Pakistan Depreciation

Initial Depreciation Allowance: Front-Loading Under the Third Schedule

Pakistan's Income Tax Ordinance 2001 provides accelerated depreciation through the Third Schedule, which divides capital assets into categories with distinct initial depreciation allowances (IDA) and normal depreciation rates. New industrial, commercial, and scientific machinery attracts a 25% IDA in the tax year of purchase, applied to original cost before normal depreciation is calculated on the residual. Buildings qualify for a 15% IDA. Most significantly, plant and machinery used in an approved industrial undertaking or located in a Special Industrial Zone can receive a 50% IDA — half the cost deducted in year one alone. For a Pakistani textile manufacturer investing PKR 500 million in new spinning machinery under an approved industrial undertaking, the 50% IDA provides PKR 250 million in first-year depreciation. At Pakistan's 29% corporate tax rate (for non-SME companies as of 2024), this generates PKR 72.5 million in immediate tax savings — substantial working capital freed up in the critical first production year.

Normal Depreciation Rates and the Declining-Balance Method

Following the IDA year, assets are depreciated at normal rates on the declining written-down value. Third Schedule rates include: buildings (10%, or 5% for reinforced concrete structures), furniture and fittings (15%), machinery and equipment (15%), computers, peripheral equipment, and software (30%), motor vehicles including cars and motorcycles (15%), and ships (10%). A critical distinction from India's block-of-assets approach: Pakistan tracks each asset's WDV individually after the IDA year, though many taxpayers pool assets of the same class for administrative convenience. The FBR has historically allowed this pooling approach in practice, though the Ordinance technically requires individual tracking. Disposal proceeds in excess of WDV are taxed as income; shortfalls generate a terminal deduction reducing the taxable pool balance.

Intangible Asset Amortisation and Special Sector Provisions

Intangible assets including patents, trademarks, copyrights, franchises, and purchased goodwill are amortised under Section 24 of the Income Tax Ordinance at 25% per year on a straight-line basis, with a statutory assumed useful life of four years unless the intangible has a legally specified shorter life. Where an intangible's legal life (such as a 10-year patent) exceeds four years, the 25% straight-line rate still applies, meaning the asset is fully written off before legal expiry — an unusual provision that benefits IP-intensive businesses. Agricultural machinery used for mechanised farming qualifies for the full 25% IDA plus 15% normal rate, reflecting Pakistan's strategic priority to modernise its agricultural sector, which accounts for approximately 23% of GDP and employs 37% of the labour force according to Pakistan Bureau of Statistics data.