depreciation comparison

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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