Section 26 of the Income Tax Ordinance, 2001, provides a significant incentive for businesses in Pakistan. The Federal Board of Revenue (FBR) has incorporated this provision, updated up to June 30, 2021, through the Finance Act, 2021, encouraging businesses to engage in scientific research.
The text of Section 26 outlines the conditions and provisions related to the deduction for scientific research expenditure incurred in Pakistan during a tax year. The key elements of Section 26 are as follows:
(1) Purpose of the Deduction: According to Section 26(1), a person is allowed a deduction for scientific research expenditure incurred in Pakistan during a tax year. This deduction is permitted if the expenditure is incurred wholly and exclusively for the purpose of deriving income from a business chargeable to tax.
(2) Definitions: In Section 26(2), several crucial definitions are provided to clarify the scope and nature of scientific research and related terms. The definitions include:
• Scientific Research: Refers to any activity undertaken in Pakistan in the fields of natural or applied science for the development of human knowledge.
• Scientific Research Expenditure: Encompasses any expenditure incurred by a person on scientific research undertaken in Pakistan to develop their business. This includes contributions to a scientific research institution for the purpose of conducting research for the person’s business. However, certain exclusions are noted, such as expenditure on depreciable assets or intangibles, immovable property acquisition, or activities related to natural deposit exploration.
• Scientific Research Institution: Described as any institution certified by the Board as conducting scientific research in Pakistan.
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This section acknowledges the crucial role of scientific research in fostering economic development and technological progress. By allowing a deduction for scientific research expenditure, businesses are incentivized to invest in innovative projects that contribute to knowledge enhancement and, in turn, improve their competitiveness.
The provision emphasizes the importance of ensuring that the scientific research is conducted within the borders of Pakistan, aligning with the broader goal of promoting domestic innovation and research activities. The deduction serves as a financial encouragement for businesses to engage in research endeavors that can have positive implications for their growth and the overall advancement of knowledge in the country.
The certification process for scientific research institutions by the Board adds an additional layer of credibility to the initiative, ensuring that recognized entities are at the forefront of driving scientific exploration within Pakistan.
As businesses navigate the complexities of tax regulations, Section 26 emerges as a beacon, highlighting the government’s commitment to fostering a culture of research and development. It not only offers financial benefits to businesses but also underscores the significance of scientific contributions in shaping a progressive and forward-looking economy. As Pakistan seeks to position itself on the global innovation map, such initiatives play a pivotal role in building a foundation for sustainable and knowledge-driven economic growth.
