If most patients or clients pay in cash, how does the law treat cash income and cash expenses?

A general practitioner in a small town or an advocate at a district court may see very little money arrive by bank transfer. The Income Tax Ordinance, 2001 does not tax cash any differently from bank receipts, but it attaches conditions to cash in three places: how expenses are paid, what records are kept, and what happens when money cannot be explained.

What does the law say about cash income?

Fees are income when they are practice receipts, whatever form they take. Nothing in the Ordinance exempts cash fees or taxes them at a different rate. The practice profit is fees less allowed expenses, as for any business.

The duty that bites on cash is record-keeping. Section 174(1) requires every taxpayer to keep the records that are prescribed. The Income Tax Rules, 2002 prescribe them:

• Rule 29(1) requires every person with business income to keep proper books covering all sums of money received and spent, all services provided and obtained, all assets and all liabilities.
• Rule 30(3) sets the minimum for professionals, a group that expressly includes medical practitioners, legal practitioners, accountants, auditors, architects and engineers:
  • a serially numbered and dated patient-slip, invoice or receipt for each receipt, showing the professional’s name, address, National Tax Number or CNIC, the treatment or service (confidential details are not required), the amount charged, and the name and address of the patient or client;
  • a daily appointment and engagement diary;
  • a daily record of receipts, payments and expenses; and
  • vouchers of purchases and expenses.

General medical practitioners do not have to record the patient’s address on the slip or keep the appointment diary. Rule 29(3) makes duplicate copies of the slips part of the records. Section 174(3) and rule 29(4) require the records to be kept for six years after the end of the tax year.

What does the law say about cash expenses?

Section 21 disallows several expenses when they are paid in cash:

Rule	What it says
Section 21(m)	A salary above Rs. 32,000 a month is not deductible unless paid by crossed cheque, direct transfer to the employee’s bank account or digital means
Section 21(l)	An expense under a single account head that in aggregate exceeds Rs. 250,000 is not deductible unless paid from the business bank account by crossed cheque, draft, pay order or other crossed banking instrument. Online transfers between business accounts and credit card payments count, if verifiable from bank statements
Exceptions to 21(l)	Expenses not exceeding Rs. 25,000, and utility bills, freight charges, travel fare, postage, and taxes, duties, fees, fines or other statutory obligations
Section 174(2)	The Commissioner may disallow or reduce any deduction for which there is no receipt or other evidence, unless there was reasonable cause

Section 21(l) speaks of “business bank account”. A professional who pays practice bills from a personal account should read the clause closely, because the text ties the exemption to that account.

Worked example (illustrative figures)

Dr. Imran Qureshi runs a general practice in Multan. Most of his income arrives in cash. His made-up tax year 2027 expenses, all paid in cash, are:

Expense	Amount	Treatment
Receptionist, Rs. 40,000 a month	Rs. 480,000	Disallowed, section 21(m)
Nurse, Rs. 30,000 a month	Rs. 360,000	Allowed, not above Rs. 32,000 a month
Clinic renovation, one payment	Rs. 300,000	Disallowed, section 21(l), above Rs. 250,000
Repair of a steriliser, one payment	Rs. 20,000	Allowed, not above Rs. 25,000
Electricity bills	Rs. 150,000	Allowed, utility bills are excepted

Step by step:

1. Cash expenses paid: Rs. 480,000 + Rs. 360,000 + Rs. 300,000 + Rs. 20,000 + Rs. 150,000 = Rs. 1,310,000.
2. Disallowed: Rs. 480,000 + Rs. 300,000 = Rs. 780,000.
3. Allowed: Rs. 1,310,000 minus Rs. 780,000 = Rs. 530,000.

If the receptionist’s salary and the renovation had been paid through the business bank account, all Rs. 1,310,000 would have passed these two clauses. The example assumes the renovation is a revenue repair; if it were a capital improvement, section 21(n) would send it to depreciation instead.

What if …?

What if I cannot explain a deposit or a purchase? Section 111(1) covers any amount credited in the books, any investment, money or valuable article owned, and any expenditure, where the person offers no explanation of its source or the Commissioner finds the explanation unsatisfactory. The amount is added to income: suppressed receipts go under Income from Business, and other unexplained amounts under Income from Other Sources. Section 111(2) places Pakistan-source amounts in the tax year to which they relate, and section 174(3) keeps the six-year limit on records from applying to foreign matters caught by section 111(2)(ii).

What if a patient pays a single large bill in cash? Section 21(s) disallows fifty percent of the expenditure claimed in respect of a sale where the taxpayer received more than Rs. 200,000 otherwise than through a banking channel or digital means against a single invoice, including invoices for services. The clause does not explain how the expenditure linked to one invoice is to be worked out for a professional practice.

What if I buy supplies from someone without an NTN? Section 21(q) disallows ten percent of the expenditure attributable to purchases from persons who are not National Tax Number holders, whether paid in cash or not.

Common mistakes

• Recording only bank receipts. Rule 29(1) covers all money received, so cash fees belong in the daily record.
• Paying all staff in cash. The Rs. 32,000 limit in section 21(m) disallows the whole salary, not only the part above it.
• Splitting a large payment to stay under Rs. 25,000. Section 21(l) looks at the aggregate under a single account head.
• Discarding patient slips. Duplicate slips are part of the records under rule 29(3) and must be kept for six years.

What to check in the official text

Read section 21, clauses (l), (m), (q) and (s), section 174 and section 111. The record formats are in rules 29 and 30 of the Income Tax Rules, 2002, amended to 24 November 2023; later changes to those rules are outside this corpus. Section 174(5) lets the Board require certain persons to install electronic resources by notification in the official Gazette; any such notification is not in this corpus.