The FBR has outlined how the tax cost of assets is determined, covering purchases, business use, inheritance, foreign currency loans and partial disposals.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the rules for determining the cost of assets for tax purposes under Section 76 of the Income Tax Ordinance, 2001, updated up to June 30, 2026, for Tax Year 2027.
Section 76 establishes how the cost of an asset is determined for the purposes of the Income Tax Ordinance, subject to the specific provisions and exceptions contained in the law.
Cost of purchased assets
Under Section 76(2), the cost of an asset purchased by a person generally comprises several components.
These include the total consideration paid for the asset, including the fair market value of any consideration provided in kind, determined at the time of acquisition.
The cost also includes incidental expenditure incurred in acquiring or disposing of the asset, as well as expenditure incurred to alter or improve it.
However, expenditure on the acquisition, disposal, alteration or improvement of an asset that has already been fully allowed as a deduction under the Income Tax Ordinance is excluded from the asset’s cost.
Assets converted to business use
Section 76(3) provides a specific rule for assets treated as acquired when a personal asset is applied to business use under Section 75.
In such cases, the cost of the asset is its fair market value on the date it is applied to business use.
For an asset produced or constructed by a person, Section 76(4) provides that its cost comprises the total expenditure incurred in producing or constructing the asset, along with qualifying incidental, alteration or improvement expenditure.
Foreign currency loans
The Ordinance also contains specific provisions for assets acquired through foreign currency-denominated loans.
Where the liability under such a loan increases or decreases in rupee terms before the loan is fully repaid, the resulting increase is added to the cost of the asset, while any decrease is deducted from the cost.
The law further provides that differences arising from fluctuations in foreign currency exchange rates are taken into account in the year in which they occur for depreciation purposes.
In determining whether the liability has increased or decreased, the taxpayer’s position under any hedging agreement relating to the loan must also be taken into account.
Disposal of part of an asset
Where only part of an asset is disposed of, Section 76(7) requires the cost to be apportioned between the portion retained and the portion disposed of.
The apportionment is made according to the respective fair market values of the two portions, determined at the time the asset was originally acquired.
This provision ensures that the relevant portion of the original asset cost can be attributed to the part that has been disposed of.
Assets acquired through taxable or exempt amounts
The law also establishes special rules where the acquisition of an asset represents the derivation of an amount chargeable to tax.
In such circumstances, the cost of the asset is the amount charged to tax plus any amount paid by the person for the asset.
Where the acquisition represents an amount that is exempt from tax, the cost is the exempt amount plus any amount paid for the asset.
These provisions determine the tax cost where an asset is acquired through an amount that has a specific tax treatment under the Ordinance.
Inherited immovable property
Section 76(8A) contains a specific provision for immovable property acquired by an individual through inheritance.
In such cases, the cost of the property in the hands of the beneficiary is its fair market value, as defined under the Ordinance, determined in accordance with Section 68(5) when the property is transferred to the beneficiary.
The provision therefore establishes the tax cost of inherited immovable property for the individual receiving it.
Grants and subsidies excluded from cost
Under Section 76(10), the cost of an asset does not include any grant, subsidy, rebate, commission or other assistance received or receivable in respect of its acquisition.
An exception applies where such assistance is chargeable to tax under the Income Tax Ordinance.
The law also clarifies that a loan, whether repayable with or without profit, is not treated as such assistance for this purpose.
FBR may prescribe cost rules
Finally, Section 76(11) empowers the FBR to prescribe rules for determining the cost of any asset.
The provisions of Section 76 therefore establish a framework for determining an asset’s tax cost in a range of circumstances, including ordinary purchases, construction, conversion of personal assets to business use, foreign currency financing, partial disposals, inheritance and acquisitions involving taxable or exempt amounts.