India’s Airspace Ban on Pakistan: Tax Implications for Businesses

India has closed its airspace to Pakistani airlines from April 30 to May 23, 2025, in retaliation for Pakistan’s ban on Indian airlines, following the Pahalgam attack that killed 26 tourists in occupied Kashmir, a development with significant tax implications for cross-border businesses. Our tax law firm urges clients to address compliance challenges amidst this escalating diplomatic conflict.

The airspace closure impacts Pakistan International Airlines (PIA), which operates routes to Kuala Lumpur via Indian airspace, forcing rerouting through longer paths like Chinese airspace, increasing fuel costs and operational expenses. Pakistan’s Prime Minister Shehbaz Sharif, in a call with US Secretary of State Marco Rubio, rejected India’s claims linking Pakistan to the attack, calling for a neutral investigation, while Pakistan alleges credible intelligence of an impending Indian military action, further straining ties.

This follows Pakistan’s closure of its airspace to Indian airlines last week, alongside measures like suspending trade, revoking South Asian visas, and India’s suspension of the Indus Water Treaty, as noted in posts on X. For clients engaged in cross-border trade or aviation-related businesses, these disruptions may affect expense deductibility under Section 29 of the Income Tax Ordinance, as increased fuel costs and rerouting expenses could be claimed as business deductions. However, suspended trade may reduce taxable income from bilateral transactions, requiring adjustments in sales tax and withholding tax (WHT) filings with the Federal Board of Revenue (FBR).

Clients must ensure compliance with FBR regulations, particularly on expense documentation and tax reporting, to avoid penalties amidst these disruptions. Businesses relying on trade with India should also prepare for tax adjustments due to halted transactions, ensuring accurate income reporting in upcoming returns.

Our firm advises clients to review financial impacts, adjust tax filings for increased costs, and maintain FBR compliance, navigating the fallout from this geopolitical crisis.