Finance Act 2025: businesses bear brunt of tax reforms
The taxpayers of Pakistan have started feeling the aftershocks of the Finance Act 2025, which came into effect from July 1, 2025. The federal government has set an ambitious revenue target of Rs19.278 trillion for fiscal year 2025-26, from which the tax revenue target is Rs14.131 trillion. This marks a significant jump compared to the revised target of Rs11.9 trillion for fiscal year 2024-25.
The government claims that it is focusing more on direct taxation, supported by the increased target of Rs6.9 trillion for direct taxes, compared to Rs5.826 trillion last year. However, the reality is that a large chunk of the direct tax revenue continues to be collected indirectly through advance taxes and withholding mechanisms.
The government also asserts that it has taken steps for broadening the tax base and digitisation via the Finance Act 2025. However, it is crucial to assess the impact of these measures across different sectors, especially the business community.
One of the most debated amendments has been introduced under Section 21 of the Income Tax Ordinance, 2001 [the Ordinance]. According to this provision, if a person receives a payment exceeding Rs200,000 against a single invoice, comprising one or multiple transactions, other than through banking channels or digital means, then 50% of the expenditure related to that sale shall be disallowed as a deductible expense. This effectively increases the taxable income and, consequently, the tax payable.
This amendment has triggered concern and confusion among taxpayers regarding its practical implementation. It remains unclear whether the disallowed expense would be restricted to costs directly linked with the sale or if it would be applied proportionately to all claimed costs relating to the supply of goods or services.
Moreover, registered taxpayers are expressing frustration over how they can compel customers to pay digitally in a market where non-cash alternatives are still widely accepted. Although the measure is geared towards promoting documentation, such a significant shift should have been preceded by a transitional period to allow businesses to adapt.
Another amendment under the same section disallows 10% of expenditure on purchases made from persons who do not possess a National Tax Number (NTN), with an exception carved out for direct purchases of agricultural produce from farmers. While the stated objective is to widen the tax base, it is widely perceived that this move shifts the burden of enforcement onto compliant taxpayers. Instead of leveraging available data and digital infrastructure to identify non-filers, the tax administration appears to be outsourcing its job to the formal sector. The effectiveness of this provision will depend largely on how strongly and consistently it is enforced during the post-return assessment process.
The services sector, in particular, finds the government's narrative of offering a "different budget" to be misleading. Withholding tax rates for service providers have increased significantly, with the standard rate now at 15% for all persons, up from the earlier rates of 9% for companies and 11% for individuals or Associations of Persons (AOPs). For specified sectors excluding tech services, the withholding tax has also increased from 4% to 6% of the gross amount payable. These changes continue the trend of embedding indirect taxation within direct tax laws, raising longstanding concerns about cash flow constraints and sustainability, especially for SMEs operating in the formal sector.
The Finance Act 2025 also introduces new tax obligations on online marketplaces, digital platforms, and courier services. A new tax, under Section 6A read with Section 153 of the Ordinance, now applies to every person receiving payments for digitally ordered goods or services delivered within Pakistan through online platforms or websites. Under these provisions, payment intermediaries must deduct 1% income tax, while courier services involved in cash-on-delivery transactions must withhold 2% on behalf of the seller. A flat 2% sales tax also applies under the Sales Tax Act, 1990 [the Act].
More concerning, however, is the amendment to Section 181 of the Ordinance and Section 14 of the Act, which places the burden on online marketplaces and courier services to ensure that vendors using their platforms are registered for income tax and sales tax. This requirement is harsh, particularly given that no transitional period has been allowed.
It also risks pushing small vendors out of the digital economy, which has otherwise been a growing and promising sector. The disparity becomes evident when comparing these requirements with those applicable to physical marketplaces and malls, where no such registration enforcement responsibility exists. The sudden enforcement of this provision may stifle the digital economy before it matures.
In addition to these policy shifts, the Finance Act 2025 has also reversed some earlier structural reforms. Last year, in response to concerns regarding the lack of independence of the Commissioner (Appeals), the government had introduced pecuniary jurisdiction limits to move major appeals directly to the Appellate Tribunal Inland Revenue. It was also announced that mixed questions of fact and law could be brought before the High Court. Both of these changes have now been rolled back.
Whether due to administrative difficulties or unintended consequences, such reversals damage the consistency of tax policy and erode taxpayer confidence. The concern regarding the independence of the Commissioner (Appeals) remains unresolved, and the number of pending cases has only grown.
While there is no denying that the Finance Act 2025 contains measures intended to promote digitisation, documentation, and expansion of the tax base, the critical question remains: why is taxation in Pakistan still not based on the principle of equity? Large segments of the economy, particularly retail, real estate, and agriculture continue to enjoy preferential or minimal tax treatment. This creates resentment among compliant taxpayers who already bear a disproportionate share of the tax burden. Tax reform must be inclusive and equitable, or it risks undermining the very objectives it seeks to achieve.
The writer is a tax expert and member of the Institute of Chartered Accountants of Pakistan