Set-Off and Carry Forward of Losses

Tuesday, March 9, 2010

Set-Off and Carry Forward of Losses

Set-Off of Losses:

The adjustment of losses from one head against the income, profits or gains of any other head of income during the same tax year is called set-off of losses.

Carry-Forward of Losses:

Where the losses are not fully adjusted against the income of the same tax year and such losses are transferred to the next tax year, this process of transferring un- adjustable losses to the next year is known as carry-forward of losses.

Now the question arises, whether such adjustment of losses during the same tax year or transfer of losses to the next year is performed according to the will of the taxpayer or law has provided any specific procedure?

Remember it, Income Tax Ordinance, 2001 has provided the specific procedure for adjustment and carry forward of losses sustained by a taxpayer during the tax year.

Procedure of Set-Off of Losses:

Losses under different heads of income may be set-off under the following procedure:

1) Salary:

Salary may not be in negative. So, there is no possibility of loss under the head 'salary'

2) Property:

Gross rent received is taxable under the head income from property as a separate block of income. So, we may not set-off any loss against income from property.

3) Losses under the head Business:

To set-off and carry forward of losses, we shall classify the business losses into two categories:

i) Non-speculation business losses

ii) Speculation business losses

i) Non-Speculation Business:

Where a person sustains loss under the head "Income from Non- Speculation Business", such loss may be set-off against any other income from non- peculation business, salary, income from speculation business, capital gains and income from other sources).

For example: Mr. Akmal incurred a loss under the head 'Income from non- speculation business' he may set-off such loss against any other income from non-speculation business, salary, income from speculation business, capital gains and income from other sources)

In other words:

Loss under the

head non - speculation business

May be set-off

against income from

ii) Speculation Business:

Where a person sustains loss under the head 'Income from Speculation Business' such loss may be set-off only against income from any other speculation business. If there is no other income during the current tax year under the head speculation business, speculation loss shall be carried forward to the next year.

In other words:

Loss under the head speculation business

May be set-off only

Against

Any other income under the head speculation business

4) Losses under the head “Income from Other Sources”:

Where a person sustains loss under the head "Income from Other Sources", such loss may be set-off against any other under this head, salary, income from speculation business, income from non-speculation business and capital gains.

For example: Mr. Shabbir incurred a loss under the head "Income from Other Sources" he may set-off such loss against any other income under this head, salary, income from speculation business, income from non-speculation business and capital gains.

In other words:

Loss under the

head income from other sources

May be

set-off

Against income from

5) Loss under the head "Capital Gains"

Where a person sustains loss under the head "Capital Gains", such loss may be set-off only against any other income from the head capital gains. If there is no other income under this head, during the tax year, loss under such head shall be carried forward to the next year.

In other words:

Loss under the head capital gains

May be set-off only

against

Any other income under the head "Capital Gains"

Briefly speaking:

We may categories the losses under different heads of income in the following manner:

1) Category "A"

i) Loss from non-speculation business

ii) Loss from other sources

2) Category "B"

Loss from speculation business

3) Category "C"

Loss from capital assets:

i) Loss from any head under category "A" may be set off against all categories like "A", "B" and "C"

ii) Loss from category "B" may be set-off only against any other income from category "B".

iii) Loss from category "C" may be set-off only against any other income from category "C"

Notes:

i) Where a person incurs losses under more than one head of income, including "Income from Business", the business loss shall be set-off at last.

ii) If an income from a source is exempt from tax, the loss from such source may not be set-off or carry forward.

Set Off of Losses of Companies Operating Hotels: [56A]

Subject to sections 56 and 57, where a company registered in Pakistan or Azad Jammu and Kashmir (AJ&K), operating hotels in Pakistan or AJ&K, sustains a loss in Pakistan or AJ&K for any tax year under the head “income from business” shall be entitled to have the amount of the loss set off against the company’s income in Pakistan or AJ&K, as the case may be, from the tax year 2007 onward.

