October 11, 2024
Tax treatment on consideration against asset disposal

Tax treatment on consideration against asset disposal

The Federal Board of Revenue (FBR) has provided clarity on the determination of consideration received by individuals on the disposal of assets through Section 77 of the Income Tax Ordinance, 2001, as updated up to June 30, 2021.

The amendments incorporated via the Finance Act, 2021, aim to streamline the calculation of consideration, ensuring accuracy and fairness in tax assessments.

Key Provisions of Section 77:

1. Total Amount Received:

• The consideration received by a person on the disposal of an asset is defined as the total amount received for the asset or its fair market value, whichever is higher.

• This includes the fair market value of any consideration received in kind, determined at the time of disposal.

2. Lost or Destroyed Assets:

• In cases where an asset is lost or destroyed:

• The consideration received includes any compensation, indemnity, or damages received by the person through insurance, indemnity, agreement, settlement, or judicial decision.

3. Asset Treated as Disposed:

• For assets treated as disposed of under specified sections:

• The consideration received is the fair market value of the asset at the time it is applied to personal use, discarded, or ceases to be used in business.

4. Leased Assets:

• Consideration received by scheduled banks, financial institutions, modarabas, or approved leasing companies for leased assets is determined as follows:

• For leasing companies, the consideration is the residual value received on maturity of the lease agreement, provided it is not less than the original cost of the asset.

5. Multiple Assets in a Single Transaction:

• In transactions involving the disposal of two or more assets without specified consideration for each:

• The total consideration received is apportioned among the assets based on their respective fair market values at the time of the transaction.

6. Board’s Authority to Prescribe Rules:

• The Board reserves the authority to prescribe rules for the determination of consideration received for any asset, offering flexibility to adapt to evolving financial landscapes.

It’s essential to note that the information provided is for reference purposes, and individuals are encouraged to seek guidance from tax professionals for accurate and up-to-date advice. The disclaimer emphasizes that while efforts are made to provide correct information, the team at PkRevenue.com is not responsible for any errors or omissions. Section 77 is a critical component of the Income Tax Ordinance, ensuring transparency and fairness in assessing tax liabilities related to asset disposals.