The Federal Board of Revenue (FBR) has clarified the entitlement of initial allowance for taxpayers during the tax year 2025-26.
The explanation follows amendments made through the Finance Act, 2025, which updated several provisions of the Income Tax Ordinance, 2001.
What is Initial Allowance?
According to Section 23 of the Income Tax Ordinance, 2001, initial allowance is a deduction available to a person who brings an eligible depreciable asset into service in Pakistan for the first time. This allowance is provided in the tax year in which the asset is first used for business purposes or in the year commercial production begins, whichever occurs later.
The amount of the initial allowance is calculated by applying the prescribed rate, as outlined in Part II of the Third Schedule, against the cost of the asset. For the purpose of determining cost, the rules under Section 76 of the Ordinance are applied.
Eligible and Non-Eligible Assets
The law specifies that only “eligible depreciable assets” qualify for this deduction. These generally include machinery and equipment used in business operations. However, some assets are excluded, such as:
• Road transport vehicles (unless used for hire),
• Furniture and fittings,
• Previously used plant or machinery in Pakistan,
• Plant or machinery that has already been fully deducted under another section,
• Immovable property and structural improvements.
Special Cases
Where the asset is owned by a leasing company, investment bank, modaraba, scheduled bank, or development finance institution and leased to another person, the deduction can only be claimed against the rental income earned from that asset.
Why Does This Matter?
The provision of initial allowance is an important incentive for businesses investing in new machinery and equipment. It encourages modernization, supports industrial expansion, and reduces the tax burden in the early years of investment.
Disclaimer: The information provided in this article is for general guidance and awareness purposes only. It does not constitute legal or tax advice. Taxpayers are advised to consult the Federal Board of Revenue (FBR) regulations or seek professional advice from a qualified tax consultant before making any financial or compliance decisions regarding initial allowance or other tax matters.