Tax credit for establishing industrial undertaking has been clarified by the Federal Board of Revenue (FBR) to facilitate the business community.
In a move aimed at fostering industrial growth and incentivizing investment, the Federal Board of Revenue (FBR) has clarified the provisions of Section 65E of the Income Tax Ordinance, 2001. This section provides a tax credit to taxpayers, particularly companies, for establishing industrial undertakings before July 1, 2011. The FBR’s clarification comes within the framework of amendments introduced through the Finance Act, 2021.
Section 65E outlines the eligibility criteria and the mechanism for availing tax credits for industrial undertakings. According to the section, a taxpayer, being a company set up in Pakistan before July 1, 2011, qualifies for the tax credit if it invests a minimum of seventy percent new equity, raised through the issuance of new shares, in the purchase and installation of plant and machinery for an industrial undertaking. This includes corporate dairy farming, with the intention of expanding existing facilities or undertaking new projects.
The tax credit, as outlined in subsection (1), is allowed for a period of five years beginning from the date of setting up or the commencement of commercial production from the new plant or expansion project, whichever is later.
Subsection (2) and (3) detail the methodology for calculating the tax credit. If a taxpayer maintains separate accounts for an expansion or new project, the tax credit is equal to the amount computed in subsection (3A) of the tax payable, including minimum tax and final taxes under the Ordinance, attributable to the specific project. In cases where separate accounts are not maintained, the credit is determined based on the proportion of new equity to the total equity, including new equity.
Subsection (3A) provides the formula for computing the tax credit, incorporating the amount of tax assessed, equity raised through new shares, and the total amount invested in plant and machinery.
The applicability of Section 65E is extended to industrial undertakings where plant and machinery are installed between July 1, 2011, and June 30, 2021, as specified in subsection (4).
Taxpayers can deduct the amount of the tax credit from the tax payable for a period of five years from the date of setting up or the commencement of commercial production from the new plant or expansion project, per subsection (5).
However, the FBR has included safeguards in subsection (6) to address any discrepancies. If, within five years of availing the tax credit, it is discovered that the business has been discontinued or the conditions specified in the section were not fulfilled, the Commissioner Inland Revenue has the authority to recompute the tax payable.
For clarity, “new equity” is defined in subsection (7) as equity raised through the fresh issuance of shares against cash by the company, excluding loans from shareholders or directors. Short-term loans and finances obtained for working capital needs from banking institutions do not disqualify taxpayers from claiming the tax credit.
As with previous clarifications, PkRevenue.com has issued a disclaimer stating that while efforts are made to provide accurate information, the team is not responsible for any errors or omissions. This clarification aims to provide transparency and guidance to businesses considering or involved in establishing industrial undertakings, emphasizing the government’s commitment to promoting industrial development and economic growth.
