FBR urged to extend tax credit to investment in infrastructure

KARACHI: Federal Board of Revenue (FBR) has been urged to extend tax credit facility to investment in factory building and manufacturing related infrastructure.

Pakistan Tax Bar Association (PTBA) in its tax proposals for budget 2019/2020 said that tax credit under section 65E of Income Tax Ordinance, 2001 is restricted to investment in plant and machinery.

Tax credit under section 65D is available only at the time of setting up a new industrial undertaking. No tax credit is given on subsequent expansion of such an industrial undertaking since section 65E restricts eligibility to companies formed before 01 July, 2011.

Expansion of plant or undertaking a new project involves investment in factory building and manufacturing related infrastructure and as such, these types of investments should also be made eligible for tax relief.

Expansion is also possible in industrial units’ set-up after 01 July, 2011.

It is, therefore, recommended that tax credit under section 65E should also be extended to investment in factory building and manufacturing related infrastructure.

Applicability of section 65E to only such companies’ setup after 01 July, 2011 may be relaxed to include industrial undertakings formed thereafter as well, which undergo expansion.

An increased availability of tax credits may act as an incentive to new investment since the investors foresee tax benefits which they may practically be able to utilize.

The tax bar further highlighted that tax credits under sections 65B and 65E are restricted to investment in plant and machinery.

The rational behind these tax credits is not the purchase of plant and machinery but industrial expansion and increased economic activity. In this regard, it may be appreciated that expansion of business (and the consequent increase in economic activity) is not achieved from plant and machinery in isolation and is, for all practical purposes, not possible without an appropriate support structure.

In order to streamline section 65B(4) with the wordings of section 65B(1), the following wording, in bold, may be inserted:-

“65B (4) make an investment for the purposes of extension, expansion, balancing, modernization and replacement of the plant and machinery.”
An explanation be added to sub-section (1) of Section 65B:-

“For removal of doubts, for the purposes of this section, it is declared that the words “purchase of a plant and machinery” includes all direct expenses which are necessary to make the Plant and Machinery in a workable condition and also includes factory buildings and manufacturing related infrastructure.”

Tax credit under Section 65E should also be extended to investment in factory building and manufacturing related infrastructure, the PTBA recommended.

The proposed amendment/modification in tax credits will clarify the ambiguity for the companies’ set-up before first day of July, 2011 and shall promote industrial expansion and increased economic activity.

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