The Federal Board of Revenue (FBR) has clarified which deductions cannot be claimed against business income during the tax year 2025-26.
These rules have been updated in the Income Tax Ordinance, 2001, after amendments introduced through the Finance Act, 2025.
To help taxpayers better understand, here’s an interactive breakdown of the key points:
❓ Can all expenses of a business be deducted from income?
Answer: No. While genuine operating costs are allowed, Section 21 of the Ordinance specifically lists expenses for which deductions are not permitted when calculating taxable business income.
🚫 Examples of disallowed deductions:
• Taxes on profits: Any cess, rate, or tax calculated directly on business profits cannot be deducted.
• Unpaid withholding taxes: If a taxpayer fails to deduct and deposit withholding tax where required, the related expense will not qualify.
• Excess commission: Payments of commission above 0.2% on certain sales, unless the recipient is on the Active Taxpayers List.
• Entertainment costs: Any expense that exceeds prescribed limits.
• Unrecognized funds: Contributions to funds that are not approved pension, gratuity, or provident funds.
• Cash transactions: Expenditures above Rs. 250,000 that are not paid through banking or digital channels.
📌 Why these rules matter
The purpose of restricting such deductions is to ensure that taxable business income is calculated fairly and transparently. It discourages cash dealings, promotes digital payments, and ensures that only legitimate and verifiable costs are considered.
By clearly defining what cannot be deducted, the FBR aims to strengthen compliance and broaden the tax base, while making sure that businesses report their income in line with national tax policy.
Disclaimer: This article provides a simplified overview of disallowed deductions against business income under the Income Tax Ordinance, 2001 for the tax year 2025-26. It is intended for general informational purposes only and does not constitute legal, tax, or financial advice. Taxpayers should consult professional advisors or refer directly to official Federal Board of Revenue (FBR) publications before making any decisions regarding their business income or deductions.