The Federal Board of Revenue (FBR) has announced the restoration of the 100 percent depreciation deduction for depreciable assets used in a business for the first time.
This significant update related to depreciation was implemented through the Finance Act, 2022, and detailed in Income Tax Circular No. 15 of 2022/2023.
Previously, the Finance Act, 2020, imposed a restriction on the depreciation deduction, allowing only 50 percent of the depreciation to be claimed in the first year of an asset’s use in a business. The remaining 50 percent could be claimed in the year of disposal of such assets. This limitation aimed to regulate and streamline the depreciation claims but received feedback from various business sectors regarding its impact on investment and asset management.
The recent amendment has lifted this restriction, allowing businesses to claim a full 100 percent depreciation deduction in the year they introduce a depreciable asset into their operations. This change is expected to provide immediate tax relief and incentivize businesses to invest in new assets, potentially boosting economic activity.
In addition to restoring the full depreciation deduction, the FBR has made other notable amendments:
1. Withdrawal of 50% Depreciation on Disposal: The entitlement to claim 50 percent depreciation deduction during the year of disposal has been removed. Previously, businesses could claim the remaining 50 percent depreciation when disposing of an asset, but this provision no longer applies.
2. Increased Limit for Passenger Transport Vehicles: The cost limit for depreciation deduction on passenger transport vehicles not used for hire has been significantly increased from Rs 2.5 million to Rs 7.5 million. This adjustment reflects current market values and the rising cost of vehicles, providing businesses with more realistic depreciation benefits.
3. Exclusion of Immovable Property: The definition of eligible depreciable assets for initial allowance now excludes immovable property and structural improvements to immovable property. This exclusion clarifies that these types of assets do not qualify for initial depreciation allowances, aligning the tax treatment with the nature of these investments.
The restoration of the 100 percent depreciation deduction is a strategic move by the FBR to encourage businesses to invest in new assets, enhance their operational capabilities, and support overall economic growth. By providing immediate tax benefits, this policy change is likely to enhance liquidity and reduce the tax burden on businesses, fostering a more conducive environment for business expansion and technological upgrades.
The FBR’s proactive approach in updating these regulations underscores its commitment to supporting the business community and promoting sustainable economic development. Businesses are advised to review these changes and consult with tax professionals to optimize their tax strategies and take full advantage of the new depreciation provisions.
In summary, the FBR’s restoration of the full depreciation deduction and other related amendments are poised to positively impact businesses, encouraging investment in new assets and contributing to economic revitalization in Pakistan.
