INTRODUCTION OF Set off and Carry Forward of Losses
Today, our topic is how to set off and carry forward of Losses of income in a tax year as per the income tax ordinance 2001. It is one of the main concerns of business owners or directors and persons running businesses in Pakistan. A Loss in a business occurring due to certain qualified or allowed deductions exceeding income from business chargeable to tax is considered as the suffering of a loss by the business.
Income tax ordinance 2001 has clear guidance for setting off losses against income and carrying forward losses under sections 56 set off of losses and 57 carry forward of business losses respectively.
Set off of Loss under Section 56:
As per Section 56, any person sustaining a loss in a tax year under any head of income can set off against income from any other head of income except the income derived under the head of a salary. The section is permitting that loss can be set off against business income from only the head of income from the business.
However, the followings are the exception to the said section 56:
- Setting off losses from speculation against income from speculation business only.
- Carrying forward of losses of speculation business not more than six years.
- Setting off losses from capital gain against income from the same business.
- Carrying forward of losses from capital gain not more than six years.
Carry forward of business losses under Section 57:
Carry forward of business losses treatment as per the followings:
- If A person sustains a loss for a tax year under the head income from business (other than income from speculation or capital gain) and the loss cannot be fully set off in a tax year, the loss can be carried forward to subsequent tax years.
- Setting off losses in a subsequent tax year against the income from business other than any income from speculation or capital gain.
- Loss can be set off against the income from the business up to Six years succeeding the tax year in which the loss was first computed.
- If a person has a loss in a business for more than one year, the loss of the very first or earliest tax year shall be set off first.
Carry forward of Losses from speculation business or capital gain will be treated with the same as per the followings under sections 58 and 59:
- Setting off losses from speculation against income from speculation business only.
- Carrying forward of losses of speculation business not more than six years.
- Setting off losses from capital gain against income from the same business.
- Carrying forward of losses from capital gain not more than six years.
CONCLUSION OF SET OFF AND CARRY FORWARD OF LOSSES
The overall conclusion of set off and carry forward of Losses is that income exceeding allowable expenses or deductions brings profit to the business which is subject to tax liability or tax expenses or income less than allowable deductions gives loss which is subject to the relief of tax liability to the business to subsequent tax years. Therefore, there should be a clear understanding that businesses make losses when they are newly established or in a tax year where deductions exceed income, so the treatment of loss or utilization of its benefits of whatever losses in the past to the maximum extent possible and available as per sections mentioned above.
Although, the businesses are not forecast or run to achieve benefits or relief in terms of losses adjusted or set off against business income as above. Sometimes losses are due to external factors not under control or management at the business level, so the loss is adjusted or set off against income as allowable deductions that lessen income or profit that results in a reduction of tax liability or tax expenses.
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