Taxation

Tax credit for investment in plant and machinery under section 65B: the cut-off dates, Sapphire Textile and the Supreme Court

Section 65B was for a decade one of the most valuable incentives for manufacturers: a direct credit against tax for money spent on extending, expanding, balancing, modernising or replacing plant and machinery. Its end date was moved four times, and the last move, made by the Finance Act, 2019, produced a round of litigation in Karachi that reached the Supreme Court. Manufacturers asking for the best tax lawyer in Pakistan to rescue a section 65B claim for machinery installed after June 2019 need to know that the Supreme Court has, on the reported account, rejected the vested-rights argument for later years. This guide explains how the credit works, what the courts decided, and how claims and audits of the credit are handled today.

What section 65B allows

The credit is available to a taxpayer that is a company and that invests in the purchase of plant and machinery for an industrial undertaking set up in Pakistan, for the purposes of extension, expansion, balancing, modernisation and replacement. The key features of the provision are:

• Rate: ten per cent of the amount invested (subsection (1)).
• Taxes covered: the credit is set against tax payable, including minimum tax and final taxes payable under the Ordinance.
• Timing: the credit is deducted from the tax payable for the tax year in which the plant and machinery is installed (subsection (3)).
• Carry-forward: where there is no tax payable in the year of installation, or the tax payable is less than the credit, the unused amount is carried forward, for not more than two tax years in the case of the ordinary ten per cent credit (subsection (5)).
• Higher credit for BMR through new equity: a company set up in Pakistan before 1 July 2011 that invested through one hundred per cent new equity between 1 July 2011 and 30 June 2016 in balancing, modernisation or replacement of plant already installed could claim twenty per cent, with a longer carry-forward (subsections (4) and (5)). "New equity" takes its meaning from section 65E.
• Withdrawal: where the Commissioner later finds that the conditions were not met, the credit can be withdrawn and tax payable recomputed (subsection (6)).

For the purposes of sections 65B and 65E, section 65D(5) treats an industrial undertaking as set up on the date it is ready to go into production. That definition is often decisive where the dispute is about when a new line came into being.

The moving cut-off date

Section 65B was inserted by the Finance Act, 2010. The window for purchase and installation was then changed by successive Finance Acts:

Finance Act	Change to the window in subsection (2)
2010	Credit introduced for plant and machinery purchased and installed between 1 July 2010 and 30 June 2015
2015	End date extended to 30 June 2016
2016	End date extended to 30 June 2019
2018	End date extended to 30 June 2021
2019	End date brought back to 30 June 2019; first proviso reducing the credit to five per cent for tax year 2019; second proviso keeping the carry-forward rules alive after tax year 2019

The 2019 change caught companies that had ordered or imported machinery on the strength of the 2021 date. Some had bought plant before 30 June 2019 but could not install it by then; others had planned purchases for 2019-2021. Their challenges were heard together in the Sindh High Court.

Section 65B, like section 65E, remains listed in the FBR's consolidated text of the Ordinance amended up to 30 June 2026, but the window for new investment closed in 2019. Today the provision matters mainly for legacy claims, carried-forward credits and assessments of past years.

Sindh High Court: Sapphire Textile Mills (2023)

In Sapphire Textile Mills Limited v. Federation of Pakistan, C.P. No. D-8233 of 2019 with connected petitions, a Division Bench of the Sindh High Court (Muhammad Junaid Ghaffar J and Agha Faisal J) announced a short order on 07.02.2023, with reasons recorded on 27.02.2023. Relying on Gulshan Spinning Mills Ltd v. Pakistan, 2005 PTD 259, which concerned the similar credit under section 107 of the repealed 1979 Ordinance, the Court held that the right to the credit arises on purchase of the plant and machinery, and that cutting the window back after purchase impermissibly interfered with vested rights.

The Court therefore:

• read section 65B(2) so that the credit applies where plant and machinery was purchased before 30 June 2019 and installed before 30 June 2021;
• read section 65B(3) so that the credit is deducted in the tax year of installation;
• struck down the first proviso to section 65B(1), which had reduced the rate to five per cent for tax year 2019; and
• left it to the Department to decide, in pending or fresh proceedings, whether each taxpayer's purchase and installation fell within those dates.

The Court expressly confined its findings to purchases before 30 June 2019. Later Sindh benches disposed of similar petitions in the same terms, for example C.P. No. D-1053 of 2020 and connected petitions by order dated 08.09.2023.

The Department's arguments in Sapphire are worth noting because they resurfaced on appeal: that the 2019 amendment only advanced a future expiry date and was not retrospective; that installation is an essential condition alongside purchase; and that whether a taxpayer qualifies is a factual matter for the assessing officer.

