Can I claim depreciation on my shop equipment, furniture, vehicle or machinery?

What does the law say?

Section 20(2) of the Income Tax Ordinance, 2001 says that expenditure on a depreciable asset with a useful life of more than one year must be depreciated under sections 22 and 23, not deducted in full when paid. Section 22 then allows a yearly deduction for depreciation of assets used in the business. Section 23 gives an extra first-year deduction, the initial allowance, for certain new assets.

A “depreciable asset” under section 22(15) is tangible movable property, immovable property (other than unimproved land) or a structural improvement, that has a normal useful life over one year, is likely to lose value through wear and tear or obsolescence, and is used wholly or partly to earn business income.

Rates for tax year 2027

The rates in Part I of the Third Schedule are applied to the written down value:

Asset	Rate
Building (all types)	10%
Furniture (including fittings), machinery and plant (not otherwise specified), motor vehicles (all types), ships, technical or professional books	15%
Computer hardware including printer, monitor and allied items, machinery and equipment used in manufacture of I.T. products, aircraft and aero engines	30%
Ramp built to provide access to persons with disabilities, not exceeding Rs. 250,000 each	100%

Part II of the Third Schedule sets the initial allowance under section 23 at 25% for plant and machinery, applied to cost.

How does it work in practice?

Written down value. Section 22(5) defines it. For an asset bought during the tax year, it is cost less any initial allowance. For older assets, it is cost less all depreciation and initial allowance already allowed. The Ordinance no longer halves depreciation in the first year: the proviso that did so was omitted by the Finance Act, 2022.

Initial allowance. Section 23 applies when an eligible asset is placed into service in Pakistan for the first time. Section 23(5) excludes road transport vehicles unless plying for hire, furniture and fittings, plant or machinery that has been used previously in Pakistan, and immovable property or structural improvements. So a new sewing machine or oven qualifies. A second-hand machine bought locally, a shop counter or the owner’s car does not.

Partly private use. Section 22(3) restricts the deduction to the “fair proportional part” when an asset is used partly for business and partly for another purpose. Section 22(6) says the written down value is still worked out as if the asset were used solely for business.

Vehicles. Section 22(13)(a) caps the cost of a passenger transport vehicle not plying for hire at Rs. 7,500,000.

Buildings. Section 22(13)(b) excludes the cost of land from the cost of a building.

Ceiling and disposal. Section 22(7) says total depreciation and initial allowance cannot exceed the asset’s cost. Section 22(8) denies depreciation in the year of disposal and taxes any gain over written down value as business income, or allows a loss below it as a deduction.

Withholding link. The proviso to section 22(1) denies depreciation on amounts paid to a seller for capital assets where the tax that had to be withheld from those payments was not deducted and deposited in the treasury.

Particulars in the return. Rule 12 of the Income Tax Rules, 2002 lists what must be furnished with the return to claim depreciation or initial allowance, including a description of each asset, the extent of part use, the date of acquisition and the written down value.

Worked example (illustrative figures)

Hamza runs a printing shop in Lahore. In tax year 2027 he buys, all new:

Asset	Cost (Rs.)	Use
Printing machine	1,000,000	Business only
Furniture for the counter area	200,000	Business only
Car	9,000,000	60% business, 40% family

Printing machine

1. Initial allowance, 25% x Rs. 1,000,000 = Rs. 250,000.
2. Written down value for the year = Rs. 1,000,000 - 250,000 = Rs. 750,000.
3. Depreciation, 15% x Rs. 750,000 = Rs. 112,500.
4. Total deduction in year one = Rs. 250,000 + 112,500 = Rs. 362,500.
5. Written down value carried to next year = Rs. 1,000,000 - 362,500 = Rs. 637,500. Year two depreciation = 15% x Rs. 637,500 = Rs. 95,625.

Furniture

No initial allowance. Depreciation = 15% x Rs. 200,000 = Rs. 30,000.

Car

1. Cost capped at Rs. 7,500,000. No initial allowance.
2. Full depreciation = 15% x Rs. 7,500,000 = Rs. 1,125,000.
3. Business share, 60% x Rs. 1,125,000 = Rs. 675,000 deductible.
4. Next year’s written down value, as if wholly business = Rs. 7,500,000 - 1,125,000 = Rs. 6,375,000.

Total for tax year 2027: Rs. 362,500 + 30,000 + 675,000 = Rs. 1,067,500.

What if I bought a used machine?

It still earns yearly depreciation under section 22. If it has been used previously in Pakistan, section 23(5)(c) excludes it from the initial allowance.

What if depreciation creates a loss?

The Ordinance has separate rules for carrying forward the part of a business loss that comes from depreciation. They are explained on the page on business losses.

Common mistakes

• Deducting the full cost of equipment in one year. Section 20(2) requires the cost to be recovered through depreciation instead.
• Claiming initial allowance on furniture or a car. Both are excluded by section 23(5).
• Using the car’s full price. The cost is capped at Rs. 7,500,000.
• Reducing next year’s value by only the business share. Section 22(6) works out written down value as if the asset were used only for business.

What to check in the official text

Read Part I and Part II of the Third Schedule in the consolidated Ordinance. The printed text also shows an older rate table in a footnote that was replaced by the Finance Act, 2005; the rates above are the current ones. Read section 22 in full, including sub-sections (8) to (11) on disposal, and section 23(5) for the list of excluded assets.