Deductions: Special Provisions, Depreciation

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Taxation Management FIN 623

MODULE 8

LESSON 8.34

INCOME FROM BUSINESS & ITS COMPUTATION

Deductions---Special Provisions

Depreciation (Sec. 22)

Deduction for depreciation allowed to a person if depreciable assets used in the person's business in a tax

year. Rate of depreciations shall be applied as specified in part 1 of 3rd schedule.

Written down value of a depreciable asset of a person as at the beginning of the tax year shall be ;

a) where the asset was acquired in the tax year, the cost of the asset to the person as reduced by any

initial allowance under sec 23

b) in any other case, the cost of the asset to the person as reduced by the total depreciation

deductions ( including any initial allowance under sec 23 ) allowed to the person in respect to the

asset in previous tax years.

· No depreciation deductions allowed where in a tax year a person disposes of a depreciable asset;

· If consideration received exceeds the value of the written down value of the asset at the time of

disposal, the access consideration shall be chargeable to tax under the head "Income from business".

· If the consideration received is less than the written down value, the difference shall be allowed as a

deduction in computing the person's income chargeable under the head "income from business" for

that year.

Depreciable asset means a tangible movable or immovable property (not unimproved land) or structural

improvement to immovable property owned by a person that has:

· Normal useful life of one year or more.

· Likely to lose value due to normal wear and tear.

· Used wholly in deriving income from business chargeable to tax.

Initial Allowance (Sec. 23)

A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year shall

be allowed a deduction at the rate of 50% of the cost of asset provided the asset is used by the person for

the purposes of business for the first time or the tax year in which commercial production is commenced,

whichever is later.

"Eligible depreciable asset" means a depreciable asset other than:

Any road transport vehicle unless the vehicle is plying for hire;

Any furniture, including fittings;

Any plant or machinery that has been used previously in Pakistan or

Any plant or machinery in relation to which a deduction has been allowed under another section of

this Ordinance for the entire cost of the asset in the tax year in which the asset is acquired.

Intangibles (Sec. 24):

A person shall be allowed an amortization deduction in a tax year for the cost of intangibles;

The intangibles or wholly or partially used by the person is the tax year in deriving income from

business chargeable to tax and

The intangibles have a normal useful life exceeding one year.

Amortization deduction allowed as under

A/B

Where

A is the cost of intangible; and

B is normal useful life of intangible

Deductions---Special Provisions

An intangible that has

a) Normal useful life of more than 10 years; or

b) Does not have an ascertainable useful life, shall be treated as if it had a normal useful life of 10

years.

Pre-commencement expenditure (Sec.25)

It means any expenditure incurred before the commencement of the business wholly and exclusively to

derive income chargeable to tax, including the cost of feasibility studies, trial production activities but shall

Taxation Management FIN 623

not include any expenditure which is incurred in acquiring land, or which is depreciated or amortized under

section 22 ( depreciation) or section 24 ( intangibles)

Rate of amortization of pre-commencement expenditure shall be 20%.

Deductions--Special Provisions

Scientific research institutions (sec 26)

Employee training and facilities (sec 27)

Profit on debt, financial costs and lease payments (sec 28)

Bad debts (sec 29)

Sec 29A: Deductions on consumer loans to a banking company, non banking finance company and

house building finance corporations. (Deduction shall not exceed 3 % of income for the tax year arising

out of consumer loans.

Profit on non- performing debts of a banking company or development finance institution (sec 30)

Transfer to Participatory Reserve (Sec 31)

Following Incomes are taxable under the head Income from Business even in cases where no business is

carried on by taxpayer.

Recovery against any deduction/expenses previously allowed (Add back to income).

Gain on sale of depreciable asset.

Recovery of bad debt/or written off loan.

Trading liabilities not paid within expiration of three years.

Amount received after discontinuance of business.

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