Section 25 of the Income Tax Ordinance, 2001 provides a valuable tax benefit by allowing deductions for pre-commencement expenditure.
This section, as issued by the Federal Board of Revenue (FBR) and updated up to June 30, 2021, is designed to facilitate the growth of businesses by providing relief for certain essential costs incurred before the official commencement of operations.
The specific provisions of Section 25 are as follows:
25. Pre-commencement expenditure.—(1) A person shall be allowed a deduction for any pre-commencement expenditure in accordance with this section.
(2) Pre-commencement expenditure shall be amortized on a straight-line basis at the rate specified in Part III of the Third Schedule.
(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.
(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.
(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 amortized under section 22 or 24.
This section allows individuals or entities embarking on business ventures to claim deductions for specific costs incurred before the actual commencement of operations. These pre-commencement expenditures may include expenses related to feasibility studies, construction of prototypes, and trial production activities, all aimed at establishing and developing a business.
The amortization of pre-commencement expenditures is carried out on a straight-line basis, as specified in Part III of the Third Schedule. This systematic approach ensures a fair and consistent treatment of the deductible amount over time, aligning with responsible financial practices.
Importantly, the total deductions allowed under Section 25 for pre-commencement expenditure in the current tax year and all previous tax years must not exceed the actual amount of the expenditure incurred. This provision prevents potential misuse or exaggeration of pre-commencement costs for tax benefit purposes.
It’s worth noting that if a deduction has already been allowed under another section of the Income Tax Ordinance for the entire amount of the pre-commencement expenditure in the tax year of its incurrence, no additional deduction will be allowed under Section 25.
While Section 25 provides valuable tax relief for businesses, it’s crucial for taxpayers to understand the scope and limitations outlined in the ordinance. The definition of “pre-commencement expenditure” is explicitly detailed, excluding expenses related to acquiring land and those already depreciated or amortized under other sections of the ordinance.
As part of the disclaimer issued by Team PkRevenue.com, it is important to note that while efforts are made to provide the correct version of the text, the team is not responsible for any error or omission. Taxpayers are encouraged to consult with tax professionals to ensure a comprehensive understanding and application of the regulations in their specific circumstances.
Section 25 of the Income Tax Ordinance, 2001 serves as a beneficial provision for businesses, offering a mechanism to recoup certain essential costs incurred before the commencement of operations. This tax relief is designed to incentivize entrepreneurship and strategic planning, ultimately contributing to the economic development of the country.
