Industrialization remains the cornerstone of Pakistan’s economic strategy. To stimulate new investment and encourage technological advancement, Section 65G of the Income Tax Ordinance, 2001 offers a 25% investment tax credit for specified industrial undertakings that make qualifying capital investments.
This incentive reflects the Government’s policy to promote greenfield industrialization, renewable energy production, and manufacturing innovation through targeted tax relief.
Legal Provision Section 65G
“When making certain eligible capital investments, the eligible taxpayers shall be allowed to take an investment tax credit of twenty-five percent of the eligible investment amount, against tax payable under the provisions of this Ordinance including minimum and final taxes. The tax credit not fully adjusted during the year of investment shall be carried forward to the subsequent tax year, subject to the condition that it may be carried forward for a period not exceeding two years.”
1. Rate of Tax Credit
A 25% tax credit is available on the eligible investment amount made during a tax year.
This credit can be adjusted against normal tax liability, minimum tax, and final tax, ensuring broad utility.
If not fully utilized, the unused portion may be carried forward for up to two subsequent tax years.
2. Eligible Investments under Section 65G(2)
For the purpose of claiming this tax credit, eligible investment includes:
Purchase and installation of new machinery;
Construction of industrial buildings;
Procurement of equipment, hardware, and software (excluding self-created software);
Investment in renewable energy generation assets;
Excludes used capital goods and internally developed software.
This ensures the relief is granted only for fresh and value-adding industrial development.
3. Eligible Taxpayers under Section 65G(3)
(a) Greenfield Industrial Undertakings
Defined under Section 2(27A), these include new industrial entities engaged in:
Manufacturing goods or materials, or
Shipbuilding activities.
Conditions for Eligibility:
Incorporated between 30 June 2019 and 30 June 2024;
Must not be formed by splitting up or reconstruction of an existing business;
Must not have received machinery or buildings transferred from an existing undertaking;
Must not form part of an expansion project.
This provision promotes new investments rather than restructuring existing operations.
(b) Renewable Energy Manufacturing Units
Industrial undertakings established by 30 June 2023 engaged in manufacturing:
Machinery, equipment, or items exclusively used for generation of renewable energy (solar, wind, etc.).
The relief applies for five years from the date of establishment of such undertaking.
4. Carry Forward of Unused Tax Credit
If the tax credit exceeds the tax payable for the year, the remaining balance can be carried forward for up to two years, ensuring investors can fully utilize the incentive even in early loss-making years.
5. Example of Computation
Suppose a greenfield industrial undertaking invests PKR 200 million in new machinery and buildings.
Tax Credit:
200,000,000×25%=PKR50,000,000
If the current year’s tax liability is PKR 30 million, the credit will reduce it to zero, and the remaining PKR 20 million may be carried forward to the next year (for up to two years).
6. Policy Rationale and Objectives
Section 65G aims to:
Encourage industrial expansion and employment generation;
Support manufacturing for renewable energy;
Attract foreign direct investment (FDI) in industrial infrastructure;
Promote local technology manufacturing and industrial self-sufficiency.
This incentive strategically aligns with Pakistan Vision 2025 and the Green Industrial Policy.
7. Documentation and Compliance Requirements
To claim the benefit, taxpayers must maintain and provide:
Investment invoices and import documents for machinery/equipment;
Proof of installation and commissioning;
Certificate of incorporation for new undertakings;
Tax computations and schedules reflecting credit utilization;
Audited financial statements verifying new asset capitalization.
8. Restrictions and Disqualifications
Tax credit will not be available if:
The undertaking is formed by splitting up or reconstitution of an existing entity;
Machinery or buildings are transferred from an old business;
The project represents an expansion of an existing facility;
The investment involves used or second-hand equipment.
Section 65G provides a strategic tax credit mechanism to boost Pakistan’s industrial productivity and encourage environmentally responsible manufacturing. By granting a 25% investment tax credit, the government offers tangible financial relief that directly incentivizes industrial innovation, modernization, and renewable energy development.
At Tanweer Habib & Co., we advise manufacturers, investors, and industrial entrepreneurs on eligibility assessments, documentation, and tax planning to ensure lawful availing of the Section 65G incentive under FBR regulations.
FAQs on Section 65G Tax Credit for Specified Industrial Undertakings
1. What is Section 65G about?
It provides a 25% investment tax credit for eligible industrial undertakings making capital investments in new machinery, equipment, or renewable energy manufacturing facilities.
2. Who qualifies as an eligible taxpayer?
Greenfield industrial undertakings and companies engaged in renewable energy equipment manufacturing.
3. What types of investment qualify?
Purchase and installation of new machinery, buildings, equipment, hardware, and software (excluding used goods and self-created software).
4. What is the percentage of tax credit allowed?
A 25% investment tax credit on the eligible investment amount.
5. Can the tax credit be carried forward?
Yes, for up to two subsequent tax years if not fully utilized in the year of investment.
6. Is the credit available against minimum and final taxes?
Yes, it can be adjusted against normal, minimum, and final tax liabilities.
7. What is a greenfield industrial undertaking?
A newly established industrial entity incorporated between 30 June 2019 and 30 June 2024, not formed by reconstruction or asset transfer.
8. Is the tax credit available to expansion projects?
No, it is only for new undertakings, not expansions of existing businesses.
9. What is the eligibility cutoff date for renewable energy undertakings?
Projects must be set up by 30 June 2023 to qualify.
10. For how many years can renewable energy undertakings claim the credit?
For five years from the date of commencement.
11. What does “dedicated use” mean in this context?
The manufactured equipment must be used solely for renewable energy generation (no multiple or general industrial uses).
12. Can imported machinery qualify for the credit?
Yes, provided it is new and not previously used anywhere.
13. Can self-developed software be included?
No, self-created software does not qualify for investment tax credit.
14. What records must be maintained for audit?
Investment invoices, import documentation, installation certificates, and audited accounts.
15. Can loss-making businesses claim this credit?
Yes, the credit can be carried forward for up to two years to offset future taxable income.
16. Does Section 65G overlap with Section 65E (industrial undertakings)?
No, Section 65G specifically targets new capital investments for greenfield and renewable energy projects.
17. Is FBR approval required to claim the credit?
Not directly, but documentation must be available for verification during audit or assessment.
18. Can a partnership or AOP claim this credit?
Yes, if it qualifies as a registered industrial undertaking under the law.
19. Is the tax credit refundable?
No, it is non-refundable, but can be carried forward for adjustment.
20. How can Tanweer Habib & Co. assist investors?
We provide end-to-end tax planning, documentation review, and compliance filing for claiming Section 65G tax credits lawfully under FBR regulations.
