Professional Documents
Culture Documents
Initial Allowance,
First Year Allowance
And
Amortization
Of
Capital Expenditures
Revenue Division
Federal Board of Revenue
Government of Pakistan
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0800-00-227, 051-111-227-227
www.fbr.gov.pk
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Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Introduction
This brochure gives basic information for the
benefit and use of persons deriving income
from business and/or letting out of building
together with machinery and plant. It
explains:
What is capital expenditure;
What is decline in value of capital
expenditure;
Deductibility of decline in value of
capital expenditure under the Income
Tax Ordinance, 2001;
How to workout the decline in value of
capital expenditure, i.e., depreciation of
tangible assets and amortization of
intangible
assets
and
precommencement expenditure under the
Income Tax Ordinance, 2001;
What happens when a tangible or an
intangible asset is disposed off; and
How to workout the gain or loss on
disposal of tangible and intangible
assets
under
the
Income
Tax
Ordinance, 2001.
In this brochure words and phrases that are not
familiar to taxpayers have been explained in the
earlier part of this brochure and such words and
phrases used in this brochure are in italic bold.
This brochure is to assist taxpayers and reflects the
position at time of printing. In case of conflict, the
provisions of law shall prevail over the contents of this
brochure.
Contents
Page
Introduction
Words and phrases frequently used
Amortization
Capital expenditure
Cost of tangible and intangible assets
Debt incurred in acquiring a tangible or an
intangible asset
Decline in value of capital expenditures
Depreciation
Economic benefit
Fair market value
Finance lease
Intangible assets
Lease
Non-arms length dealing or transaction
Normal useful life
Operating lease
Owned
Pre-commencement expenditures
Revenue expenditure
Tangible assets
Written down value
Depreciation of tangible assets
Ordinarily
Under the Income Tax Ordinance, 2001
Specified tangible assets
Depreciable assets
Structural improvements
Depreciation method prescribed under the
Income Tax Ordinance, 2001
Written down value
Cost of depreciable asset
Cost of depreciable asset in certain specific
circumstances
Passenger transport vehicle not plying for
hire
Personal asset applied to business use
Internally produced or constructed
Acquired by the lessee on maturity or
pre-mature termination of finance lease
agreement
Acquired against a loan denominated in a
foreign currency
Consideration in full or in part settled
against income chargeable to tax or
exempt from tax
Consideration in full or in part settled
against
grant,
subsidy,
rebate,
commission or any other assistance
Immoveable property or a structural
improvement to immoveable property
Owned by more than one person
Acquired in non-arms length transaction
Two or more depreciable assets acquired
in a single transaction
Acquired with some thing else in a single
transaction
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Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
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Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Words
and
frequently used
phrases
Pre-commencement expenditures
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Not willing
transaction.
to
undertake
the
deal
or
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Amount
(Rupees)
500,000
250,000
37,500
212,500
Amount
(Rupees)
212,500
31,875
180,625
Amount
(Rupees)
180,625
27,094
153,531
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Example -
Purchase
of
molding
machine in exchange for old
machine
Purchase price paid - Cheque drawn on
business bank account
Bringing
to
present
location
Amount
(Rupees)
Amount
(Rupees)
50,000
35,000
35,000
500,000
700,000
700,000
Cost
of
internally
produced
or
constructed depreciable asset is the cost
incurred to produce or construct.
Amount
(Rupees)
Example -
Boiler
produced
in
house by the entity for
its factory
Cost incurred to produce
Material
Wages
Consumables (welding rods etc)
Fuel and power (electricity, gas,
etc)
Overheads
Factory
&
administrative expenditures etc.
