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

A sole proprietor can deduct the cost of business assets such as machinery, computers, furniture and vehicles, but through depreciation spread over several years rather than as a single expense. The Income Tax Ordinance, 2001 sets the rates in the Third Schedule and the method in sections 22 and 23.

What does the law say?

Section 20(2): capital cost is not an ordinary expense. Where expenditure is incurred in acquiring a depreciable asset, the person “must depreciate or amortise the expenditure in accordance with sections 22, 23, 24 and 25”.

Section 22: yearly depreciation. Section 22(1) allows a deduction for depreciation of depreciable assets used in the business in the tax year. Section 22(2) computes it by applying the Part I rate to the written down value of the asset at the beginning of the year. A “depreciable asset” in section 22(15) is tangible movable property, immovable property (other than unimproved land) or a structural improvement, with a normal useful life over one year, likely to lose value through wear and tear or obsolescence, and used wholly or partly in the business.

Section 23: initial allowance. An eligible depreciable asset placed into service in Pakistan for the first time gets an initial allowance at the Part II rate, applied to cost. Section 23(5) excludes road transport vehicles unless plying for hire, furniture including fittings, plant or machinery used previously in Pakistan, and immovable property or structural improvements.

The rates in force. The Third Schedule in the consolidated text as amended to 30 June 2026, which applies for tax year 2027:

Part I class	Rate on written down value
I. Building (all types)	10%
II. Furniture (including fittings) and machinery and plant (not otherwise specified), motor vehicles (all types), ships, technical or professional books	15%
III. Computer hardware including printer, monitor and allied items, machinery and equipment used in manufacture of I.T. products, aircrafts and aero engines	30%
V. A ramp built to provide access to persons with disabilities not exceeding Rs. 250,000 each	100%

Part II sets the initial allowance under section 23 at 25% for plant and machinery. Class IV covers mineral oil concerns and is not relevant to most small businesses.

How does it work in practice?

In the year of purchase, the written down value at the beginning of the year is the cost less any initial allowance (section 22(5)(a)). In later years it is cost less all depreciation and initial allowance already allowed (section 22(5)(b)). Section 22(7) says total deductions over the life of the asset cannot exceed its cost.

The current text of section 22 contains no month-by-month apportionment. The footnotes record that sub-section (4), which used to reduce depreciation by months of use, was omitted by the Finance Act, 2004.

Part-personal use. Under section 22(3), where an asset is used partly for the business and partly for another purpose, the deduction is restricted to the “fair proportional part”. Section 22(6) says the written down value is still computed as if the asset were used only for business.

Vehicles. Under section 22(13)(a), the cost of a passenger transport vehicle not plying for hire cannot exceed Rs. 7,500,000 for depreciation.

Worked example (illustrative figures)

Sana runs a bakery in Lahore. In tax year 2027 she buys a new oven that has not been used in Pakistan before, for Rs. 1,000,000, and a car for Rs. 4,000,000. Assume, for this example, that the oven is plant and machinery within Part I class II, and that the fair proportional part of the car’s business use is 75%.

Oven, tax year 2027:

1. Initial allowance: 25% of Rs. 1,000,000 = Rs. 250,000.
2. Written down value at the beginning of the year: Rs. 1,000,000 minus Rs. 250,000 = Rs. 750,000.
3. Depreciation: 15% of Rs. 750,000 = Rs. 112,500.
4. Total deduction: Rs. 250,000 + Rs. 112,500 = Rs. 362,500.

Oven, tax year 2028: written down value = Rs. 1,000,000 minus Rs. 362,500 = Rs. 637,500. Depreciation: 15% of Rs. 637,500 = Rs. 95,625.

Car, tax year 2027:

1. No initial allowance, because section 23(5)(a) excludes a road transport vehicle not plying for hire.
2. Cost is under the Rs. 7,500,000 cap, so the full Rs. 4,000,000 is used.
3. Depreciation at full business use: 15% of Rs. 4,000,000 = Rs. 600,000.
4. Restricted to 75%: Rs. 450,000 allowed.
5. Written down value carried to tax year 2028, computed as if used only for business under section 22(6): Rs. 4,000,000 minus Rs. 600,000 = Rs. 3,400,000.

What if …?

What if I buy a second-hand machine? Section 23(5)(c) excludes plant or machinery that has been used previously in Pakistan from the initial allowance. Section 22 depreciation still applies.

What if I sell the asset? Section 22(8) allows no depreciation in the year of disposal. A sale price above written down value is taxed as business income; a lower price gives a deduction for the difference.

What if I did not deduct withholding tax when paying for the asset? The proviso to section 22(1) denies depreciation on the amount paid for the asset where the withholding tax deductible on that payment was not deducted and deposited. That rule is covered on a separate page.

Common mistakes

• Using the old table. The consolidated text still prints the pre-2005 table as a footnote with rates such as 20% for motor vehicles. The current Part I gives 15% for vehicles and 30% for computer hardware.
• Claiming initial allowance on furniture or a car. Section 23(5) excludes both.
• Including land. Section 22(13)(b) excludes the cost of land from the cost of immovable property.
• Depreciating the full price of an expensive car. The Rs. 7,500,000 cap in section 22(13)(a) applies.

What to check in the official text

Read sections 20(2), 22 and 23, then Part I and Part II of the Third Schedule in the official PDF. Whether a particular item, such as a point-of-sale terminal or a refrigerated display, falls within “machinery and plant” or “computer hardware” is a question of classification that the Schedule does not answer item by item.