Pakistan’s Finance Act 2025, effective from July 1, has begun reshaping the country’s fiscal landscape—and not without controversy. While the federal government touts it as a move toward documentation and equitable taxation, businesses and taxpayers are feeling the aftershocks, especially in the formal and digital sectors.
Ambitious Revenue Target, Complex Implementation
The government has set a bold revenue target of Rs19.278 trillion for FY2025-26, including Rs14.131 trillion in tax collection—a significant jump from last year’s revised Rs11.9 trillion. Officials claim this shift focuses on direct taxation, with targets for direct taxes raised to Rs6.9 trillion, up from Rs5.826 trillion.
But the reality on ground tells a different story: much of this direct tax will still be collected through indirect means, especially advance and withholding taxes—undermining the goal of a fair and simplified system.
Cash Transactions Over Rs200,000 Disallowed
Among the most hotly debated provisions is the amendment to Section 21 of the Income Tax Ordinance, 2001, which disallows 50% of expenses on sales where payments above Rs200,000 are not made through banking or digital channels.
The move is intended to promote documentation, but in Pakistan’s cash-driven market, this has caused confusion and frustration. Businesses ask:
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How do we enforce digital payments on customers?
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Will the disallowed expense apply only to cost of goods sold or to all related costs?
With no transitional window, taxpayers are being asked to adapt overnight.
10% Disallowance for Non-NTN Purchases
Another major shift is the disallowance of 10% expenditure on purchases from vendors without a National Tax Number (NTN)—except in the case of agricultural produce purchased from farmers.
While designed to broaden the tax base, this effectively outsources enforcement to already compliant taxpayers. Instead of leveraging digital data and FBR systems, the burden now lies with businesses to vet their suppliers.
Withholding Tax Hikes for Service Providers
The services sector is also facing steeper withholding taxes:
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15% flat rate (up from 9% for companies, 11% for individuals/AOPs)
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For non-tech specified services: 6% (up from 4%)
These hikes are eroding margins and strangling cash flow, especially for SMEs. The line between direct and indirect taxation continues to blur, undermining trust in tax policy.
New Digital Taxes on E-Commerce and Couriers
Section 6A, read with Section 153, now imposes fresh taxes on online marketplaces and digital platforms:
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1% income tax on digital transactions
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2% withholding by courier services for COD sales
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Flat 2% sales tax under the Sales Tax Act, 1990
The most controversial element: platforms must ensure vendors are registered for tax, per amendments to Section 181 and Section 14.
Unlike physical marketplaces, online platforms are being made tax police, without any grace period. Many fear this will push small sellers out of the digital economy.
Reversal of Structural Judicial Reforms
Disappointingly, the Act has reversed key reforms introduced last year:
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Jurisdiction caps removed, sending large appeals back to Commissioner (Appeals)
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Mixed questions of fact and law no longer go directly to High Courts
These reversals further erode taxpayer confidence in a system already riddled with administrative inefficiencies and a growing backlog of appeals.
Tax Policy Still Not Equitable
Despite all talk of fairness and reform, the real estate, retail, and agriculture sectors remain lightly taxed. Meanwhile, compliant businesses are burdened with higher taxes, stricter compliance, and enforcement duties that should belong to the Federal Board of Revenue (FBR).
Until tax reform becomes inclusive and balanced, the goal of a broader tax base and fiscal stability will remain out of reach.
Conclusion: Reform or Regression?
The Finance Act 2025 introduces sweeping changes, some of which are necessary for documentation and digital adoption. However, the speed, burden on formal businesses, and unequal application of these policies could have unintended consequences.
Policymakers must ensure equity, provide transition periods, and focus on enforcement through state capacity, not taxpayer outsourcing.
