This document summarizes key concepts related to business income under Pakistan's tax laws. It discusses various types of assets used in business and related concepts like acquisition, cost, depreciation, disposal and consideration. It also covers topics like pre-commencement expenses, scientific research expenses, bad debts, employee training, and allowable financial costs. The document provides definitions and rules for these concepts across 18 sections in a detailed but structured manner.

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4. Assets:
i. Depreciable Asset [S-22(15)]:
Means any tangible movable property, immovable property or structural improvement to immovable property owned by a person that :
a. has normal useful life exceeding one year
b. is likely to lose value as a result of normal wear and tear or obsolescence AND
c. is used wholly or partly by person in deriving income from business
it shall not include any asset whose entire cost is allowed as deduction under Income Tax Ordinance 2001
ii. Structural Improvement [S-22(15)]:
Includes building, road, driveway, car park, railway line, pipeline, bridge, tunnel, airport runway, canal, dock, wharf, retaining wall, fence, power lines, water
or sewage pipes, drainage, landscaping or dam.
iii. Eligible Depreciable Asset [S-23(5)]:
a depreciable asset which is not:
a. furniture & fittings
b. road transport vehicle not plying for hire
c. plant & machinery previously used in Pakistan
d. plant & machinery whose entire cost is allowed as deduction under Income Tax Ordinance 2001

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4. Assets:
iv. Business Asset [S-75(7)]:
Means asset held wholly or partly for use in business, including stock-in-trade and depreciable asset
v. Personal Asset [S-75(7)]:
Means asset held wholly for personal use

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5. Acquisition & Cost:
i. Acquisition [S-75]:
when the person begins to own the asset including when the right is granted OR
when the personal asset is applied to business use
ii. Cost [S-76]:
Consideration paid / payable in cash X
FMV of consideration given in kind X
Incidental expenditure for acquisition / disposal of asset X
Expenditure to alter or improve asset X
X

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5. Acquisition & Cost:
ii. Cost [S-76]:
a. Cost of Passenger transport vehicle not plying for hire shall not exceed Rs 2.5 million. [Section-22(13a)]
b. Cost of immovable property shall not include cost of land [Section-22(13b)]
c. Forex Gain/loss to be adjusted in cost of asset [Section-76(5 & 6)]
• if asset has been acquired with a foreign currency loan, then increase or decrease in liability due to foreign currency rate shall be adjusted in cost
of asset
• while determining above forex gain / loss the person's position under hedging agreement relating to foreign currency loan shall also be
considered
d. Grant, subsidy, rebate, commission or any other assistance in relation to acquisition of asset [Section-76(10)]
if chargeable to tax then it will be included in cost of asset and vice versa
e. If asset acquired in a non-arm's length transaction, then FMV of asset shall be treated as its cost [Section-78]
f. If personal asset is applied to business use, then its FMV shall be treated as its cost [Section-76(3)]

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5. Acquisition & Cost:
ii. Cost [S-76]:
g. If asset is produced or constructed by person, then its cost will include following:[Section-76(4)]
h. If an asset is partly disposed off, then its cost shall be apportioned between the part disposed off and part retained on basis of respective FMV at time of
acquisition of asset [Section-76(7)]
i. If acquisition of an asset is derivation of an amount chargeable to tax, then its cost will include following:[Section-76(8)]
j. If acquisition of an asset is derivation of an amount exempt from tax, then its cost will include following:[Section-76(9)]
Total production/construction cost X
+Incidental expenditure for acquisition / disposal of asset X
+Expenditure to alter or improve asset X
X
Amount chargeable to tax X
Amount paid to acquire asset X
X
Amount exempt from tax X
Amount paid to acquire asset X
X

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6. Depreciation [S-22]:
Method of tax depreciation : Diminishing/Reducing Balance Method
Rate of Depreciation : as per 3rd Schedule Part-I
7. Initial Allowance [S-23]:
Allowed for "eligible depreciable asset" used 1st time in Pakistan OR
Year in which commercial production is started
Rate of Initial Allowance : as per 3rd Schedule Part-II
8. First Year Allowance [S-23A]: (in lieu of initial allowance)
Conditions to be fulfilled:
• Plant & machinery & equipment installed by Industrial Undertaking in rural or under developed area OR
by cell phone manufacturer who qualifies for exemption under clause 126N of part-I of second schedule
AND
• Owned and managed by a Company
Rate of First Year Allowance : as per 3rd Schedule Part-II
which ever is later