Cost of the boiler for the purposes of
depreciation deduction
100,000
5,000
10,000
25,000
75,000
225,000
Amount
(Rupees)
50,000
7,500
3,000
2,000
1,500
64,000
Amount
(Rupees)
850,000
850,000
850,000
600,000
300,000
150,000
85,000
35,000
30
6
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
1,050,000
850,000
600,000
300,000
150,000
85,000
Amount
(Rupees)
7,000,000
- Machinery acquired
in January 2010 and
put to commercial use
on December 31,
2010
Cost at the time acquired (January
2010) including debt in foreign
currency of US$ 67,857
Debt of US$ 67,857 expressed in
Pak Rs. at the prevailing exchange
rate of Rs. 84.00 at the time
acquired
th
Debt out-standing on 30 June,
2010, US$ 67,857 expressed in Pak
Rs. at the prevailing exchange rate
of Rs. 84.368 resulting into increase
in debt.
th
Cost of machinery on 30 June,
2010 (cost at the time acquired plus
th
increase in debt up to 30 June,
2010)
st
First installment paid on 1 July,
2010 US$ 10,000 at the prevailing
exchange rate of Rs. 84.068
resulting into exchange gain
(decrease in debt) of Rs.0.30 per
US$ as compared to the exchange
th
rate of 30 June, 2010
st
Debt
out-standing
on
31
December,
2010
(date
of
commencement of commercial
production) US$ 57,857 expressed
in Pak rupees at the prevailing
exchange rate of Rs. 84.458
25,000
7,025,000
(3,000)
22,500
19,500
7,044,500
(40,000)
(35,000)
7,009,500
5,700,000
5,000
Amount
(Rupees)
7,000,000
5,700,000
25,000
7,025,000
(3,000)
7
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
22,500
19,500
7,044,500
Amount
(Rupees)
75,000
500,000
800,000
15,000
Example - Packing machinery
15,000
Mr. A son of Mr. B, the manufacturer of
the machinery is doing business outside
Pakistan
Mr. B father of Mr. A, the purchaser of the
machinery is doing business in Pakistan.
Mr. B purchased (imported) machinery
from Mr. A with a recorded C&F price
US$ 15,000 equivalent to Pak rupees
Fair market value at the time of acquiring
the machinery
The transaction between Mr. A and Mr. B
does not satisfy the conditions of an
arms length transaction.
Cost of the packing machinery for the
purposes of depreciation deduction
105,000
Amount
(Rupees)
Amount
(Rupees)
900,000
610,000
610,000
85,000
15,000
85,000
800,000
Cost of depreciable asset acquired in nonarms length transaction is the fair market
value at the time of acquiring.
Amount
(Rupees)
1,000,000
Amount
(Rupees)
1,500,000
850,000
650,000
Amount
(Rupees)
100,000
70,000
50,000
120,000
58,333
41,667
8
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Amount
(Rupees)
100,000
70,000
70,000
15%
15%
30%
30%
100%
20%
Depreciation deduction
asset partly used for
chargeable to tax is
proportional use in
chargeable to tax.
of depreciable
deriving income
restricted to fair
deriving income
Ships
Motor vehicles (all types)
Computer hardware, including
printer, monitor & allied items,
machinery and equipment used in
manufacture of I.T. products
Aircraft, aero-engines
Below ground installations in
mineral oil concerns the income of
which is liable to be computed in
accordance with the rules in Part I
of the Fifth Schedule
Offshore platforms and Production
installation in mineral oil concerns
the Income of which is liable to be
computed in accordance with the
rules in Part I of the Fifth Schedule
Rate
10%
100%
15%
Amount
(Rupees)
800,000
70%
30%
120,000
84,000
680,000
15%
15%
9
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Disposal of depreciable
assets
Under
the
International
Accounting
Standards, assets leased under a finance
lease or an operating lease are given
different treatment for accounting purposes
as against the uniform treatment given
under the Income Tax Ordinance, 2001.
