Tax incentive for companies on purchase of machinery and expansion has been clarified by the Federal Board of Revenue (FBR).
In a move aimed at encouraging industrial investment and expansion, the FBR has provided clarity on Section 65B of the Income Tax Ordinance, 2001. This section outlines tax credit incentives for companies investing in the purchase of plant and machinery for the extension, expansion, balancing, modernization, and replacement of existing industrial machinery. The clarification comes as part of the amendments introduced through the Finance Act, 2021, in the updated ordinance effective up to June 30, 2021.
Understanding Section 65B: Tax Credits for Industrial Investment
Section 65B of the Income Tax Ordinance, 2001, lays out the conditions under which a taxpayer, specifically a company, can avail tax credits for investments in industrial undertakings. If a company invests in the purchase of plant and machinery for purposes such as expansion or modernization, it is eligible for a tax credit equal to ten percent of the amount invested. This credit is deducted from the tax payable, including minimum tax and final taxes, as outlined in subsection (1) of the section.
However, for the tax year 2019, the rate of credit is adjusted to five percent, as specified in the first proviso. Importantly, the provisions related to the carry-forward of credits, specified in subsection (5), continue to apply beyond the tax year 2019.
The applicability of Section 65B is restricted to investments made in plant and machinery purchased and installed between July 1, 2010, and June 30, 2019, as per subsection (2). The credit is then deducted from the tax payable for the relevant tax year in which the machinery is installed, as stipulated in subsection (3).
In a special provision under subsection (4), the section is extended to companies set up in Pakistan before July 1, 2011, making investments through hundred percent new equity between July 1, 2011, and June 30, 2016, for the purposes of balancing, modernization, and replacement of existing plant and machinery. For this category, a higher credit of twenty percent is allowed against the tax payable.
The term “new equity” is clarified in the explanation section, referring to the definition in subsection (7) of Section 65E.
Carry-forward and Safeguards
Subsection (5) addresses scenarios where no tax is payable in the tax year of installation or when the tax payable is less than the credited amount. In such cases, the unused credit can be carried forward for up to two tax years for investments under subsection (1) and up to five tax years for investments under subsection (4). However, the aggregate deduction should not exceed the limit specified in the respective subsections.
To ensure compliance, subsection (6) empowers the Commissioner Inland Revenue to reassess cases where the conditions of Section 65B are not fulfilled, allowing the recalculation of tax payable accordingly.
As with previous clarifications, PkRevenue.com has issued a disclaimer, emphasizing that while efforts are made to provide accurate information, the team is not responsible for any errors or omissions. This clarification aims to provide businesses with a clear understanding of the tax incentives available for industrial investments, aligning with the government’s efforts to stimulate economic growth and development in the industrial sector.
