Karachi, August 29, 2023 – The Federal Board of Revenue (FBR) has taken a significant step toward providing tax relief to eligible taxpayers by identifying those qualified for the grant of an initial allowance.
This move comes following the issuance of an updated Income Tax Ordinance, 2001 for the tax year 2023-24, which includes detailed provisions regarding the initial allowance.
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Under Section 23 of the ordinance, the initial allowance is defined and outlined as follows:
(1) Eligible Assets and Initial Allowance: A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year shall be allowed a deduction, referred to as an “initial allowance.” This allowance is granted if the asset is used by the person for the purposes of their business for the first time or in the tax year in which commercial production is commenced, whichever comes later.
(2) Computation of Initial Allowance: The amount of the initial allowance for a person shall be calculated by applying the rate specified in Part II of the Third Schedule against the cost of the asset.
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(3) Cost Determination: The rules outlined in Section 76 of the ordinance will be applied to determine the cost of an eligible depreciable asset for the purposes of this section.
(4) Deduction Restrictions: A deduction allowed under this section to entities such as leasing companies, investment banks, modarabas, scheduled banks, or development finance institutions, in respect of assets owned by them and leased to another person, shall be deducted only against the leased rental income derived from such assets.
(5) Eligible Depreciable Asset Definition: In this section, “eligible depreciable asset” refers to a depreciable asset, with certain exceptions:
(a) Road transport vehicles unless the vehicle is plying for hire.
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(b) Furniture, including fittings.
(c) Plant or machinery that has been previously used in Pakistan.
(d) Plant or machinery in relation to which a deduction has been allowed under another section of this Ordinance for the entire cost of the asset in the tax year in which the asset is acquired.
(e) Immovable property or structural improvements to immovable property.
This provision is aimed at incentivizing investment in new, productive assets by offering tax relief to businesses and individuals who contribute to economic growth by adding fresh depreciable assets to the Pakistani economy. It is expected to encourage capital expenditure and modernization, ultimately fostering economic development in the country.
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The FBR’s identification of eligible taxpayers for this initial allowance is a significant step in facilitating compliance with the tax regulations and ensuring that deserving individuals and entities benefit from this tax incentive.
