Govt Proposes Major Relief for Businesses: Cash Transaction Cap Raised to Rs. 2.5 Million

In a significant development for the business sector, the federal government has proposed a phased revision to Section 21 of the Income Tax Ordinance, 2001, aimed at easing restrictions on cash transactions and providing relief to taxpayers engaged in business activities.

According to official sources, the limit for disallowing expenditure on cash sales has been proposed to increase from Rs. 200,000 to Rs. 2.5 million per transaction, a move that has been welcomed by the business community.

Section 21, introduced under the Finance Act 2025, disallows 50 percent of expenditure attributable to cash sales exceeding Rs. 200,000 per transaction, solely under the head “Income from Business” (as defined in Section 18).

This provision was initially introduced to curb undocumented transactions and promote digital and traceable payments. However, businesses raised concerns that the threshold was too low and would lead to compliance difficulties, especially in sectors where cash sales are predominant.

To address these concerns while still aiming to strengthen documentation and improve tax compliance, the government has now proposed a three-year phased plan for implementing this restriction:

Year 1:

• The threshold increased to Rs. 2.5 million per transaction

• Disallowance reduced from 50% to 20%

Year 2:

• Threshold reduced to Rs. 1.5 million

• Disallowance percentage increased

Year 3:

• The threshold was lowered further to Rs. 500,000

• Disallowance reaches the original 50% rate.

This gradual implementation strategy is designed to balance revenue protection with ease of compliance, giving businesses time to adapt and digitize their transactions.

The business community has cautiously welcomed the proposal, terming it a pragmatic approach to formalize cash-heavy segments without disrupting day-to-day operations. Tax experts say the phased rollout may also encourage digital transactions while offering sufficient breathing space to small and medium-sized enterprises (SMEs).

Importantly, the disallowance only applies to income categorized under business income and does not impact other heads of income such as salaries, capital gains, or property income.