Tax Depreciation 2008 and 2009

[AbdulSamad]

Aslamo Alekum


I want to enhance my knowledge how to calculate Tax Deprection.

In my knowledge which may be wrong, is that there is some percentages% in Income Tax ORdinance in 3rd shedule PART 2 which is fixed and there is another one i have heard about INITIAL Allownce.

Please some answer how to calculate tax deprection if company start first time buisness how they and when calculate initial allownace and rate.

initial Allowance i think in 2008 is 50% and in 2009 first year is 90% after that is same 50%.

and i have one more confusion in the 3rd shedule part 2 Tax Depreciation rate which is given there is that also applying in Accounting Tax Depreciation or not, beacuse i am confuse tax rate on accounting depreciation rate and tax depreciation rate?

please clear my question i will be thankfull to you?

[kamranACA]

Dear A.S.,


Tax depreciation is provided on fixed assets after providing for initial allowance. Initial allowance is provided only for the first year of operation on certain fixed assets that have been prescribed in Section 23 of the Income Tax Ordinance, 2001 as eligible depreciable assets. First year of operation means the first year in which asset has been used for business or the tax year in which commercial production has been started.

Rate of initial allowance is 50%. The rate of 90% has been stipulated by Finance Act,2008 only for those industrial undertaking which are to be set up in prescribed rural and under developed areas.

After providing initial allownance depreciation will also be charged under section 22 of the ITO 2001. Depreciation rates and initial allowance rates are given in Part I and Part II of Third Schedule to the ITO 2001 respectively.

I recommend you to study section 23, 22, 76 and third schedule to the Income Tax Ordinance 2001 for further clarity.

For accounting purpose you have to assess the usefull lives of the assets and their depreciable amounts (cost less residual value, if any). Depreciation rate would be the rate which will charge off the depreciable amount to profit and loss account spanning over the useful life so determined. This is a technical question and normally people adopt tax depreciation rates for accounting purpose as well. This helps them reducing accounting and tax profit gaps and minimizing resulting tax implications and deferred tax consequences.

Hope you have been answered.


Regards,


KAMRAN.

[awaisaftab]

Dear Kamran ;

Please tell me
Wether the initial depreciation is also an expense?

What will be the amount of expence charged to the income statement for the year ended on 30 june 2008 for asset of Rs 100,000/-purchased diring the financial year?

I expect an unbaised question

[kamranACA]

Dear,

Accounting profit and tax profit are two different things and are determined following different basis. This is the major reason which creates differences between tax and accounting base of related assets and liabilities causing deferred tax consequences. I just wrote it to clarify a basic misconception.

Now, in determining accounting profit and drafting the income statement, one has to follow the financial reporting framework applicable to his entity. The initial depreciation is a concept within the meaning of Income Tax Ordinance, 2001 and has nothing to do with the financial reporting framework.

Therefore, while determining accounting profit depreciation would be charged based upon useful life of the related asset.

In your query, you have not mentioned the description of the asset, its useful life and period for which such asset was put to use during the year. How can I tell you the depreciation charge. Please revist your question.

I don't know why you feel the replies given on this forum, specially the professional ones, are biased.

Regards,


KAMRAN.

[awaisaftab]

Kamran

I dont want to involve in any long debate with you

I know the differce between accounting and tax depreciation.
Infact I was asking the answer and expecting a reply on the baisis of ITO 2001, I am Untouch with tax law for last many year. The work of tax has been outsourced by may company.

Assume I am asking question about a building and assuming the provision of ITO,2001 are also followed for making financial statement and we are talking about a private limited company.

[kamranACA]

Dear Aftab,

Are we debating for something? I don't see anything biased on this whole sub-forum. If you see, please let me know for my correction.

You mentioned in your previous question the words "income statement" which is never used in terms of ITO 2001. Anyway.

Please note, even if you are using same depreciation rates as have been given in third schedule of ITO 2001, you cannot charge initial allowance (allowed under section 23 of ITO 2001) in your books of account.

Initial allowance is not a normal depreciation charge in fact. Even ITO 2001 differentiates it from normal depreciation charge. You can see the governing sections are different in ITO 2001.

Please remember that depreciation in accounts has to be charged based upon useful life of the assets. If some one is using tax depreciation rates even for accounting purpose, he is assuming that useful lives are in acordance with such rates.

As for as initial allowance is concerned for tax purpose, the eligible assets have also been stipulated in section 23. This allowance is not available on every asset. You have mentioned the building. Yes, in first year after construction (a new building) initial allowance is available at 50% of cost. The normal depreciation would thus be calculated after adjusting the cost with initial allowance i.e. using diminishing balance method.

If you need to know how these are calulated please study section 23 (also section 22) of ITO 2001.

Having remained untocuh with practice (handling) is not an issue. I am not the tax partner in my firm. You only have to study the tax law and keep the things in memory. I also recommend you to update the knowledge with every year's finance act and other significant amendments.

Let me know if you need to know something else on this topic.


Regards,


KAMRAN.

[awaisaftab]

Dear Kamran

From you opinion I reach on that result that we cannot charge Iniitial allowance as expense in our books of accounts.

Sir although the word income statement is not included anywhere in ITO,2001 but the words account or books of accounts is mentioned in tax law. You can use word P& L A/c instead of income stmt.



Awais

[kamranACA]

Yes, its clarified. No problem.