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9. Accelerated Tax Depreciation to Alternate Energy Projects [S-23B]:
Conditions to be fulfilled:
• Plant & machinery & equipment installed by Industrial Undertaking installed any where in Pakistan AND
• for generation of alternate energy AND
• Owned and managed by a Company
Rate of First Year Allowance : as per 3rd Schedule Part-II

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10. Disposal and Consideration:
i. Disposal [S-75]:
Asset is treated as disposed off when:
• person parts with its ownership
• sold, exchanged, transferred, distributed, destroyed or lost
• cancelled, redeemed, relinquished
• Transmitted
• put wholly to private use from business use
• discarded or ceased to be used
Gain or loss on disposal shall be calculated as follows:
Consideration for disposal X
Less:
Cost X
Initial Allowance OR (X)
First Year Allowance OR (X)
Accelerated Tax Depreciation (X)
Normal Depreciation (X)
X
Gain / Loss on disposal X

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10. Disposal and Consideration:
ii. Consideration for Disposal [S-77]:
a. If Asset is lost or destroyed, then consideration shall include compensation, indemnity or damages received from:
• insurance claim
• Settlement
• judicial decision
b. If asset applied to personal use from business use or is discarded, then consideration shall be FMV of asset
c. If two or more assets disposed off in single transaction and consideration of each asset is not specified, then total consideration received shall be
apportioned on basis of FMV of each asset, at time of disposal
d. If actual cost of passenger transport vehicle not plying for hire was more than Rs 2.5 million, then consideration shall be calculated as follows:
Amount Received X
FMV of consideration in kind X
X
FMV of asset at time of disposal X
Which ever is higher
Actual consideration received on
disposal
x
2.5 million
Actual cost paid to acquire vehicle
[Section-77(2)]
[Section-77(3)]
[Section-22(10)]
[Section-77(5)]

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10. Disposal and Consideration:
ii. Consideration for Disposal [S-77]:
e. If consideration for immovable property exceeds its cost, then it's consideration received shall be treated as cost.
f. If asset disposed off in a non-arm's length transaction, then FMV of asset shall be treated as consideration.
g. If depreciable asset is exported/transferred outside Pakistan, then its cost shall be treated as consideration received.
[Section-22(13d)]
[Section-78]
[Section-22(14)]

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11. Depreciation on asset partly used in business:
i. Where asset is used partly for business purposes and partly for any other use, the depreciation expense shall be restricted to fair proportional part which
is used for business.
ii. Initial Allowance/First Year Allowance/Accelerated Tax Depreciation shall be allowed on total cost of asset. The fact that asset was partly used for
business is irrelevant here.
iii. Written Down Value of such assets shall be calculated, as if the asset was wholly used for business purposes.
iv. On disposal of such asset, following shall be deducted from consideration
[Section-22(3)]
[Section-22(6)]
Total cost of asset X
Less:
Initial Allowance-if any (X)
First Year Allowance-if any (X)
Accelerated Tax Depreciation-if any (X)
Normal Depreciation allowed as deduction (proportionate basis) (X)
X

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12. Leasing business:
Leasing Co., Investment Bank, Modaraba, Scheduled Bank, Development Finance Institution
i. Initial Allowance/First Year Allowance/Accelerated Tax Depreciation or Normal Depreciation is allowed as deduction only against lease rental income
ii. Asset shall be treated as used in the business of lessor
iii. On completion of lease term, asset shall be transferred to lesee and treated as disposed off by leasing company and the consideration received shall be
residual value received by leasing company
iv. The cost of assed realized through lease rentals + residual value should not be less than cost of the asset
[Sections-22(12), 23(4), 23A(2), 23B(2)]
[Section-22(13c)]
[Section-77(4)]
[Section-77(4)]

