Karachi, September 3, 2023 – The Federal Board of Revenue (FBR) has issued guidelines specifying conditions for allowing deductions for bad debts during the tax year 2024.
These guidelines are outlined in the updated Income Tax Ordinance, 2001, which became effective on July 1, 2023, and provides clarity on the deduction of bad debts.
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Bad debts are eligible for deduction under Section 29 of the Income Tax Ordinance, 2001, and the following conditions must be met for a person to claim such a deduction during a tax year:
1. Inclusion in Business Income: The amount of the debt should have been either previously included in the person’s income from business subject to taxation or should pertain to money lent by a financial institution in the course of generating income from business subject to taxation.
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2. Account Write-off: The debt or a portion of it must be formally written off in the accounts of the person during the tax year for which the deduction is sought.
3. Reasonable Grounds for Irrecoverability: There should be reasonable grounds for believing that the debt is irrecoverable.
Furthermore, the amount of deduction allowed to an individual under this section for a particular tax year should not exceed the amount of the debt that was written off in the accounts during that tax year.
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In situations where an individual has been granted a deduction for a bad debt in a particular tax year, and subsequently, they receive any amount in cash or kind related to that debt in a later tax year, the following rules shall apply:
• If the amount received exceeds the difference between the total bad debt and the amount previously allowed as a deduction under this section, the excess will be included in the person’s income under the “Income from Business” category for the tax year in which it was received.
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• If the amount received is less than the difference between the total bad debt and the amount allowed as a deduction under this section, the shortfall will be allowed as a bad debt deduction when computing the person’s income under the “Income from Business” category for the tax year in which it was received.
These guidelines provide clarity on the conditions and limitations for claiming deductions related to bad debts, offering businesses and individuals a framework for managing their financial records in accordance with tax regulations.
