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8/2/2019 Depreciation Comparison
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ASSETS AND DEPRECIATIONLECTURE # 26
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Rates for Depreciation AllowancePart I of the 3rd Schedule
S. No Description Rate on WDV
1 Building (all types). 10%
2 Furniture (including fittings) andMachinery and Plant (not otherwisespecified), Motor Vehicles (all types),
ships, technical or professional books
15%
3 Computer hardware including printer,monitor and allied items, aircrafts andaero engines
30%
4 In case of mineral oil concerns the
income of which is liable to becomputed in accordance with therules in part I of the fifth schedule
a) Below ground installations
b) Offshore platforms
100%
20%
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Special Provisions
1. Normal
Depreciation
On WDV even for 1st time (Cost minusinitial allowance)
Reducing balance method
Section22(2)
2. Usage of
machinery
Admissible Proportionally in derivingincome chargeable to tax & other usageSection 22(3)
3. Depreciation
in the year of
purchase
Full years depreciation is allowed, even if
asset is purchased on the last date.
Section 22(4)
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Initial Depreciation
PARTICULARS INCOME TAX ORDINANCE, 2001
Initial AllowanceSection 23
Eligible depreciable assets onlyused for the first time in Pakistan
Allowed on cost
Rate 50% (Part II of the 3rd Schedule)
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Special Provisions-continued
4. WDV ondisposal
Increased by depreciation not allowedfor other usage
Section 22 (9)
5. Leased asset Depreciation is restricted to lease rental
income only.
Section 22(12)
6. Maximum cost
of motor of
motor vehicle
Rs. 1 Million
Section 22 (10) and Section 22(13)(a)
This provision shall not be applicable
from 1-07-2005
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7. Limitation on
admissibility
Not more than cost
8. Used assets exported
Section 22(14)
Sale price equal to cost
9.Assets acquired with
foreign Loans
Cost increased/decreased on the basisof repayment of loan
10. Structural
improvement (Road,
bridge, sewerage pipes)
Depreciation Admissible but not oncost of land
Section 22(13)(b)
Special Provisions-continued
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Eligible Depreciable Assets
Combined study of Depreciable Assets andEligible Depreciable Assets reveals that thefollowing assets can be termed as EligibleDepreciable Asset.
1. Buildings;2. Structural improvement to immovable property
(e.g., roads, car park, railway line, bridges, canal,runway, etc.);
3. Plant or machinery being used first time inPakistan;
4. Ships;5. Computer hardware and allied accessories;6. Technical or professional books;7. Vehicles which are plying for hire; and
8. Aircrafts, etc.
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Assets cannot be treated asEligible Depreciable Assets:
Section 23(5)
1. Vehicles not plying for hire (i.e., the vehiclesprovided to employees by the employer, buses, etc.,being used by a person for transportation of hisgoods 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 deductionwhile computing income under the income tax
ordinance.
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Example
M/s. Sarfraz Limited is a manufacturingcompany. It purchased a bus worthRs. 1,250,000 at the start of the tax year
and expended Rs. 50,000 on itsregistration, etc. The bus is used fortransportation of the employees of the
company. Compute the depreciation to beallowed as deduction while computing theincome of the company.
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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 vehiclesplying for hire. Section 23 (5) (a)
Tax Year 2006
Depreciation on actual cost 13,00,000 @ 15%=1,95,000
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Continuing with above example
Assume M/s Sarfraz is a transporter.
Cost of the bus for depreciation onpurpose Rs 1,000,000
Initial Dep (1,000,000*50% ) 500,000
Normal Depreciation 15% 75,000
4,25,000
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Tax Year 2006
Actual Cost 13,000,000
Initial Depreciation @ 50 % 6,50,000
WDV 6,50,000
Normal Depreciation @ 15 % 97,500
5,52,500
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Example of Export of used AssetSection 22 (14)
Mr. Haseeb purchased a new machine forRs 1,000,000 in tax year 200A and afterone year use exported the asset for a
consideration of Rs 1,200,000.
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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
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Tax Year 200B
EXPORT OF ASSET
Consideration received Rs. 1,200,000
W. D. V 4,25,000 Should be taxed 7,75,000
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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
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Example of leased assetSection 22 (12)
A leasing company leased out a plantcosting Rs. 1,000,000 in the tax year200A.
The annual lease rentals were agreed atRs. 240,000 spread over five (5) years.
Compute the amount of depreciation to beallowed for the tax years 200A, 200B,200C, 200E.
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Ans: Depreciation Schedule
TaxYear
UnabsorbedDep. B/F
Depreciationfor the year
Total Dep. LeaseRental
AdmissibleDep.
Unabsorbed Dep.C/F
200A - 575,000 575,000 240,000 240,000 3,35,000
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
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AMORTIZATION ONINTANGIBLES SECTION 24
1. Patent
2. Invention
3. Design or Model
4. Formula OR Process
5. Copy right or other like propertyor right.
6. Contractual rights.
7. Any expenditure.
2. Amortization on intangible Admissible
3.Use of Intangible for Exempt Income Deductions restricted proportionately.
4. Method of Calculations Cost of the Intangible
Normal useful life (years).
(Maximum Ten years).
5. Intangible Not Used for the wholeyear
Amount of Amortization x used days
Total Number of days in Tax year.
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PRE-COMMENCEMENTEXPENDITURE SECTION 25
1.Pre-commencement
Expenditure
Part III of the 3rd Schedule
1. Cost of Feasibility Studies.
2. Construction of Prototypes.
3. Trial Productions.
4. Any Expenditure.
2. Amortization of Pre-
commencement Expenditure
Admissible
3. Method of Calculations. Rate = 20%
Straight-line basis.
4. Incurrence of Expenditure
taxable and Exempt income
Inadmissible
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CASE STUDY ON DEPRECIATION
Muhammad Ashraf purchases a machinecosting Rs. 1 (M) on 1st July, 200A. Themachine is used partly to derive incomechargeable to tax and partly to deriveincome exempt from tax for the complete
tax year 200B and 200C.The machine is disposed off in the tax year200D, for Rs. 1.2 (M).
Calculate:
i. Depreciation allowed for 200B,200C and200D.ii. (Written down value) for 200B,200C and
200D.
iii. Gain or loss on disposal of asset in 200D.
SOLUTION
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SOLUTIONTax year 200B
Type Machine 22(15)
Cost Rs. 1(M) 76
Usage Partly for incomechargeable to tax and
partly for exemptincome
22(3)
Initial allowance Not admissible 23(1)
W.D.V Rs. 1(M) 22(4)
Normal Depreciation 50% of 15% ofW.D.V=75,000
22(4) Rate in thirdschedule
W.D.V 8,50,000
(Include depreciationnot allowed75,000)
22(6)
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TAX YEAR 200C
W.D.V Rs. 8,50,000
NormalDepreciation
Rs. 1,27,5002=63,750 22(4)
Rate inThird
ScheduleW.D.V Rs. 7,22,500
8,50,000-(63,750+63,750
22(6)
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TAX YEAR 200D
NormalDepreciation
Not admissible 22(8)
W.D.V 7,22,500+75,000+63,750=8,61,000
22(9)
Disposal Rs. 1.2 (M)
Gain/Loss Rs. 1.2 (M)-Rs. 0.861=
Rs. 3,39,000
22(8)
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