What is Tax Depreciation in Pakistan?

Depreciation is a tax-deductible expense that allows businesses to account for the wear and tear on their assets over time. In Pakistan, businesses can calculate depreciation for tax purposes using the straight-line method or the reducing balance method. Here is a step-by-step guide on how to calculate depreciation for tax purposes in Pakistan using the straight-line method:

Step 1: Determine the Cost of the Asset The first step in calculating depreciation is to determine the cost of the asset. This includes the purchase price, shipping and handling charges, and any installation or set-up costs. It is important to exclude any trade discounts or rebates from the cost of the asset.

Step 2: Determine the Useful Life of the Asset The next step is to determine the useful life of the asset. This is the estimated number of years that the asset will be used in the business before it is no longer productive or functional. The Federal Board of Revenue (FBR) provides a list of useful lives for different types of assets, but businesses can also estimate their own useful lives based on their experience with similar assets.

Step 3: Determine the Salvage Value of the Asset The salvage value is the estimated value of the asset at the end of its useful life. This value is subtracted from the cost of the asset to determine the depreciable amount. The FBR provides guidance on how to determine the salvage value for different types of assets, but businesses can also estimate their own salvage values based on their experience.

Step 4: Divide the Depreciable Amount by the Useful Life The straight-line method of depreciation involves dividing the depreciable amount by the useful life of the asset. The result is the annual depreciation expense that can be deducted from the business’s taxable income. The formula for calculating straight-line depreciation is:

Depreciation Expense = (Cost of Asset – Salvage Value) / Useful Life

For example, if a business purchases a machine for PKR 1,000,000 with a useful life of 10 years and a salvage value of PKR 100,000, the depreciation expense for tax purposes would be:

(1,000,000 – 100,000) / 10 = PKR 90,000 per year

The business can deduct PKR 90,000 from its taxable income each year for the next 10 years.

The reducing balance method is another method of depreciation that allows businesses to claim higher depreciation expenses in the early years of an asset’s life. However, this method is more complex and requires more frequent calculations. Businesses should consult with a tax professional to determine which method of depreciation is best for their specific situation.

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