Tax relief applies to qualifying new depreciable assets placed into business use in Pakistan for the first time
ISLAMABAD: The Federal Board of Revenue (FBR) has set out the conditions and categories of assets eligible for an initial allowance under the Income Tax Ordinance, 2001 for Tax Year 2027.
According to the Income Tax Ordinance, 2001, updated by the FBR up to June 30, 2026, Section 23 allows taxpayers to claim an initial allowance when qualifying depreciable assets are placed into service in Pakistan for the first time.
Initial allowance available on eligible assets
Under Section 23, a taxpayer who places an eligible depreciable asset into service in Pakistan for the first time during a tax year can claim an initial allowance.
The asset must be used by the taxpayer for business purposes for the first time. Alternatively, the allowance may be claimed in the tax year in which commercial production begins, whichever is later.
The initial allowance is calculated by applying the rate specified in Part II of the Third Schedule of the Income Tax Ordinance to the cost of the eligible asset.
The cost of an eligible depreciable asset is determined in accordance with Section 76 of the Ordinance.
Special rules for financial institutions
The FBR has prescribed separate treatment for leasing companies, investment banks, modarabas, scheduled banks and development finance institutions.
Where these institutions own assets and lease them to another person, the initial allowance relating to those assets can only be deducted against lease rental income earned from the relevant assets.
Assets excluded from initial allowance
The FBR has specified several categories of depreciable assets that do not qualify for the initial allowance.
These include:
•Road transport vehicles, unless they are used for hire;
•Furniture and fittings;
•Plant or machinery previously used in Pakistan;
•Plant or machinery for which another provision of the Income Tax Ordinance has already allowed a deduction for the asset’s entire cost in the tax year of acquisition; and
•Immovable property or structural improvements to immovable property.
The exclusion of previously used plant and machinery means that the initial allowance is primarily targeted at qualifying new assets being introduced into business operations in Pakistan.
Initial allowance supports business investment
The initial allowance provides businesses with an upfront tax deduction on qualifying capital assets in addition to the normal depreciation mechanism, subject to the conditions prescribed under the Income Tax Ordinance.
By limiting eligibility to specified depreciable assets placed into business use for the first time, the provisions are intended to provide tax relief for qualifying investment in productive business assets while preventing claims on used equipment, furniture, non-hire vehicles and excluded property.
Businesses seeking to claim the allowance for Tax Year 2027 will therefore need to ensure that their assets meet the eligibility requirements and that the relevant conditions concerning first-time business use or commencement of commercial production have been fulfilled.