Carry Forward of Loss:

Where the loss is not fully adjusted against the income of same tax year and it is transferred to the next tax year, such process of transferring loss to the next tax year is known as carry forward of loss. However, a taxpayer may carry-forward loss only under the following heads:

1) Loss under non-speculation business

2) Loss under speculation business

3) Capital loss

Procedure for Carry Forward of Loss:

1) Carry Forward of Loss under Non-speculation Business:

Any un-adjustable loss under the head non-speculation business may be carried forward upto 6 years immediately succeeding the tax year in which loss was incurred.

Notes:

i) Where more than one tax year's losses are being carried forward, the loss of the earliest tax year shall be set-off first.

ii) Any amount of unabsorbed depreciation shall be allowed as deduction against the incomes of following tax years. There is no limit of six tax years for carry forward of unabsorbed depreciation. Where losses and un-absorbed depreciation occur together, the losses shall be adjusted first and depreciation shall be adjusted last.

2) Carry Forward of Speculation Loss:

Any un-adjustable loss under the head speculation business may be carried forward upto 6 tax years immediately succeeding the tax year in which loss was incurred to set-off only against the profits and gains from the speculation business only.

Where more than one tax year's losses are being carried forward, the loss of the earliest tax year shall be set-off first.

3) Carry Forward of Capital Loss:

Any un-adjustable capital loss may be carried forward upto 6 tax years immediately succeeding the tax year in which loss was incurred to set-off only against the profit and gains from the capital assets only.

Where more than one tax year's losses are being carried forward, the loss of the earliest tax year shall be set-off first.

Set-off and Carry Forward of Losses of Banking Company:

A banking company may set-off and carry forward its losses upto a period of 10 years if the following conditions are fulfilled:

i) The banking company is wholly owned by the Federal Government as on 01- 06- 2002

ii) It has been approved by the State Bank of Pakistan (SBP) for banking business.

iii) Loss occurred during the period of 01-07-1995 to 30-06-2001.

Group Taxation: [59AA]

1) Holding companies and subsidiary companies of 100% owned group may opt to be taxed as one fiscal unit. In such cases, besides consolidated group accounts as required under the Companies Ordinance, 1984, computation of income and tax payable shall be made for tax purposes.

2) The companies in the group shall give irrevocable option for taxation under this section as one fiscal unit.

3) The group taxation shall be restricted to companies locally incorporated under the Companies Ordinance, 1984.

4) The relief under group taxation would not be available to losses prior to the formation of the group.

5) The option of group taxation shall be available to those groups companies which comply with such corporate governance requirements as may be specified by the Securities and Exchange Commission of Pakistan from time to time and are designated as company entitled to avail group taxation.

6) Group taxation may be regulated through rules as may be made by the Board.

Set Off and Carry Forward of Losses under Group (Group relief):[59B]

1) Subject to sub-section (2), any company, being a subsidiary of a holding company, may surrender its assessed loss (excluding capital loss) for the tax year (other than brought forward losses and capital losses), in favour of its holding company or its subsidiary or between another subsidiary of the holding company:

Provided that where one of the company in the group is a public company listed on a registered stock exchange in Pakistan, the holding company shall directly hold 55% or more of the share capital of the subsidiary company. Where none of the companies in the group is a listed company, the holding company shall hold directly 75% or more of the share of capital of the subsidiary company.

2) The loss surrendered by the subsidiary company may be claimed by

the holding company or a subsidiary company for set off against its income under

the head “Income from Business” in the tax year and the following two tax years

subject to the following conditions, namely:—

a) There is continued ownership for five years, of share capital of the subsidiary company to the extent of 55% in the case of a listed company, or 75% or more, in the case of other companies;

b) A company within the group engaged in the business of trading shall not be entitled to avail group relief;

c) Holding company, being a private limited company with 75% of ownership of share capital gets itself listed within three years (3) from the year in which loss is claimed;

d) The group companies are locally incorporated companies under the Companies Ordinance, 1984;

e) The loss surrendered and loss claimed under this section shall have approval of the Board of Directors of the respective companies;

f) The subsidiary company continues the same business during the said period of three years;

g) All the companies in the group shall comply with such corporate governance requirements as may be specified by the Securities and Exchange Commission of Pakistan from time to time, and are designated as companies entitled to avail group relief; and

h) Any other condition as may be prescribed.

