The Federal Board of Revenue (FBR) has informed banks that only bad debts classified as losses related to non-performing assets under the State Bank of Pakistan’s (SBP) Prudential Regulations will be allowed as expenses.
The FBR’s explanatory circular on the Finance Act 2024 outlines amendments to the Seventh Schedule of the Income Tax Ordinance 2001. Previously, rule 1(d) of the Seventh Schedule disallowed bad debts classified as substandard or doubtful under SBP’s Prudential Regulations as expenses, only permitting those classified as losses under specific restrictions.
However, the Finance Act 2024 has substituted sub-rule (d) of rule 1. Now, bad debts classified as “substandard” or “doubtful” under SBP’s Prudential Regulations or any provisions for advances, off-balance sheet items, or other financial assets categorized as performing, under-performing, or non-performing under applicable accounting standards, including IFRS 09, are not allowed as expenses.
Furthermore, a new sub-rule (da) states that provisions or expected credit losses for advances and off-balance sheet items or any other financial assets existing before or after January 1, 2024, under IFRS-09 are not deductible as expenses.
Prior to the Finance Act 2024, sub-rule (g) of rule 1 excluded adjustments made in annual accounts due to the application of international accounting standards 39 and 40 from taxable income calculations. The amended sub-rule (g) now excludes adjustments made in annual accounts due to any applicable accounting standards, policies, or guidelines from the State Bank of Pakistan.
Additionally, rule 7CA specifies that section 4C provisions apply to taxpayers under this schedule and are taxed at rates specified in Division IB of Part I of the First Schedule from tax year 2023 onwards. The Finance Act 2024 has inserted an explanation clarifying that “tax year 2023 onwards” means section 4C provisions apply from tax year 2023 and all subsequent tax years.
