New income tax law: How 41% tax applies to Rs200,000 deposits?

ISLAMABAD: Confusion has engulfed the public since the federal government introduced two major amendments to Section 21 of the Income Tax Ordinance through the Finance Act 2025–26, creating the misunderstanding that a hefty tax of 41% will be charged on cash deposits exceeding Rs200,000.

Tax consultants, however, believe that the said amendments have nothing to do with the income tax returns or bank transactions of “ordinary public”. The newly-added income clauses aim at “discouraging undocumented business transactions and promoting tax compliance.”

How the confusion arise?

The main cause of the confusion about the new income tax rules was social media posts and vague news stories, suggesting that the Federal Board of Revenue (FBR) has classified cash deposits exceeding Rs200,000 as “high risk”, triggering strict monitoring measures and a hefty tax of 20.79 per cent on such transactions.

Such internet posts also claimed that such high-value transactions will be monitored through an automated system, and banks will be authorised to report suspicious cash deposits directly to the revenue authority.

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Though, the FBR had mentioned hefty tax on Rs200,000 bank transaction, it had clarified that any single cash deposit exceeding this mark would not be credited to the account ledger unless the required tax is deducted. This statement made it clear that the board was talking about businesses.

It also warned that individuals depositing more than Rs200,000 in cash would be required to provide justification and supporting documents to verify the source of funds.

Explaining new income tax rules

The FBR said on more than one occasion that the new income measure was part of broader efforts to bring informal and undocumented financial activities under the tax net.

The new clauses (q) and (s) of the income tax ordinance impose financial penalties on businesses making purchases from unregistered suppliers or accepting large cash payments from customers.

According to tax consultants, these measures are expected to bring more transparency to commercial transactions and ensure that business volumes are accurately reflected in bank statements.

Clause (q): 10pc disallowance for buying from unregistered suppliers

Under clause (q), if a business purchases goods from a person who does not possess a National Tax Number (NTN), then 10 percent of the expenditure on that purchase will be disallowed as a deductible business expense. The disallowed amount will be added back to the business’s taxable profit, increasing its overall tax liability.

However, an exemption has been provided for purchases directly from farmers. The clause will only apply if agricultural goods are purchased from middlemen who are not tax registered.

For example, If a business purchases a product worth Rs7 million from an unregistered seller, Rs700,000 (10%) of that amount will be disallowed. This could increase the business’s taxable profit by the same amount and result in additional tax of over Rs140,000 depending on the rate applicable.

Clause (s): 50pc disallowance for large cash receipts

Clause (s) targets cash dealings on the sales side. If a business receives a cash payment exceeding Rs200,000 from a customer against a single invoice, and the payment is not made through a banking channel or digital means, then 50% of the cost of goods sold related to that transaction will be disallowed.

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For instance, if a business sells goods worth Rs200,000 in cash and the cost of those goods was Rs140,000, then Rs70,000 of that cost may be disallowed in the accounts. This adjustment would increase the taxable profit and lead to a higher tax bill.

Businesses shifting burden to cash-paying customers

While the government has not directly imposed a 20.5% or 41% tax on Rs200,000 cash transactions – as incorrectly stated in a viral internet posts – some companies have calculated the tax impact of such disallowances and are passing this burden onto customers who insist on paying in cash.

These firms argue that accepting large cash payments results in disallowed expenses, increased profits on paper, and significantly higher tax obligations. To offset this, some companies are now either inflating prices for cash transactions or reducing the quantity of goods provided for the same amount.

Exemptions and clarifications

Direct purchases from farmers continue to remain exempt from the 10% disallowance, but transactions through unregistered middlemen will still trigger the penalty.

Similarly, the Rs200,000 cash payment threshold applies per invoice; however, tax authorities may in future apply it on an annual aggregate basis to prevent misuse by splitting payments across multiple invoices.

Industry sources suggest that further clarification may be issued through updated tax rules or SROs. Until then, some uncertainty remains, especially for small businesses and retailers who operate in largely cash-based environments.

A push towards formalisation

Financial analyst believe that these provisions are part of the government’s broader strategy to formalise the economy, promote bank-based transactions, and document the business supply chain. The changes are likely to hit cash-intensive sectors the hardest, including wholesalers, manufacturers, and small traders who operate outside the tax net.

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Meanwhile, tax professionals are advising businesses to adapt quickly by ensuring that all major transactions are conducted through traceable banking channels and by dealing only with registered suppliers and customers. With implementation now in effect, they urge businesses to understand the new clauses, realign their accounting practices, and avoid penalties that could significantly raise their tax bills.