Section 65B offers 10% and, in certain cases, 20% tax credits, but the incentives apply to specified historical investment periods.
ISLAMABAD: The Federal Board of Revenue (FBR) has clarified the tax credit available to companies making qualifying investments in plant and machinery under Section 65B of the Income Tax Ordinance, 2001, for Tax Year 2027.
According to the Income Tax Ordinance, 2001, updated up to June 30, 2026, a company can claim a 10 per cent tax credit on qualifying investment in plant and machinery used for the extension, expansion, balancing, modernisation or replacement of existing plant and machinery in an industrial undertaking established in Pakistan and owned by the company.
However, the provision is subject to a crucial historical limitation.
Section 65B 10% tax credit
Under Section 65B(1), a qualifying company is entitled to a tax credit equal to 10 per cent of the amount invested in eligible plant and machinery.
For example, where a qualifying investment amounted to Rs100 million, the tax credit would be Rs10 million, subject to the conditions prescribed under the law.
However, the investment covered by the main provision must have been made and the relevant plant and machinery purchased and installed between July 1, 2010 and June 30, 2019.
As a result, Section 65B does not provide a new 10 per cent tax credit for fresh investments made during Tax Year 2027.
The credit may be adjusted against tax payable, including minimum tax and final taxes payable under the relevant provisions of the Income Tax Ordinance.
For Tax Year 2019, the applicable rate was reduced to 5 per cent of the qualifying investment.
Special 20% tax credit
Section 65B also contains a separate provision for certain companies established in Pakistan before July 1, 2011.
Where such a company made an investment through 100 per cent new equity between July 1, 2011 and June 30, 2016 for balancing, modernisation or replacement of existing plant and machinery in an industrial undertaking owned by it, the tax credit was 20 per cent of the amount invested.
The credit was allowed in the tax year in which the relevant plant and machinery was installed.
Unused tax credit carry-forward
Where a taxpayer had no tax payable in the year in which the plant or machinery was installed, or its tax liability was lower than the available credit, the unused amount could be carried forward.
For investments covered under Section 65B(1), unused credit could be carried forward for up to two subsequent tax years.
For qualifying investments under Section 65B(4), the carry-forward period was up to five tax years.
The total amount claimed remains subject to the applicable limits and conditions under the relevant provision.
What companies should know for Tax Year 2027
The key point for companies reviewing their Tax Year 2027 tax position is that Section 65B does not provide a fresh 10 per cent tax credit for plant and machinery purchased and installed in 2026 or during Tax Year 2027.
The main 10 per cent provision relates to investments made during the historical period specified in the law.
The FBR may also recover a tax credit where it subsequently determines that one or more conditions for claiming the benefit were not fulfilled. In such circumstances, the credit may be treated as wrongly allowed and the taxpayer’s tax liability recomputed.
Companies therefore need to examine the investment date, installation date, nature of the plant and machinery and other statutory conditions before claiming any Section 65B benefit for Tax Year 2027.