Goodwill and tax treatement

[Ree]

<font color="blue">Hello! I need some help in my assingment.</font id="blue">

<font color="blue">Topic is</font id="blue">
<i><b>"Income from Business Goodwill paid on acquisition of a running business, what will be the tax treatment as per Income Tax Law?"</b></i> <font color="blue">[we are reuiqred to follow income tax ordinance 2001]</font id="blue">

<font color="blue"><b>What i understand is</b></font id="blue">
<b>Goodwill is an intangible asset and in an acquirement, it appears on the balance sheet of the acquirer in the amount by which the acquire price exceeds the net tangible assets of the acquired company. It is amortized over its expected useful life. Amortization of goodwill is charged to the profit & loss account on a straight line basis.</b>

<font color="blue"><b>What i want to know is</b></font id="blue">
<b>1. At what rate it is amortized according to Income tax laws in Pakistan?
2. What is the section and subsection in income tax ordinance 2001 that is related to this treatment?</b>

[kamranACA]

Dear,

You have asked a good question though you did not mention the details of the business combination.

However, getting specific to your query, I refer you to study section 24 of the Income Tax Ordinance, 2001 which deals with Intangibles. It provides for amortizing the "COST" of intangibles equally over the useful years of their lives unless such life is beyond 10 years in which case it will be amortized during the first 10 years equally.

Having explained this, I also wish to point out what this very section of ITO 2001 includes in the meaning of Intangibles. This is extremely important to know and ponder on. Section 24 states

“intangible” means any patent, invention, design or model, secret formula or process, copyright, trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, licence, 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)."

Goodwill has not specifically been included in this list. This creates doubts over the deductability of good-will. However, the last item in above list i.e. "any expenditure that provides an advantage or benefit for a period of more than one year" renders the good-will a qulified item for deduction against business income.

I advise you to study this section in detail along with other relevant portion of law (from section 18 to 31 more specifically) and treat the good-will as deductible/amortizable under section 24 of ITO 2001.

Regards,



KAMRAN.

[awaisaftab]

Dear friend the goodwill and all other intengible assets shall be amortized at the rate of 10% per year using straight line method
according to section 24(3)of Income tax ordinace. The section 24(3)states that an intengible whose useful life cannot be determined shall be assumed having usefull life o ften years

As for your query is concerned abour the nature of goodwill, the Income Tax Rules 2002 has specified that the Generally Accepted Accounting Principles(GAAP) shall be followed while making accounts. According to Generally Accepted Accounting Principles the Goodwill is intengible assets, so shall be dealt accrdingly.

Awais Aftab
ACMA (Finalis)

[kamranACA]

Dear,

There are certain charges/expenses which are accounted for using generally accepted accounting principles but are not allowed for deduction against various incomes (vice versa). Therefore, that rule is for preparation of accounts and not for claiming the expenses as deductions in all cases. These are two different things and cannot be mingled up.

However, in my view, section 23 provides admissibility for amortization of good will as a deduction against business income subject to conditions of time period of 10 years as explained in my earlier post.

Regards,


KAMRAN.