FBR sets out restrictions on business expense deductions, including cash payments, salary, commissions, penalties and digital compliance for 2027.
ISLAMABAD: The Federal Board of Revenue (FBR) has outlined a range of expenses and payments that taxpayers cannot claim as deductions when calculating income from business for Tax Year 2027.
The provisions are contained in the Income Tax Ordinance, 2001, updated up to June 30, 2026, with Section 21 specifying expenditures that are not allowable as deductions against business income.
Taxes on business profits
Under the rules, taxpayers cannot deduct any cess, rate or tax paid or payable in Pakistan or another country where the levy is imposed on business profits or gains or calculated with reference to those profits.
Tax deducted under the relevant provisions of the Income Tax Ordinance from an amount derived by a taxpayer is also not allowable as a business deduction.
An expenditure from which a taxpayer is required to deduct or collect tax is generally disallowed unless the taxpayer has complied with the applicable tax deduction and payment requirements.
However, disallowance relating to purchases of raw materials and finished goods under this provision cannot exceed 20% of such purchases. Tax recovered under Sections 161 or 162 is treated as tax paid.
Commission and entertainment expenses
The FBR has also placed restrictions on deductions for certain commission payments.
Commission paid or payable on supplies of products listed in the Third Schedule of the Sales Tax Act, 1990, is not deductible where it exceeds 0.2% of the gross amount of supplies, unless the recipient of the commission appears on the Active Taxpayer List.
Entertainment expenditure exceeding prescribed limits or incurred in violation of prescribed conditions is also not allowable.
Contributions to funds
Contributions to funds that are not recognised provident funds, approved pension funds, approved superannuation funds or approved gratuity funds cannot be deducted.
The rules further disallow 50% of contributions made to an approved gratuity fund, approved pension fund or approved superannuation fund.
Contributions to provident or other employee-benefit funds are also subject to conditions relating to tax deduction from payments made by the fund to employees.
Fines, penalties and personal expenses
The FBR has maintained that fines and penalties paid or payable for violating any law, rule or regulation are not deductible.
Similarly, personal expenditure incurred by a taxpayer cannot be claimed as a business expense.
Amounts transferred to a reserve fund or capitalised in any manner are also excluded from deductible business expenditure.
Profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to one of its members is likewise not allowable as a deduction.
Restrictions on cash transactions
The tax rules impose restrictions on business transactions involving payments outside the banking channel.
Expenditure under a single account head exceeding Rs250,000 in aggregate generally must be paid through a crossed cheque, crossed bank draft, crossed pay order or another crossed banking instrument showing transfer from the taxpayer’s business bank account.
Online transfers from the payer’s business account to the payee’s business account and credit-card payments are treated as banking-channel transactions, provided they can be verified through the respective bank statements.
The restriction does not apply to individual expenditures of up to Rs25,000, as well as utility bills, freight charges, travel fares, postage and payments of taxes, duties, fees, fines and other statutory obligations.
For companies, a separate provision requires certain transactions exceeding Rs250,000 under a single account head to be made through digital means from the business bank account notified to the Commissioner under Section 114A. The provision will take effect from a date to be notified by the FBR.
Salary payments and capital expenditure
Salary exceeding Rs32,000 per month paid to an individual is not deductible if it is not paid through a crossed cheque, direct transfer to the employee’s bank account or approved digital means.
The FBR also disallows expenditure of a capital nature, except where specifically provided for under the relevant provisions of the Income Tax Ordinance.
For pharmaceutical manufacturers, expenditure on sales promotion, advertising and publicity exceeding 10% of turnover is not deductible.
Utility expenditure exceeding prescribed limits or incurred in violation of prescribed conditions can also be disallowed.
Purchases from non-NTN holders
The rules provide for a 10% disallowance of claimed expenditure attributable to purchases made from persons who do not hold a National Tax Number (NTN).
For purchases of agricultural produce, the provision applies only to purchases made from middlemen.
The FBR may exempt specific persons or classes of persons from this restriction through notification in the official Gazette, subject to specified conditions.
Electronic invoicing and payment restrictions
The FBR has also introduced a 3% disallowance of claimed expenditure for a person who fails to install an electronic resource or act as an integrated enterprise where required by law, subject to the prescribed method and procedure.
In addition, 50% of expenditure claimed in respect of sales may be disallowed where a taxpayer receives more than Rs200,000 against a single invoice through means other than a banking channel or digital payment.
The provision applies to invoices covering one or more transactions involving the supply of goods or provision of services.
The restrictions outlined under Section 21 form part of the FBR’s broader tax-compliance framework for Tax Year 2027, aimed at promoting documented transactions, banking-channel payments, digital compliance and proper withholding-tax practices.