The Supreme Court decision reported in September 2024

On 19 September 2024 Business Recorder reported a 41-page Supreme Court judgment on section 65B arising from the Sindh High Court decisions. The title, case numbers and law-report citation of that judgment have not been verified for this guide, and a certified copy should be obtained before it is cited. According to the report, the Supreme Court:

• struck down the proviso reducing the credit to five per cent for tax year 2019, as violating Article 25 read with Article 8 of the Constitution, because the ten per cent rate applied to tax years 2010 to 2018 and there was no intelligible differentia for treating the 2019 group differently;
• held that the change made to subsection (2) by the Finance Act, 2019 did not infringe Articles 18, 23, 24 or 25;
• allowed the ten per cent credit to taxpayers who purchased and installed plant and machinery by 30 June 2019; and
• held that claims to the credit for later years on the strength of vested rights or promissory estoppel were inadmissible, reversing the Sindh High Court to that extent and partly allowing the converted appeals.

On that account, the reading of section 65B(2) adopted in Sapphire, which extended the installation date to 30 June 2021, no longer stands. Under Article 189 of the Constitution the Supreme Court's decision binds the High Courts, the Tribunal and the Department. Because the report is a news summary, the precise scope of the Supreme Court's orders (for example, how it treated plant purchased before 30 June 2019 but installed afterwards) should be read from the judgment itself.

The related credit under section 65E

Section 65E is a separate incentive for companies set up in Pakistan before 1 July 2011 that invest in the purchase and installation of plant and machinery for an industrial undertaking, including corporate dairy farming, either to expand existing capacity or to start a new project. The investment must be made through one hundred per cent new equity raised by issuing new shares. The Board of Investment's incentive summary describes the credit as available for five years from the date of setting up or commencement of commercial production from the new plant or expansion project, whichever is later.

Section 65E has its own conditions, rate and time limits, and it was not the subject of the Sapphire or Supreme Court decisions discussed above. A company claiming both credits for the same investment should expect close scrutiny of how the investment was funded and allocated, and should check the current text of section 65E for the tax year in question rather than relying on summaries.

Claiming the credit and answering an audit

Section 65B disputes are now mostly fought in amendment, audit and appeal proceedings for past tax years. The questions are usually factual, and both sides need the same evidence.

• Date of purchase: contracts, letters of credit, import documents and goods declarations, supplier invoices and payment through the banking system.
• Date of installation: erection and commissioning reports, trial-run records, insurance and electricity records, and the date the undertaking was ready to go into production within section 65D(5).
• Purpose: evidence that the plant was for extension, expansion, balancing, modernisation or replacement of an industrial undertaking in Pakistan, and not, for instance, for trading or non-industrial use.
• Amount invested: the cost actually incurred, reconciled with the fixed asset register and the accounts.
• Year and carry-forward: whether the credit was taken in the year of installation, and whether any unused credit was adjusted within the permitted two years.

Where the Department proposes to withdraw a credit, it will usually do so through section 65B(6) together with amendment of the deemed assessment under section 122, so the time limits and the notice requirements of that section apply (see amendment of assessment under section 122 and our show-cause notice guide).

Common mistakes and open questions

• Relying on the 2021 installation date. After the reported Supreme Court decision, a claim that depends on Sapphire's extension of the installation date to 30 June 2021 is unlikely to succeed unless the judgment itself supports it on the facts.
• Claiming in the wrong year. The credit belongs to the year of installation. Claiming it in the year of purchase, or spreading it, invites disallowance.
• Confusing the carry-forward rules. The section 65B carry-forward is separate from the carry-forward of minimum tax under section 113, whose own pre-2021 limits were settled by the Supreme Court in Kassim Textile (see our case note).
• Assuming the five per cent rate still applies to 2019. The proviso has been struck down by both courts; assessments for tax year 2019 framed at five per cent are open to challenge on that ground.
• Overlooking forum and limitation. Constitutional petitions on the validity of the amendment are now largely spent; individual disputes go through the ordinary appeal route to the Commissioner (Appeals), the Appellate Tribunal Inland Revenue and, on questions of law, the High Court (see the appeal route guide).

Reported Tribunal decisions applying section 65B after the Supreme Court's ruling are only beginning to appear, and how individual benches treat borderline installation dates is not yet settled. Our tax and customs practice advises both manufacturers and the Department on these claims.

Common questions

This article is general information about Pakistani law and procedure, not legal advice for any specific matter. If this touches on something you're currently facing, get in touch and we'll advise on your facts directly.