Karachi, September 5, 2024 – The Federal Board of Revenue (FBR) has explained the deduction of the initial allowance for eligible depreciable assets under the Income Tax Ordinance (ITO), 2001, which has been updated as of June 30, 2024.
The deduction falls under Section 23 of the Ordinance, which outlines specific provisions for businesses regarding tax calculations.
According to the FBR, the initial allowance is applicable to taxpayers who place an eligible depreciable asset into service in Pakistan for the first time during a tax year. This deduction is granted on the condition that the asset is being used by the taxpayer for business purposes for the first time, or in the year when commercial production begins, whichever occurs later. The purpose of this allowance is to incentivize businesses to invest in new assets, fostering economic growth.
The amount of the initial allowance is calculated by applying the specified rate, as mentioned in Part II of the Third Schedule of the Ordinance, to the cost of the asset. To determine the cost of the asset, the rules laid out in Section 76 are applied. This ensures uniformity in how the costs of assets are computed across various businesses and industries.
The ordinance further clarifies that certain financial institutions, such as leasing companies, investment banks, modarabas, scheduled banks, and development finance institutions, are entitled to claim this deduction on leased assets. However, the deduction in these cases is allowed only against the rental income derived from leasing such assets, adding a layer of specificity for financial sector entities.
Additionally, the FBR explains that not all assets qualify for the initial allowance. Excluded from eligibility are:
• Road transport vehicles, unless they are used for hire.
• Furniture and fittings.
• Any plant or machinery previously used in Pakistan.
• Plant or machinery for which a deduction has already been granted under other provisions of the ordinance.
• Immovable property or any structural improvements made to immovable property.
By delineating these exclusions, the FBR ensures that the allowance is granted only for new, productive investments that genuinely contribute to the economic activities within the country. This measure also prevents businesses from double-dipping by claiming deductions on assets that have already received tax benefits.
This clarification by the FBR aims to facilitate businesses in planning their tax obligations and making informed decisions regarding asset investments, thereby contributing to overall economic development.
