Major Tax Reform Update – What Businesses Must Know | Ali Law Associates

Major Tax Reform Update – What Businesses & Individuals Must Know

The tax landscape in Pakistan is entering a new phase of change. With the Federal Board of Revenue (FBR) increasingly emphasising digital economy, documentation and formalisation, businesses and individuals alike must prepare proactively. At Ali Law Associates, we are closely monitoring these developments so our clients can navigate with clarity, confidence and compliance.

What is changing & why it matters

The government’s latest reform initiatives (including measures under the Finance Act 2025 and the Budget 2025-26) reflect two intertwined objectives: broadening the tax base and strengthening compliance through digital and procedural mechanisms. :contentReference[oaicite:2]{index=2}

Key themes include:

Greater reliance on withholding taxes and indirect mechanisms to collect direct taxes.
Increased focus on digital transactions, online marketplaces and e-commerce platforms.
Tighter rules on undocumented payments, purchases from non-registered persons, and cash-based business practices.
Enhanced administrative powers for tax authorities and the formalisation of vendor/supplier payments.

Highlighted reform measures

Some of the most significant changes already in motion or newly legislated are:

Under Section 21 of the Income Tax Ordinance, 2001, expenses paid via non-banking/non-digital means and above specified thresholds may be partially disallowed. :contentReference[oaicite:3]{index=3}
For purchases from suppliers who are not registered with an NTN (National Tax Number), up to 10% of the expense may be disallowed as deductible. :contentReference[oaicite:4]{index=4}
Online marketplaces and digital platforms now face specific withholding and registration obligations for vendors using their systems: for example, 1 % withholding on digital payments and 2 % on cash-on-delivery services. :contentReference[oaicite:5]{index=5}
On the sales tax front, electronic invoicing and digital record-keeping are being strengthened; e-commerce sales and cross-border digital services face additional scrutiny. :contentReference[oaicite:6]{index=6}
The Budget for FY 2025-26 targets a revenue collection of approximately Rs 14.131 trillion in direct taxes, up from ~Rs 11.9 trillion for the previous year — signalling an aggressive push on tax collection. :contentReference[oaicite:7]{index=7}

Who is impacted and how

These reforms are broad in scope, meaning they will affect a variety of taxpayers—but some groups should pay particular attention:

Businesses & SMEs: Withholding obligations, digital transaction rules and vendor registration requirements mean that normal business processes may need updating.
Online sellers, marketplaces & e-commerce operators: If you operate in online sales, delivery services, or digital platforms you may face new registration and withholding duties.
Service providers & freelancers: Withholding tax changes may shift tax collection burdens onto payers rather than recipients.
Individuals with high cash-based transactions: Buying large assets, paying suppliers in cash or conducting major transactions outside banking channels may trigger new disallowance rules.

Practical risks to consider

While many reforms aim to formalise the economy and support compliance, they also present practical risks for unprepared taxpayers:

Cash-flow disruption: A business that must now withhold tax on payments may see net payments to vendors fall—requiring alternate liquidity planning.
System/process upgrades: If you operate or pay digital vendors, your accounting software, vendor onboarding, payment systems may need immediate revision.
Cost of non-compliance: Disallowed expenses, penalties for non-registration or +50% disallowance for non-bank transactions may significantly increase effective tax burden. :contentReference[oaicite:8]{index=8}
Complex contract implications: Agreements drafted under old tax-withholding regimes may become outdated—and could expose either party to unanticipated tax exposure.

What you should do now – a checklist

To stay ahead and avoid surprise exposures, we recommend the following immediate steps:

Review your supplier/vendor payment methods: Are you paying through banking channels or digital platforms? If not, assess the risk of disallowed expenses.
Ensure all vendors have a valid NTN and are tax-registered: Payments to non-registered persons may increase your taxable base.
Update accounting, payroll and vendor-management systems: Ensure your systems capture withholding obligations, digital payment classifications and vendor registration status.
Train your finance team and procurement department: Awareness of new thresholds, bank-vs-cash payment limits and correct invoice documentation is essential.
Conduct a cash-flow and tax-burden scenario analysis: Modelling withholding tax changes, vendor payment shifts or new digital platform costs will help you anticipate impact.
Seek professional tax & legal advice: Early engagement with specialists can often identify opportunities to structure payments, contracts and vendor relationships optimally in light of change.

How Ali Law Associates can support you

At Ali Law Associates, we specialise in bridging the gap between business operations and tax-legal compliance. Our services include:

Regulatory monitoring: Keeping you updated on draft rules, compliance deadlines and evolving FBR policy.
Risk and tax-burden assessment: Running impact models for your specific business profile and identifying exposures or mitigation opportunities.
Due-diligence for vendors and contracts: Assessing vendor tax-registration status, withholding obligations and contract tax clauses so your operations remain compliant.
Withholding & digital-platform advisory: Helping businesses design workflows, systems and controls that meet the new digital-economy tax requirements.
Representation & dispute advisory: Should you face a tax-authority query or audit, we provide professional representation and documentation support.

Frequently Asked Questions (FAQ)

Q: When will these new rules be enforced?
A: Many of the Finance Act 2025 provisions came into force from July 1, 2025 (start of FY 2025-26) while others may be subject to SROs, regulations or policy notifications in coming months. :contentReference[oaicite:9]{index=9}

Q: Are small businesses exempt from the withholding obligations?
A: The legislation does not uniformly exempt small businesses; instead it provides thresholds and conditions—your business should confirm if your operations qualify and whether you should register accordingly.

Q: How should we handle existing contracts negotiated under prior tax rules?
A: Review vendor/client contracts for payment terms, tax-withholding responsibilities and ensure they are updated to reflect new obligations. Where appropriate, include protective clauses or renegotiate payment mechanisms.

Real-world scenario: what a business should do

Imagine a mid-sized manufacturing company in Lahore that purchases services from contractors and receives payments from digital marketplaces. Under the new regime:

If the company pays a service provider over Rs 200,000 in one invoice or cumulatively through non-banking channels, it risks disallowance of up to 50% of that expense. :contentReference[oaicite:10]{index=10}
The company must verify whether that service provider is registered with an NTN. If not, 10% of the payment may be non-deductible.
If the company is also a vendor on an online marketplace, the platform may apply 1% withholding on payments made to it (digital settlement) and/or 2% for cash-on-delivery arrangements. The company needs to factor this into pricing and net cash receipt calculations. :contentReference[oaicite:11]{index=11}
The business should update its accounting software so that payments made via bank versus cash/physical instruments are flagged, and appropriate tax controls built in before year-end.

Strategic takeaway

These reforms reflect a clear direction: the tax authorities are shifting from manual, reactive compliance toward digital-first, formalised processes. While this may increase the administrative burden in the short term, businesses that adapt early will benefit through fewer surprises, better tax-risk control and potentially improved competitive advantage through documented transactions.

In essence: review your operations, update your systems, get your vendors in order, and engage proactively with legal and tax advisers. Consider these reforms not just as a compliance burden, but as an opportunity to strengthen your financial architecture and vendor-ecosystem transparency.

Contact us for tailored guidance

At Ali Law Associates, our mission is to help you “Automate the People and Ease their Work and Save Their Time in the Business Field and the Business Growth.” We invite you to contact us for a bespoke assessment of how these tax changes may impact your business or personal tax strategy.

Ali Law Associates
Phone: +92 321 7702526
Website: alilawassociates.com.pk

Disclaimer: This article is intended for general information only and does not constitute legal or tax advice. Please consult Ali Law Associates for advice specific to your circumstances.