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........

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