Karachi, September 6, 2024 – The Federal Board of Revenue (FBR) has clarified the provisions regarding deductions for intangibles under the Income Tax Ordinance, 2001. In its latest update, issued until June 30, 2024, the FBR has outlined the procedures and rules for the amortization of intangible assets, providing a clear framework for taxpayers.
Section 24 of the Income Tax Ordinance, 2001, governs the deduction of intangibles. According to the FBR, the amortization deduction is available to businesses for intangible assets that are used to generate income chargeable to tax and that have a useful life exceeding one year. The rules are designed to ensure that businesses properly account for and deduct the cost of intangible assets over time, rather than all at once.
Key Provisions under Section 24
1. Eligibility for Deduction: Taxpayers are entitled to an amortization deduction for intangibles used wholly or partially in a tax year to derive income from business. However, this deduction is only applicable if no other section of the Income Tax Ordinance provides a full deduction for the cost of the intangible in the same tax year.
2. Amortization Formula: The amortization deduction is calculated by dividing the cost of the intangible by its normal useful life in years. If the intangible’s useful life is not determinable, the law assumes a default useful life of 25 years.
3. Partial Use: In cases where the intangible is used only partly for generating business income, the deduction is adjusted accordingly to reflect the proportion of the asset used for business purposes. Similarly, if the intangible is not used for the entire tax year, the deduction is prorated based on the number of days the intangible was in use.
4. Maximum Deduction: The total amount of deductions allowed cannot exceed the actual cost of the intangible asset, ensuring that businesses do not claim more than what they invested in acquiring or creating the intangible.
5. Disposal of Intangibles: Upon disposal of an intangible, no further amortization deduction is allowed for that year. If the proceeds from the sale exceed the written-down value of the intangible, the excess is treated as business income and is chargeable to tax. Conversely, if the proceeds are less than the written-down value, the shortfall is deducted from the taxpayer’s business income.
6. Determination of Written-Down Value: The written-down value at the time of disposal is calculated as the original cost of the intangible, reduced by the cumulative deductions claimed over the years. This ensures that the remaining value of the intangible is appropriately accounted for in the taxpayer’s financial records.
7. Definition of Intangibles: The ordinance broadly defines “intangibles” to include patents, inventions, copyrights, trademarks, scientific knowledge, software, franchises, intellectual property, and other rights or assets that provide a benefit for more than one year. Notably, self-generated goodwill and accounting adjustments are excluded from the definition.
This section of the law emphasizes a structured approach to handling intangible assets for tax purposes, helping businesses manage their finances more efficiently while complying with the tax regulations. By providing detailed guidelines, the FBR aims to foster transparency in how businesses report and deduct the value of intangibles, contributing to a more streamlined tax collection process.
