Dr. Ikramul Haq & Abdul Rauf Shakoori
The challenges of fair and equitable tax collection and financial inclusion in Pakistan are deeply rooted in systemic constraints, widespread informality, and limited trust in the fiscal apparatus. The tax system remains heavily dependent on indirect taxation, with a narrow formal base and a large, undocumented economy that continues to escape regulation/taxation. The fragmented approach to policy enforcement, combined with inconsistent fiscal measures, has historically yielded poor compliance and limited success in broadening the tax base.
The successive governments in Pakistan, in their repeated failed and/or aborted attempts to discourage the cash-based economy, often ended up introducing measures under the pretext of documenting the economy. However, such measures, including excessive penalization of cash transactions, tend to have the opposite effect, and instead of promoting transparency and documentation, they drive businesses further into informal channels, disrupt market operations, and erode the ease of doing business. These policies, rather than enhancing revenue collection, frequently give rise to a parallel financial system that undermines the objectives of economic stability and inclusiveness.
The introduction of section 21(s) in the Income Tax Ordinance, 2001 through the Finance Act 2025 reflects a policy choice that is both economically regressive and operationally flawed, particularly for a country like Pakistan where cash remains an essential medium for commerce across vast segments of the economy.
The policy measure purports to promote documentation and broaden the tax base by disallowing 50% of expenditure related to any single-invoice sale exceeding Rs 200,000 if settled in cash or through non-banking channels (non-digital mode). The provision, though framed under the pretense of fiscal reform, lacks the institutional, infrastructural, and logical basis required for credible implementation, and is poised to further tighten Pakistan’s already struggling business environment.
The implementation of section 21(s) has already revealed severe administrative deficiencies. The Federal Board of Revenue (FBR), even twelve days after the effective date of Finance Act, 20125, July 1, 2025, has failed to release any clarification, formula, or guideline on how taxpayers are to attribute expenditures to specific invoices exceeding Rs 200,000 threshold.
The absence of operational clarity renders the provision of section 21(s) effectively unenforceable and creates significant space for interpretive disputes, selective enforcement, and unintended non-compliance. The very objective of formalizing the economy through this mechanism is, therefore, undermined by the FBR’s failure to offer regulatory directions and prior consultation with tax bars, professional and trade bodies and experts.
The cash economy in Pakistan is not merely a symptom of evasion but a structural feature dictated by ground realities, such as the lack of banking infrastructure in rural areas, low financial literacy, and technology barriers faced by small traders and agricultural businesses.
The penal disallowance of legitimate business expenditures solely due to the mode of receipt not only risks marginalizing these segments but also impairs the already widening trust deficit between the taxpayer and the state. The policy’s punitive design wrongly presumes malicious intent in every large-value cash transaction, a notion that discounts the economic and geographic diversity of financial behaviour in Pakistan.
The enforcement of section 21(s) raises even graver concerns when examined in practical terms. The law does not define a method for proportioning expenditures across sales, nor does it specify whether logistics costs, commission payments, or carriage charges should be disaggregated per invoice. The ambiguity paves the way for discretionary assessments by tax officers and arbitrary expense rejections, opening the floodgates for litigation, corruption, and harassment. The result is not increased documentation but increased inefficiency and legal uncertainty for already compliant businesses.
The formal economy, particularly small and medium enterprises (SMEs), is highly sensitive to cost volatility. These enterprises often operate on narrow profit margins, and any fiscal shock such as arbitrary disallowance of legitimate expenditures can quickly lead to downsizing, business closures, or informalization. The effect of penalizing cash-linked expenditures is not just a matter of additional tax liability; it systematically increases the cost of doing business, reduces the incentive to remain within the tax net, and impairs long-term competitiveness.
The disallowance mechanism also ignores the asymmetric enforcement capabilities of the tax administration. Individuals and unregistered entities operating entirely in cash, outside the banking system, and beyond the documentation perimeter are unaffected by this rule. These operators, constituting a vast portion of the shadow economy, are neither audited nor subject to meaningful oversight. The policy, therefore, punishes formal-sector businesses that already bear the weight of compliance, while leaving untouched the large, undocumented economy that the law ostensibly seeks to formalize.
The parallel economy will likely to grow as businesses, faced with arbitrary fiscal measures, retreat from formal banking channels to avoid penal consequences. The disincentive to report full sales or to receive payments through traceable means will increase, which is the exact opposite of what the government aims to achieve through digitization. The state’s strategy, in this regard, not only fails to address the core issue of informality but unintentionally promotes it by making formal participation economically irrational and costly.
The digitization of an economy like Pakistan’s must be grounded in pragmatism and incentivization, not coercion. The structural shift towards digital payments, traceable transactions, and real-time tax reporting is a commendable goal but requires infrastructure, education, trust, facilitation and policy coherence.
The use of punitive taxation tools to penalize cash is misplaced in an economy where, for many, cash is not a preference but a necessity. The aggressive fiscal measures under section 21(s) violate the basic principle of economic inclusivity by discriminating against sectors that are still transitioning toward digital adoption.
The global experience provides clear directions that countries who achieved real economic documentation did so not by banning cash or disallowing expenses, but by building systems that made digital transactions safer, faster, cheaper, and more rewarding. The Kenyan model of M-Pesa, the Brazilian tax lottery system, and Indonesia’s digitization incentives are instructive. They focused on building ecosystems where digital adoption was a matter of economic benefit, not regulatory compulsion. The latest Germany-wide requirement to report on electronic cash registers is also worth studying.
The digital economy is not built by punishing cash users, it is built by enabling alternatives that are superior, secure, and simple. The government must understand that disallowing business expenditures simply because of the payment mode introduces fiscal distortions and is counterintuitive to investment growth. Instead, the state should focus on strengthening payment infrastructure, offering rebates or tax credits for digital transactions, and investing in integrated point-of-sale systems for retail and wholesale sectors.
The current approach, on the contrary, appears to conflict documentation with enforcement. This confusion has real economic costs. It invites selective targeting, reduces predictability in taxation, and discourages long-term capital formation. Pakistan is already grappling with declining investment, rising unemployment, and a fragile macroeconomic framework, such policies are fiscally short-sighted and strategically damaging.
The business community’s concerns are not based on resistance to documentation but stem from the irrationality of blanket penalization. The formal sector has time and again demonstrated willingness to cooperate with digital reforms, be it through e-filing, point-of-sale integration, or real-time reporting provided these transitions are accompanied by stability, clarity, and fairness. The way forward is not the penalization of cash-linked activity but the incentivization of digital migration.
The government must urgently withdraw or suspend the implementation of section 21(s) until a comprehensive framework is issued that includes attribution formulas, audit parameters, and transition support. Simultaneously, it must initiate wide consultations with businesses, professional bodies, and provincial governments to develop a harmonized roadmap for digital inclusion that recognizes the layered structure of Pakistan’s economy.
The future of economic documentation lies in building an environment where transparency is rewarded and compliance is simplified not in adding another layer of fiscal hostility to the formal sector. The digital economy should be a path to growth, not a threat to viability. The government must realize that trust, not a threat, is the foundation of sustainable reform.
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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws.
He holds LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law.
He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).
He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
X (formerly Twitter): DrIkramulHaq
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.
His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.
His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .
X (formerly Twitter): Adbul Rauf Shakoori
The recent publication, coauthored by these writes with Huzaima Bukhari is
Pakistan Tackling FATF: Challenges & Solutions, available at:
https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35
https://www.amazon.com/dp/B08RXH8W46