exported
or
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Amount
(Rupees)
850,000
850,000
850,000
Amount
(Rupees)
1,250,000
1,000,000
850,000
680,000
600,000
300,000
150,000
85,000
35,000
30
1,050,000
850,000
600,000
300,000
150,000
85,000
Amount
(Rupees)
2,000,000
225,000
1,775,000
1,850,000
1,850,000
11
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Amount
(Rupees)
2,000,000
225,000
1,775,000
2,500,000
2,000,000
Amount
(Rupees)
100,000
70,000
50,000
120,000
58,333
41,667
Amount
(Rupees)
100,000
70,000
Amount
(Rupees)
70%
30%
800,000
120,000
680,000
102,000
578,000
86,700
491,300
84,000
71,400
60,690
216,090
583,910
70,000
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Initial allowance
Initial Allowance of 50% of the cost of
eligible depreciable assets is allowed as
deduction against the chargeable income from
business or letting out of building together with
machinery and plant in the tax year in which
such asset is used for the first time or
commercial
production
is
commenced,
whichever is latter.
Amount
(Rupees)
100,000
Not
known
6,000
6,000
each
depreciable
asset
13
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
generation,
conversion,
transmission or distribution of
electrical energy, or the supply of
hydraulic power; or
the working of any mine, oil-well
or any other source of mineral
deposits; and
Any other industrial undertaking which the
Federal Board of Revenue may by
notification in the official Gazette, specify.
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Amortization
assets
of
intangible
Expenditure
renewing.
incurred
in
improving
or
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Disposal of specified
intangible assets
Amount
(Rupees)
200,000
10 years
20,000
200
70%
30%
14,000
7,671
7,671
16
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
of
of
of
as
17
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Annex - I
Particulars to be furnished alongwith the return
of income, whenever there is a claim for
depreciation or initial allowance deduction, are
as under:
18
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Annex - II
Particulars to be furnished alongwith the return
of income, whenever there is a claim for
amortization of specified intangible, are as
under:
Description of each specified intangible
asset;
Date of acquisition
intangible asset;
of
each
specified
19
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Annex III
Schedule of Depreciable Assets, Depreciation and Initial Allowance
Tax Year
LTU/RTO
2011
02
S.
Particulars / Description
No.
NTN
1000000
Opening
Written
Down
Value
Building Factory
Building General
Furniture Office
Machinery Computers
Machinery Vehicles *
Machinery General
Total
500,000
100,000
50,000
80,000
0
0
730,000
1
2
3
4
5
6
7
Additions /
Deletions
0
200,000
10,000
40,000
1,000,000
200,000
1,450,000
Name
XYZ and Co.
Initial Allowance
Depreciation
on additions, if
any
Rate
Amount
Total/Annual
Business Use
%
Rate
Amount
Exte
Amount
%
nt %
50
0
10
50,000 100
50,000
50
100,000
10
20,000 100
20,000
0
0
15
9,000 100
9,000
50
20,000
30
30,000
50
15,000
0
0
15
150,000
50
75,000
50
100,000
15
15,000
75
11250
220,000
274,000
1,80,250
Total
500,000
300,000
60,000
120,000
1,000,000
200,000
2,180,000
Written
Down
Value
carried
forward
450,000
180,000
51,000
70,000
8,50,000
85,000
16,86,000
Annex IV
Schedule of Specified Intangibles and Amortization
Tax Year
LTU/RTO
NTN
2011
02
1000000
S.
Particulars / Description
No.
1
2
3
4
Patents
Computer Software
Copyrights
Total
Name
XYZ and Co.
Acquisition
Date
Useful
Life
(Years)
01-07-2003
01-07-2004
01-01-2005
3
10
2
Original Cost
Annual
300,000
1,000,000
150,000
1,450,000
100,000
100,000
75,000
275,000
Amortization
Business use
Exte
Amount
nt%
50
50,000
100
100,000
100
75,000
225,000
0
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures
Actual usage /
Admissible
Days
Amount
100
13,699
365
100,000
183
37,603
151,302
FATE
Facilitation and Tax Education
is the key to voluntary compliance
and
voluntary compliance is the key to
Better Revenues
1
Brochure IR-IT-06
Depreciation, Initial Allowance, First Year Allowance and Amortization of Capital Expenditures