Documentation measures in Finance Act, 2025: an analysis

Business Recorder

18-07-2025

Pakistan is faced with the serious issue of non-documentation of economic transactions leading to substantial under-reporting of actual income from businesses. This is the main reason for low tax collection in the country. It is the author's view that under-reporting is an issue larger than people out of tax net.
Various measures are introduced, from time to time, to curb under-reporting by incorporating various provisions in the tax laws for mandatory documentation. In the Finance Act, 2025 two such measures have been introduced which are the topic of discussion of this article.
Section 21
(q) ten percent of the claimed expenditure made attributable to purchases made from persons who are not National Tax Number holders:
Provided that in case of purchase of agricultural produce this clause shall only apply to the purchase made from middle man:
Provided further that the Board may, by notification in the official Gazette, exempt persons or classes of persons from this clause subject to such conditions and limitations as may be specified therein;
(s) fifty percent of the expenditure claimed in respect of sale where the taxpayer received payment exceeding two hundred thousand rupees otherwise than through a banking channel or digital means against a single invoice containing one or more than one transactions of supply of goods or provisions of services.
At the outset, it is stated that in ordinary circumstances, under the normal course and generally acceptable fiscal systems both these amendments are incorrect and represent bad law. However, the situation on ground in Pakistan would have to be examined with reference to practices in the market and the continued resistance of the retailers and wholesalers against all measures to report correct incomes.
With respect to provisions introduced under sub-section (s) it is stated that law in the present form is incomplete. Section 21 relates to expenditure claims by the tax payer. Whereas the transaction being included in this sub-section relates to supply of goods or rendering of services. This mismatch would have to be settled. The only possibility, without providing any basis, would be an ad-hoc system whereby a ratio will be determined for total supplies in that particular case with those without complying with the provisions under sub-section (s). For example, total supplies are of Rs 100 and those not complying the provisions are Rs 10 then 10 percent will be the ratio applied for expenditure disallowance in that particular case which may be treated at Rs 80. If so then 10 percent would be attributed to such supplies being Rs 8 and an actual disallowance will be made for Rs 4. This is the only possible way if the system has to work. If it is so then unanswered questions will be:
a. Pakistan works under the self-assessment system and the return filed is treated as an assessment order under Section 120 of the Ordinance. It is not conceivable that every case would be examined before being treated as assessment order with respect to this section. This would mean that taxpayers would be required to 'voluntarily' add this amount in the return to be filed; and
b. The status of expenditure such as depreciation, interest being financial charges, etc.
In addition to the issues raised above, which are procedural in nature, in the author's view the primary problem in this case is with reference to the use of the words 'banking channel' and 'digital payment'.
The word 'banking channel' has not been defined in the Income Tax Ordinance, 2001. We are also not aware of any related statute where this term has been defined. The Ordinance has used the word 'normal banking channel' in sub-section (4) of Section 111 of the Ordinance as under:
(4) Sub-section (1) does not apply to any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million Rupees in a tax year that is en-cashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect.
For the purposes of Section 111, the term means that remittance is received by the bank not via currency exchange etc. Furthermore, it required that remittance has been credited in the bank account of the person who claimed the immunity under sub-section (4) of Section 111 of the Ordinance. This, therefore, means that criterion is the trail to the bank account of the recipient not the bank account of the payer.
The term 'digital payment' has also not been defined in the Ordinance; however, it is our view that the term 'digital means' as defined in 2(17B) of the Ordinance would include digital payment. It states as under:
(17B) 'digital means' means digital payments and financial services including but not limited to—online portals or platforms for digital payments/receipts; online interbank fund transfer services; online bill or invoice presentment and payment services; over the Counter digital payment services or facilities; card payments using Point of Sale terminals, QR codes, mobile devices, ATMs, Kiosk or any other digital; payments enabled devices; or any other digital or online payment modes.
In technical literature the terms used are:
Digital payments: A digital payment, sometimes called an electronic payment, is the transfer of value from one payment account to another using a digital device or channel. This definition may include payments made with bank transfers, mobile money, QR codes, and payment instruments such as credit, debit, and prepaid cards. Digital payments can be partially digital, primarily digital, or fully digital.
A partially digital payment might be one in which both payer and payee use cash via third-party agents, with payment providers transferring the payment digitally between the agents. A partially digital payment involves a combination of digital and physical cash transactions. A common example is when a worker in a city sends money to their family in a rural area using a money transfer service. The sender uses a digital platform or service to initiate the transfer, but the recipient receives the funds as physical cash from an agent at a physical location.
A primary digital payment might be one in which the payer initiates the payment digitally to an agent who receives it digitally, but the payee receives the payment in cash from that agent.
A fully digital payment is one in which the payer initiates the payment digitally to a payee who receives it digitally, and it is then kept and spent digitally.
Over the counter digital payment and services have been included in the definition of digital means. There can be views whether or not the term 'digital payment' is exclusive or inclusive; however, taking a broader view in the context of the case under consideration it would include any manner of a 'digital credit' in the payment account of the seller being A in this case.
Before any further discussion firstly the rationale for introduction of this sub-section would have to be identified. It appears that this sub-section has been introduced to discourage supplies/sales to people who do not make payment through banking channels. The ideal end is that all payments are made through a crossed cheque so that bank accounts of both buyer and seller are identified.
Nevertheless the text of the law does not correspond to this ideal situation. This has been explained in the following paragraphs:
In case if there is a supply of goods or rendering of services by A to B then B has following options:
a. Cash payment;
b. Payment by crossed cheque;
c. Bank to bank transfer;
d. Deposit of cash in the bank account of A with reference to particular invoice;
e. Deposit of cash in the bank account of A on lump sum or
f. The invoice remains outstanding.
It is generally considered that only the transactions covered under (b) and (c) are permitted under sub-section (s). In the author's view, this presumption is not correct. Transactions covered under (d) and (e) cannot be targeted under this sub-section as the supplier has identified that payment for supplies has been made through the banking channel and the same falls under the digital payment as described above.
In a strict sense, a banking channel or over-the-counter digital payment does not mean that amount must necessarily be routed or transferred from the bank account of B to the bank account of A.
There can be varying views on the interpretation of the word 'banking channel' and over the 'counter digital payments'; however, for all practical reasons in case if FBR intends to apply the provisions in real market situations then transactions as referred to in (d) and (e) are to be treated as not subject to this sub-section. It is reiterated that the author is of the view that such transactions are already out of this provision.
With respect to sub-section (q), it is stated that a minimum threshold would have to be necessarily provided in this sub-section as there are many people who are allowed to enter into commercial transaction in goods, not being agricultural goods, who are not required to obtain NTN such as a person having income for the year less than Rs 600,000.
The law as enacted effectively means that a case has been made that a transaction of billions of rupees can be made with a person without NTN. The only penalty is disallowance of 10 percent of expenses so recorded. The correct course of action for documentation and tax compliance would be to state that purchases above a certain amount, say Rs 1 million, cannot be allowed if made from a person who does not possess a NTN. It is so as it is not practically possible to engage in such a level of activity without NTN.
As stated earlier the author may not agree with the provisions introduced, however, keeping in view the ground realities and resistance by the under-reporting individuals and businesses, the provisions as introduced be implemented in the manner indicated.
Copyright Business Recorder, 2025