Purchase of Assets Through Banking Channel — Section 75A, Income Tax Ordinance 2001 Pakistan

Introduction

The Federal Board of Revenue (FBR) has introduced strict documentation rules under the Income Tax Ordinance, 2001 to discourage cash transactions in high-value purchases across Pakistan. One of the most important provisions in this regard is Section 75A of the Income Tax Ordinance, 2001 — which mandates that certain assets above specified values must be purchased exclusively through proper banking channels or digital means.

This rule is a cornerstone of Pakistan's drive toward a documented economy. It promotes financial transparency, prevents tax evasion through undisclosed cash transactions, and ensures that high-value asset purchases leave a verifiable paper trail in the banking system.

Whether you are buying a house, a plot of land, a vehicle, or business machinery — if the value exceeds the prescribed threshold, paying in cash is not just inadvisable — it is legally prohibited under the Income Tax Ordinance, 2001.

What Does Section 75A Say?

Section 75A of the Income Tax Ordinance, 2001 states that no person shall purchase the following assets unless the payment is made through an approved banking or digital channel:

In simple terms: if you are buying expensive property or any high-value asset, the payment must flow from one bank account to another — creating a proper and verifiable financial record.

What Qualifies as an Approved Payment Method?

The law permits the following modes of payment for purchases covered under Section 75A:

• Crossed cheque — a cheque with two parallel lines drawn across it, payable only through a bank account
• Crossed demand draft (DD) — a banker's instrument drawn on another bank, crossed to ensure account-to-account transfer
• Crossed pay order (PO) — a payment instrument issued by a bank, payable to the named party through a bank account
• Any other crossed banking instrument — any banking instrument that ensures the payment passes through a bank account
• Digital means — including online bank transfers, RTGS (Real Time Gross Settlement), mobile banking, internet banking, and other electronic fund transfers

What is Immovable Property Under This Section?

For the purposes of Section 75A, immovable property includes:

• Residential houses and apartments
• Residential and commercial plots
• Commercial buildings and offices
• Agricultural land
• Industrial property and warehouses
• Any other land or structure permanently attached to the earth

The threshold of Rs. 5,000,000 applies to the Fair Market Value (FMV) of the property — not necessarily the declared or agreed sale price.

What is Fair Market Value (FMV) for This Purpose?

For immovable property, the Fair Market Value is determined as the higher of the following two values:

1. The value notified by FBR under Section 68(4) of the Income Tax Ordinance, 2001 — which is the FBR's own valuation table for different localities and cities, or
2. The value fixed by the Provincial Authority for stamp duty purposes — the District Collector (DC) rate used for property registration and stamp duty calculation

Whichever of these two values is higher is taken as the FMV for Section 75A compliance. This prevents buyers and sellers from understating the transaction value to fall below the Rs. 5,000,000 threshold and avoid the banking channel requirement.

Practical Example: You agree to buy a plot for Rs. 4,500,000 with the seller. However, the FBR valuation table shows the same plot at Rs. 5,200,000 and the DC rate is Rs. 4,800,000. Since the FBR rate (Rs. 5,200,000) is higher than the DC rate, the FMV is Rs. 5,200,000 — which exceeds the Rs. 5,000,000 threshold. Therefore, the payment must be made through banking channels even though the agreed price is below Rs. 5 million.

What Happens If You Violate Section 75A?

Failure to comply with Section 75A can result in two serious and permanent tax consequences:

Consequence 1 — No Tax Allowances or Depreciation

If an asset is purchased in violation of Section 75A (i.e., through cash), it will not qualify for any tax allowances under the following sections of the Income Tax Ordinance, 2001:

• Section 22 — Depreciation allowance on depreciable assets (machinery, equipment, vehicles)
• Section 23 — Initial allowance on eligible depreciable assets
• Section 24 — Accelerated depreciation on specified assets
• Section 25 — First Year Allowance on certain assets

This means that a business owner who purchases machinery worth Rs. 5,000,000 in cash cannot claim annual depreciation on that machinery — losing a significant and recurring tax deduction every year.

Consequence 2 — Purchase Cost Not Recognised for Capital Gains Tax

This is the most damaging consequence. When you eventually sell the asset, the tax authorities may refuse to recognise your purchase cost under Section 76 of the ITO 2001. This dramatically increases your taxable capital gain.

