ASSETS AND DEPRECIATION

LECTURE # 26

Rates for Depreciation Allowance Part I of the 3rd Schedule

S. No 1 Description Building (all types). Rate on WDV 10%

Furniture (including fittings) and Machinery and Plant (not otherwise specified), Motor Vehicles (all types), ships, technical or professional books
Computer hardware including printer, monitor and allied items, aircrafts and aero engines

15%

30%

In case of mineral oil concerns the income of which is liable to be computed in accordance with the rules in part I of the fifth schedule
Below ground installations b) Offshore platforms
a)

100% 20%

Special Provisions
1. Normal On WDV even for 1st time (Cost minus Depreciation initial allowance) Reducing balance method Section22(2) 2. Usage of machinery Admissible Proportionally in deriving income chargeable to tax & other usage Section 22(3)

3. Depreciation Full years depreciation is allowed, even if in the year of asset is purchased on the last date. Section 22(4) purchase

Initial Depreciation
PARTICULARS INCOME TAX ORDINANCE, 2001

Initial Allowance Eligible depreciable assets only Section 23 used for the first time in Pakistan Allowed on cost Rate 50% (Part II of the 3rd Schedule)

Special Provisions-continued
4. WDV on disposal

Increased by depreciation not allowed

for other usage Section 22 (9) Depreciation is restricted to lease rental income only. Section 22(12)

5. Leased asset

6. Maximum cost Rs. 1 Million of motor of Section 22 (10) and Section 22(13)(a) motor vehicle This provision shall not be applicable from 1-07-2005

Special Provisions-continued
7. Limitation on admissibility 8. Used assets exported Section 22(14) 9.Assets acquired with foreign Loans Not more than cost

Sale price equal to cost

Cost increased/decreased on the basis of repayment of loan

10. Structural improvement (Road, bridge, sewerage pipes)

Depreciation Admissible but not on

cost of land Section 22(13)(b)

Eligible Depreciable Assets

Combined study of Depreciable Assets and Eligible Depreciable Assets reveals that the following assets can be termed as Eligible Depreciable Asset. Buildings; Structural improvement to immovable property (e.g., roads, car park, railway line, bridges, canal, runway, etc.); Plant or machinery being used first time in Pakistan; Ships; Computer hardware and allied accessories; Technical or professional books; Vehicles which are plying for hire; and Aircrafts, etc.

1. 2. 3.

4. 5. 6. 7. 8.

Assets cannot be treated as Eligible Depreciable Assets: Section 23(5)

1. Vehicles not plying for hire (i.e., the vehicles provided to employees by the employer, buses, etc., being used by a person for transportation of his goods or employees); 2. Furniture or fittings; 3. Plant and machinery previously used in Pakistan; 4. Unimproved land; and 5. Any asset total cost of which is allowed as deduction while computing income under the income tax ordinance.

Example
M/s. Sarfraz Limited is a manufacturing company. It purchased a bus worth Rs. 1,250,000 at the start of the tax year and expended Rs. 50,000 on its registration, etc. The bus is used for transportation of the employees of the company. Compute the depreciation to be allowed as deduction while computing the income of the company.

Answer
Total Actual cost [Rs. 1,250,000+Rs. 50,000] Rs. 1,300,000 Cost of the bus for depreciation purposes 1,000,000 Depreciation [Rs. 1,000,000 @ 15%] 1,50,000

Note: Initial allowance for depreciation is allowed on vehicles plying for hire. Section 23 (5) (a)
Tax Year 2006 Depreciation on actual cost 13,00,000 @ 15%=1,95,000

Continuing with above example

Assume M/s Sarfraz is a transporter. Cost of the bus for depreciation on purpose Rs 1,000,000 Initial Dep (1,000,000*50% ) 500,000 Normal Depreciation 15% 75,000 4,25,000

Tax Year 2006

Actual Cost Initial Depreciation @ 50 % WDV Normal Depreciation @ 15 % 13,000,000 6,50,000 6,50,000 97,500

5,52,500

Example of Export of used Asset Section 22 (14)

Mr. Haseeb purchased a new machine for Rs 1,000,000 in tax year 200A and after one year use exported the asset for a consideration of Rs 1,200,000.