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13. Intangibles [S-24]:
Means : patent, invention, design or model, secret formula or process, copyright, trade mark, scientific or technical knowledge, computer software, motion
picture film, export quotas, franchise, license, intellectual property, or other like property or right, contractual rights and any expenditure that provides an
advantage or benefit for a period of more than one year
other than expenditure incurred to acquire a depreciable asset or unimproved land
i. Cost of Intangibles:
Means expenditure incurred in acquiring or creating intangible
Includes expenditure for improving or renewing intangible
ii. Conditions for amortization:
a. intangible is wholly or partly used for business
b. normal useful life is more than 1 year
iii. Rules for amortization:
a. Year of acquisition; Number of days basis (An intangible available for use on a day shall be treated as used on that day)
b. Year of disposal; No amortization

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13. Intangibles [S-24]:
iv. Rate of amortization:
v. Intangible partly used for business and partly for any other use:
Amortization expenses shall be restricted to fair proportion of intangible used for business.
vi. Disposal:
Upon disposal, following shall be included in income from business
Cost
Useful life in whole years Note:
if useful life is more than 10 years then it will be treated as 10 years
if useful life is not ascertainable, then it will be treated as 10 years
Consideration X
Written Down Value X
X

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14. Pre-commencement Expenditure [S-25]:
Means, expenditure incurred before commencement of business wholly and exclusively to derive taxable income
Includes,
• cost of feasibility studies
• construction of prototypes
• trail production
Does not include,
• expenditure to acquire land
• depreciable assets
• Intangibles
i. Method: Straight line basis
ii. Rate: as per 3rd Schedule, Part-III
No deduction shall be allowed for expense which allowed as deduction under any other provision of Income Tax Ordinance 2001

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15. Scientific Research Expenditure [S-26]:
Expenditure for scientific research
Contribution to Scientific Research Institution to do research
wholly and exclusively to derive income from business
shall be allowed as deduction.
• Scientific Research:
Means activity in Pakistan in the field of natural or applied science for development of human knowledge
• Scientific Research Expenditure:
Means expenditure on scientific research, for development of business
Includes contribution to scientific research institution to do research for business
not include expense incurred for
o acquisition of depreciable asset or intangible
o acquisition of immovable property
o ascertaining existance/location/extent/quality of natural deposits
• Scientific Research Institution:
Means any institution certified by FBR to do scientific research in Pakistan

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16. Bad Debts [S-29]:
i. Conditions to claim bad debts as expense
a. Amount was previoulsy included in taxable income
b. In case of a financial institution, the amount was lent to derive taxable income
c. amount is written off as bad debts in accounts
d. resonable grounds exist that debt is irrecoverable
ii. Subsequent recovery of bad debts written off:
Following shall be included in taxable income
(10,000)
40,000
Deduction from income from business
Included in income from business
(20,000)
10,000
(20,000)
60,000
Less: amount previously not allowed
Subsequent recovery
Case (b)Case (a)
20,000
(80,000)
100,000
amount previously allowed as deduction
Whole amount of debt

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17. Employee Training & Facilities [S-27]:
Expenditure in respect of following is allowed:
a. Educational institution/hospital for benefit of employees/dependents
b. Institute for training of industrial workers
recognized/aided/funded by
Federal Govt / Proviscial Govt / Local Govt
c. Training of Pakistani citizen under scheme approved by FBR
established in Pakistan

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17. Profit on debt, Financial costs and Lease Payments [S-28]:
Following shall be allowed as expense:
i. Profit on debt:
• on loan utilized for business purposes
• paid by bank on deposit accounts
ii. Financial costs:
• by originator on securitization of receivables in respect of special purpose vehicle (SPV)
iii. Lease rentals
• paid to scheduled bank, financial institution or approved modaraba, leasing company, SPV
iv. Share of profit
• under musharika scheme paid to a bank
• under musharika scheme paid to certificate holders. Such scheme should be approved by SECP and Religious Board under Modaraba Ordinance 1980
• paid on funds borrowed from modaraba or participation term certificates
v. State Bank of Pakistan (SBPs) share of profit paid by
• House Building Finance Corporation (HBFC)
• National Development Leasing Corporation
• Small & Medium Enterprises Bank
on investment/credit line provided by SBP