a certain amount, banking channels are mandated.
• Sales Tax Input Disallowance (Section 73): In Sales Tax, if a buyer does not deposit money into a digital bank account, the input tax credit for the supplier may be disallowed, further emphasizing digital payments for tax eligibility.
• Consignment Registration via Digital Devices: A new system requires registering consignments of goods transported by vehicles using e-billing and digital devices with QR codes, integrating with the FBR system for monitoring. This allows FBR to monitor the movement of goods.
• Registration for Courier Companies/Online Marketplaces: Any courier company or online marketplace must register itself and ensure its users are tax-registered before booking consignments. Failure to comply carries heavy penalties.
• Tax on Digital Transactions (Section J-1): A new section applies a tax on payments for digital transactions in e-commerce platforms. For goods delivered within Pakistan using local online platforms, the rate is 1% if paid through a banking channel and 2% for cash on delivery. This tax is declared as a final tax, making deductions or allowances against it unavailable.
• Tax on Digital Presence (Foreign Vendors): A separate law introduces a 5% tax rate on foreign vendors providing goods or services in Pakistan, specifically targeting transactions like advertisements. This captures cross-border digital transactions.
• Centralized Data and Transparency: The system aims for absolute transparency, with data from various sources (bank accounts, CPR, mobile companies, telecom services, IP addresses) becoming readily available at a “single click,” making it difficult to hide transactions or income. FBR officers are also empowered to monitor production, supply of goods, services rendered, and stock.
• Suspension and Blacklisting Powers: The Commissioner has been granted powers to suspend business operations for three days if commitments are not fulfilled, which can lead to permanent closure if default persists. This includes suspension or blacklisting for tax fraud and non-compliance.
• Implications and Challenges for Compliance:
• Broadening of Tax Base: A primary objective is to capture the large e-commerce sector that was previously outside the tax ambit, aiming to expand the client base and ensure all relevant transactions are taxed.
• Stringent Enforcement and Anti-Fraud: The digital measures are designed to enforce compliance and reduce tax fraud by tracing transactions and making evasion more difficult. Tax fraud proceedings are now initiated directly through inquiry, similar to NAB procedures.
• Feasibility Concerns and “Ground Realities”: The cumulative effect of various disallowances (e.g., 10% on purchases from non-NTN holders, 50% on large cash sales) could lead to a significant portion of expenses being disallowed, raising concerns about the practicality of doing business, especially for smaller entities and in an economy where cash transactions are prevalent. The sources explicitly question the feasibility of applying such stringent rules without considering “ground realities” in Pakistan, where many small businesses still operate in cash.
• Adaptation for Businesses: The move requires businesses, even small shopkeepers, to adopt digital transaction methods and maintain meticulous records. Tax consultants are urged to deeply understand their clients’ business models and product recipes to navigate these AI-driven restrictions and new compliance requirements.
• Equity Issues: Concerns are raised about taxing individuals who may not fall into traditional tax brackets, such as the vast number of mobile users who might not be filers, highlighting a disparity between the documented and undocumented economy.
• Importance of Proper Documentation and Defense: The new regime emphasizes that “transactions being genuine” and proper “documentary evidence” are the main requirements for compliance. Taxpayers face “huge loss” if records are not properly maintained or cases are not defended.
• Audited Accounts Requirement: If taxable income exceeds immovable income, audited accounts are now mandatory, further pushing for formal accounting and compliance.

In essence, tax compliance under the new regime is no longer optional; it is mandated through a comprehensive digital framework that aims to capture, monitor, and tax transactions on a daily and real-time basis, moving away from traditional, less traceable methods. The success of this framework hinges on both the government’s ability to implement it effectively and the taxpayers’ willingness and capacity to adapt to stringent digital and record-keeping requirements.

By Amjad Izhar
Contact: amjad.izhar@gmail.com
https://amjadizhar.blog

Affiliate Disclosure: This blog may contain affiliate links, which means I may earn a small commission if you click on the link and make a purchase. This comes at no additional cost to you. I only recommend products or services that I believe will add value to my readers. Your support helps keep this blog running and allows me to continue providing you with quality content. Thank you for your support!