Tax on export of used asset

Tax year 200A Cost of Asset Rs. 1,000,000 Initial Deprecation 50% 500,000 Normal Deprecation 15% 75,000 W. D. V 4,25,000

Tax Year 200B

EXPORT OF ASSET Consideration received W. D. V Should be taxed

Rs. 1,200,000 4,25,000 7,75,000

BUT
Selling price restricted to cost =Rs.1,000,000 W. D. V 4,25,000 Taxable amount 5,75,000 Conclusion: Advantage to exporter for lesser taxable income and ultimately lesser tax

Example of leased asset Section 22 (12)

A leasing company leased out a plant costing Rs. 1,000,000 in the tax year 200A. The annual lease rentals were agreed at Rs. 240,000 spread over five (5) years. Compute the amount of depreciation to be allowed for the tax years 200A, 200B, 200C, 200E.

Ans: Depreciation Schedule

Tax Year Unabsorbed Depreciation Dep. B/F for the year Total Dep. Lease Rental Admissible Unabsorb Dep. ed Dep. C/F 240,000 3,35,000

200A

575,000

575,000

240,000

200B

3,35000

63,750

398,750

240,000

240,000

158,750

200C

158,750

54,188

2,12,938

240,000

212,938

200D

46,059

46059

240,000

46,059

200E

39,150

39.150

240,000

39,150

AMORTIZATION ON INTANGIBLES SECTION 24

1. 2. 3. 4. 5.
6. 7. 2. Amortization on intangible 3.Use of Intangible for Exempt Income 4. Method of Calculations

Patent Invention Design or Model Formula OR Process Copy right or other like property or right. Contractual rights. Any expenditure.

Admissible Deductions restricted proportionately. Cost of the Intangible Normal useful life (years). (Maximum Ten years). Amount of Amortization x used days Total Number of days in Tax year.

5. Intangible Not Used for the whole year

PRE-COMMENCEMENT EXPENDITURE SECTION 25

1.Pre-commencement Expenditure Part III of the 3rd Schedule 2. Amortization of Precommencement Expenditure 3. Method of Calculations. 1. 2. 3. 4. Cost of Feasibility Studies. Construction of Prototypes. Trial Productions. Any Expenditure.

Admissible

Rate = 20% Straight-line basis. Inadmissible

4. Incurrence of Expenditure taxable and Exempt income

CASE STUDY ON DEPRECIATION

Muhammad Ashraf purchases a machine costing Rs. 1 (M) on 1st July, 200A. The machine is used partly to derive income chargeable to tax and partly to derive income exempt from tax for the complete tax year 200B and 200C. The machine is disposed off in the tax year 200D, for Rs. 1.2 (M). Calculate: i. Depreciation allowed for 200B,200C and 200D. ii. (Written down value) for 200B,200C and 200D. iii. Gain or loss on disposal of asset in 200D.

SOLUTION Tax year 200B

Type Cost Usage Machine Rs. 1(M) Partly for income chargeable to tax and partly for exempt income Not admissible Rs. 1(M) 50% of 15% of W.D.V=75,000 8,50,000 (Include depreciation not allowed75,000) 22(15) 76 22(3)

Initial allowance W.D.V Normal Depreciation W.D.V

23(1) 22(4) 22(4) Rate in third schedule 22(6)

TAX YEAR 200C

W.D.V Rs. 8,50,000

Normal Rs. 1,27,5002=63,750 22(4) Depreciation Rate in Third Schedule W.D.V Rs. 7,22,500 22(6) 8,50,000(63,750+63,750

TAX YEAR 200D

Normal Depreciation Not admissible 22(8)

W.D.V
Disposal Gain/Loss

7,22,500+75,000+63,750= 22(9) 8,61,000

Rs. 1.2 (M) Rs. 1.2 (M)-Rs. 0.861= Rs. 3,39,000 22(8)