Tax concession on pre-commencement expenditure

Tax concession on pre-commencement expenditure

The Federal Board of Revenue (FBR) has unveiled the updated Income Tax Ordinance, 2001, effective up to June 30, 2021. The comprehensive amendments incorporated through the Finance Act, 2021, bring crucial changes to various sections of the ordinance, including Part III, Third Schedule, outlining the rates for tax concession on pre-commencement expenditure.

According to the latest ordinance, the rate of amortization for pre-commencement expenditure falls under Section 25 and is set at 20%. This provision outlines the conditions and limitations under which individuals can claim deductions for expenses incurred before the commencement of a business, with the aim of deriving income subject to taxation.

Section 25 of the Income Tax Ordinance, 2001, delves into the details of pre-commencement expenditure, specifying the procedures and restrictions associated with claiming deductions. The key points of Section 25 are highlighted below:

(1) A person shall be allowed a deduction for any pre-commencement expenditure in accordance with this section.

This establishes the legal basis for individuals to claim deductions for expenses incurred before the commencement of their business activities.

(2) Pre-commencement expenditure shall be amortized on a straight-line basis at the rate specified in Part III of the Third Schedule.

The amortization process is to be carried out on a straight-line basis, emphasizing simplicity and fairness. The rate specified in Part III of the Third Schedule is set at 20%, providing clarity on the deduction process.

(3) The total deductions allowed under this section in the current tax year and all previous tax years in respect of an amount of pre-commencement expenditure shall not exceed the amount of the expenditure.

To prevent abuse and ensure fiscal responsibility, the ordinance imposes a cap on the total deductions allowed, ensuring that the sum does not surpass the actual amount of pre-commencement expenditure incurred.

(4) No deduction shall be allowed under this section where a deduction has been allowed under another section of this Ordinance for the entire amount of the pre-commencement expenditure in the tax year in which it is incurred.

This clause aims to avoid double deductions by stipulating that if a deduction has already been claimed under another section of the ordinance for the entire pre-commencement expenditure, no further deduction can be claimed under Section 25.

(5) In this section, “pre-commencement expenditure” means any expenditure incurred before the commencement of a business wholly and exclusively to derive income chargeable to tax, including the cost of feasibility studies, construction of prototypes, and trial production activities, but shall not include any expenditure which is incurred in acquiring land, or which is depreciated or amortised under section 22 or 24.

This definition provides clarity on the types of expenses that qualify as pre-commencement expenditure, excluding land acquisition costs or expenditures already covered under other sections of the ordinance.

(Disclaimer: The text of the above section is provided for informational purposes. Team endeavors to offer the correct version of the text but is not liable for any errors or omissions.)

The updated provisions regarding pre-commencement expenditure under Section 25 bring transparency and specificity to the taxation process, offering businesses a clear framework for claiming deductions and promoting compliance with the Income Tax Ordinance, 2001.