In this example, the taxpayer's CGT liability could increase by 4 to 5 times simply because they paid in cash instead of through a bank. This is a permanent and irreversible financial loss.

Comparison — Banking Channel vs Cash Payment

By simply using a banking channel, this taxpayer saves Rs. 1,200,000 in Capital Gains Tax on the same property transaction.

Why This Law Was Introduced

Section 75A was introduced as part of Pakistan's broader strategy to:

• Reduce the circulation of black money — undocumented cash that circulates outside the formal banking system
• Encourage digital and banking transactions — making financial flows traceable and auditable
• Improve tax compliance — ensuring that high-value transactions are properly declared and taxed
• Strengthen Pakistan's documented economy — making the economy more transparent for investors, businesses, and international financial institutions
• Reduce money laundering risk — large cash transactions in real estate are a common channel for parking illicit funds

Pakistan's real estate sector in particular has historically been used for undisclosed cash transactions. Section 75A directly targets this practice by making banking-channel payments a legal requirement for high-value property deals.

Practical Guidelines for Buyers and Sellers

1. Always check FBR and DC valuations before agreeing on payment method
   Even if the agreed price is below Rs. 5,000,000, the FBR or DC valuation may exceed the threshold. Check both valuations before deciding to pay in cash.
2. Use a crossed cheque or bank transfer for all property transactions above Rs. 5M
   Ensure the payment is traceable — bank statement, IBFT record, or crossed cheque copy should be kept as evidence.
3. For any asset above Rs. 1M — always use banking channel
   This includes vehicles, business machinery, equipment, and other high-value movable assets.
4. Keep documentary evidence of all banking transactions
   Bank statements, pay order receipts, crossed cheque copies, and IBFT confirmation messages should be preserved for at least 6 years (the FBR's standard audit window).
5. Avoid splitting payments to fall below the threshold
   FBR can treat artificially split payments as a single transaction if they are clearly related to the same asset purchase.

Frequently Asked Questions (FAQs)

Q1: What if I paid part of the purchase price in cash and the rest through a bank?
The law requires the entire payment to be made through approved banking channels. Partial cash payment may still constitute a violation of Section 75A. To be safe, all payments for a qualifying transaction should be made through the bank.

Q2: Does Section 75A apply to agricultural land?
Yes. Agricultural land is immovable property. If the FMV exceeds Rs. 5,000,000, the payment must be made through banking channels regardless of whether the property is agricultural, residential, or commercial.

Q3: I am buying a vehicle for my business worth Rs. 2,000,000. Must I pay through a bank?
Yes. A vehicle is an "other asset" and since its value (Rs. 2,000,000) exceeds the Rs. 1,000,000 threshold, the payment must be made through a banking channel or digital means.

Q4: Does this rule apply to purchases from private sellers (not businesses)?
Yes. Section 75A applies to all purchases regardless of whether the seller is an individual, business, or company. The obligation rests on the buyer to ensure payment is made through approved channels.

Q5: Can I pay through a mobile wallet like JazzCash or Easypaisa?
Digital payments through regulated electronic money institutions (EMIs) may qualify as "digital means" under Section 75A. However, it is advisable to use bank-to-bank transfers (IBFT) or crossed banking instruments for large transactions to ensure full compliance.

Q6: What if I inherited the property and did not pay for it? Does Section 75A apply?
Section 75A applies to purchases — transactions where consideration is paid. Inheritance involves no purchase price, so Section 75A does not apply to inherited property. However, when you sell inherited property, the cost basis and CGT calculation will apply under the relevant provisions of ITO 2001.

Q7: Will FBR automatically know if I violated Section 75A?
Not always immediately. However, when you sell the property and file your tax return, FBR can cross-check property purchase records with banking data. If no banking transaction is found for the purchase, FBR may disallow the cost during assessment or audit.

Conclusion

Section 75A of the Income Tax Ordinance, 2001 is a powerful tool that the government uses to ensure high-value asset transactions pass through the formal banking system. The consequences of non-compliance — loss of depreciation allowances and disallowance of purchase cost for CGT purposes — can be financially devastating.

The rule is straightforward: if you are purchasing immovable property worth more than Rs. 5,000,000, or any other asset worth more than Rs. 1,000,000, always pay through a crossed cheque, pay order, demand draft, or digital bank transfer. This simple habit protects you from severe tax consequences in the future.