Normal depreciation is allowed at the following prescribed rates by applying the reducing-balance method.
|Assets||Depreciation rate (%)|
|Furniture (including fittings)||15|
|Machinery and plant, including motor vehicles and ships||15|
|Computer hardware, including monitors and printers||30|
|Aircraft and aero engines||30|
|Ramps built (up to PKR 250,000) to give access to persons with disabilities||100|
All depreciable assets put into service for the first time in Pakistan during a tax year, other than buildings, road transport vehicles not plying for hire, furniture (including fixtures), plant and machinery used previously in Pakistan, or plant and machinery for which a deduction has been allowed under another section of this ordinance, for the entire cost of the asset, immovable property or structural improvement (even if classifiable as plant & machinery) shall be entitled to an initial allowance at 25% of the cost of the asset.
Book depreciation need not conform to tax depreciation. Unabsorbed tax depreciation not set off against the income of the year is carried forward and added to depreciation of the assets of the same business in the following year. Tax depreciation can be carried forward for adjustment against income of future years for an unlimited period. However, such deprecation is only allowed to be set off to the extent of 50% of taxable profits of a particular (succeeding) tax year in cases where the same is PKR 10 million or more. The remaining amount can, however, still be carried forward/adjusted in future tax years.
Full tax depreciation deduction is allowable in the first year of addition of an asset used for the purpose of business and no depreciation deduction is allowed in the year of disposal.
Amortisation of intangibles
The cost incurred on acquisition of a patent, invention, design or model, secret formula or process, copyright, software, quota, licence, intellectual property (IP), or other like property or right, and any expenditure that provides an advantage or benefit for a period of more than one year, is allowed as a deduction on a straight-line basis over the useful life of the asset, but not exceeding a period of 25 years for assets whose life cannot be ascertained.
Self-generated goodwill or any adjustment arising on account of accounting treatment (e.g. that arising on account of mergers, acquisitions, and business reorganisations) is excluded from the purview of ‘intangible assets’ and no amortisation is allowable thereon.
Unabsorbed tax amortisation not set off against the income of the year is carried forward and added to amortisation of the assets of the same business in the following year. Tax amortisation can be carried forward for adjustment against income of future years for an unlimited period. However, such amortisation is only allowed to be set off to the extent of 50% of taxable profits of a particular (succeeding) tax year, in cases where the same is PKR 10 million or more. The remaining amount can be carried forward/adjusted in future tax years.
Organisational and start-up expenses
Expenditure incurred before the commencement of a business wholly and exclusively to derive income chargeable to tax can be deducted over a period of five years.
Interest expense is allowed as an expense if required WHT is deducted and deposited in the government treasury.
Bad debts are allowed as deductible expenditure if the following conditions are satisfied:
- Debts are included previously in the income chargeable to tax.
- Debts are written off in the financial statements.
- There are reasonable grounds for believing that the debt is irrecoverable.
See Charitable donations credit in the Tax credits and incentives section.
Fines and penalties
Fines or penalties that are not paid or payable for the violation of any law, rule, or regulation are allowable as tax deductible expenses.
Taxes on income are not deductible. Sales tax and excise tax are tax deductible where these are to be absorbed by the business; otherwise, these are passed on to the consumer.
Other significant items
Expenditure on scientific research incurred in Pakistan wholly and exclusively for the purpose of deriving income chargeable to tax is an allowable expenditure.
Exchange gains and loss on foreign currency loans specifically obtained for acquiring an asset are adjusted against the depreciable cost of the asset.
Any lease rental incurred by a person in the tax year to a scheduled bank, financial institution, approved modaraba, or approved leasing company shall be a deductible expense. However, financial charges paid for the above-mentioned leases are added back into the taxable income of the company.
Lease rentals deduction claimed by a lessee in respect of cost of passenger transport vehicles not plying for hire (to the extent of principal amount) shall not exceed PKR 2.5 million. With regard to depreciation on passenger transport vehicles not plying for hire, the limit on cost at PKR 2.5 million has been enhanced to 7.5 million.
An industrial undertaking will not be allowed to claim certain proportion of expenditure attributable to sales made to persons who are required to be registered but not registered under the Sales Tax Act, 1990 where the aggregate sales to such unregistered person is PKR 100 million or above per person. The expenditure to be disallowed under this provision will not exceed 10% of total deductions claimed by the industrial undertaking. Thus, expenditure attributable for sales to unregistered persons beyond the said threshold would still remain allowable.
Certain businesses in Pakistan are required to install prescribed fiscal electronic device and software for integration with FBR system. Non-compliance of the said requirement would render attributable expenditure inadmissible to the extent of 8% of the total deduction claimed. Prescribed penalty shall also be imposed on such person.
Net operating losses
Operating losses may be carried forward and set off against the profits of the succeeding six years of the same business in which the losses were incurred. Unabsorbed depreciation/amortisation can be carried forward indefinitely (subject to restrictions discussed above).
Assessed losses of an entity in the case of group relief cannot be utilised if the ownership of the holding company is reduced to less than 55% and 75% if one of the companies is a listed company or none of the companies is a listed company, respectively.
Business losses can be carried forward up to a period of six years in the case of the amalgamation of two companies, with the condition that the same business is continued for a minimum period of five years.
Payments to foreign affiliates
The deductibility of a head office expenditure of a non-resident taxpayer is limited to the same proportion of total head office expenditure as the Pakistan turnover has with the total world turnover. However, such domestic rules are overridden if the branch is a tax resident of a country having an agreement for avoidance of double taxation (treaty) and that treaty provides a different basis.