Businesses face detailed conditions on eligible assets, depreciation rates, disposal gains and leased property
ISLAMABAD: The Federal Board of Revenue (FBR) has laid down detailed conditions for claiming depreciation deductions against business income for Tax Year 2027, covering eligible assets, calculation methods, partial business use, disposal of assets and specific restrictions.
The provisions are contained in Section 22 of the Income Tax Ordinance, 2001, updated by the FBR up to June 30, 2026.
Under the rules, taxpayers can claim depreciation on depreciable assets used in a business during the relevant tax year. However, depreciation cannot be claimed on additions to capital assets where tax required to be deducted under Sections 152 or 153 has not been deducted and deposited with the government.
Such amounts cannot be included in the cost of assets for calculating tax depreciation.
Depreciation is generally calculated by applying the relevant rate prescribed in Part I of the Third Schedule to the written-down value of the asset at the beginning of the tax year.
Depreciation limited for partial business use
Where an asset is used partly to earn taxable business income and partly for another purpose, the depreciation deduction is restricted to the proportion attributable to its use in generating taxable business income.
For such assets, the written-down value is calculated on the basis that the asset was used solely to derive taxable business income.
For an asset acquired during the tax year, the written-down value is determined by reducing its cost by any initial allowance available under Section 23.
For assets acquired in earlier years, the written-down value represents the original cost less total depreciation deductions, including any initial allowance, already claimed in previous tax years.
The FBR has also clarified that depreciation is considered to have been allowed during a period in which a business’s income is exempt if its buildings, furniture, plant or machinery are used for business purposes during that period.
Once the exemption period ends, the written-down value is determined after accounting for the relevant depreciation and initial allowances.
Total depreciation cannot exceed asset cost
The total depreciation and initial allowance deductions claimed throughout the ownership period cannot exceed the original cost of the asset.
The rules also prescribe treatment for depreciable assets that are disposed of.
No depreciation deduction is allowed for the tax year in which an asset is disposed of. If the sale consideration exceeds the asset’s written-down value, the excess is treated as taxable business income.
Where the consideration is lower than the written-down value, the difference is allowed as a deduction against business income for that year.
Special treatment for leased assets
Specific rules apply to depreciation claimed by leasing companies, investment banks, modarabas, scheduled banks and development finance institutions.
Depreciation relating to assets owned by these institutions and leased to another person can only be deducted against the lease rental income generated from those assets.
Such leased assets are treated as being used in the business of the relevant leasing company or financial institution.
Rs7.5m depreciation limit for certain vehicles
For a passenger transport vehicle that is not used for hire, the depreciable cost is capped at Rs7.5 million.
The cost of immovable property or structural improvements to immovable property does not include the cost of the underlying land.
The rules further provide that where consideration received from disposing of immovable property exceeds its cost, the consideration received is treated as the property’s cost for depreciation purposes.
Tax treatment of assets transferred abroad
Where a depreciable asset previously used in Pakistan is exported or transferred outside the country, the taxpayer is treated as having disposed of the asset at the time of export or transfer.
For this purpose, the consideration received is deemed to be equal to the cost of the asset.
What qualifies as a depreciable asset?
The FBR defines a depreciable asset as tangible movable or immovable property, other than unimproved land, or a structural improvement to immovable property that:
•has a normal useful life of more than one year;
•is expected to lose value through normal wear and tear or obsolescence; and
•is wholly or partly used to derive taxable business income.
An asset is excluded if another provision of the Income Tax Ordinance already allows a deduction for its entire cost in the tax year in which it was acquired or the improvement was made.
Structural improvements covered
The definition of structural improvement covers a broad range of infrastructure and property improvements, including buildings, roads, driveways, car parks, railway lines, pipelines, bridges, tunnels, airport runways, canals, docks, wharves, retaining walls, fences, power lines, water and sewerage pipes, drainage systems, landscaping and dams.
The FBR has also prescribed a special rule for assets jointly owned by a taxpayer and an Islamic financial institution licensed by the State Bank of Pakistan or the Securities and Exchange Commission of Pakistan under Musharika or diminishing Musharika financing.
Such an asset is treated as wholly owned by the taxpayer for the purposes of the depreciation provisions.
The detailed rules under Section 22 set out the circumstances in which businesses can claim depreciation deductions while ensuring that capital assets, disposal proceeds and tax compliance requirements are properly accounted for when determining taxable business income for Tax Year 2027.