3) The subsidiary company shall not be allowed to surrender its assessed losses for set off against income of the holding company for more than three (3) tax years.

4) Where the losses surrendered by a subsidiary company are not adjusted against income of the holding company in the said three tax years, the subsidiary company shall carry forward the unadjusted losses in accordance with section 57.

5) If there has been any disposal of shares by the holding company during the aforesaid period of five (5) years to bring the ownership of the holding company to less than 55% or 75%, as the case may be, the holding company shall, in the year of disposal, offer the amount of profit on which taxes have not been paid due to set off of losses surrendered by the subsidiary company.

6) Loss claiming company shall, with the approval of the Board of Directors, transfer cash to the loss surrendering company equal to the amount of tax payable on the profits to be set off against the acquired loss at the applicable tax rate. The transfer of cash would not be taken as a taxable event in the case of either of the two companies.

7) The transfer of shares between companies and the share holders, in one direction, would not be taken as a taxable event provided the transfer is to acquire share capital for formation of the group and approval of the Security and Exchange Commission of Pakistan or State Bank of Pakistan, as the case may be, has been obtained in this effect. Sale and purchase from third party would be taken as taxable event.

Set Off of Business Loss Consequent to Amalgamation: [57A]

1) The assessed loss (excluding capital loss) for the tax year, other than brought forward and capital loss, of the amalgamating company or companies shall be set off against business profits and gains of the amalgamated company, and vice versa, in the year of amalgamation and where the loss is not adjusted against the profits and gains for the tax year the unadjusted loss shall be carried forward for adjustment upto a period of six tax years succeeding the year of amalgamation.

2) The provisions of sub-section (4) and (5) of section 57 shall, mutatis mutandis, apply for the purposes of allowing unabsorbed depreciation of amalgamating company or companies in the assessment of amalgamated company and vice versa.

Provided that the losses referred to in sub-section (1) and unabsorbed depreciation referred to in sub-section (2) shall be allowed set off subject to the condition that the amalgamated company continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation.

2A) In case of amalgamation of Banking Company or Non-banking Finance Company, Modarabas or insurance company, the accumulated loss under the head “Income from Business” (not being speculation business losses) of an amalgamating company or companies shall be set off or carried forward against the business profits and gains of the amalgamated company and vice versa, up to a period of six tax years immediately succeeding the tax year in which the loss was first computed in the case of amalgamated company or amalgamating company or companies:

Provided that the provisions of this sub-section shall in the case of Banking companies be applicable from July 1, 2007.

3) Where any of the conditions as laid down by the State Bank of Pakistan or the Securities and Exchange Commission of Pakistan or any court, as the case may be, in the scheme of amalgamation, are not fulfilled, the set off of loss or allowance for depreciation made in any tax year of the amalgamated company or the amalgamating company or companies shall be deemed to be the income of that amalgamated company 7[or the amalgamating company or companies, as the case may be, for the year in which such default is discovered by the Commissioner or taxation officer, and all the provisions of this Ordinance shall apply accordingly.

Losses of Business Exempt from Tax:

There are two types of business exempted from tax:

1) Business permanently exempt from tax:

Losses of such business may not be set-off or carried forward. Under the Income Tax Ordinance, 2001, if an income from a source is exempt from tax, the loss from such source may not be set-off or carried forward.

2) Business exempt for a specific period (Tax holiday)

A loss incurred during the exemption period may be carried forward and set off after the expiry of exemption period. Such losses may be carried forward upto a period of six years.

1 comments:

aparna john said...

Hi,Joint Partners consist one or more joint partners who are jointly responsible with Incorporation in Qatar for the debts of the company in all their assets.Thanks....

Post a Comment