FBR outlines the six-year general limit and special carry-forward periods for business losses under the Income Tax Ordinance, 2001.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the rules governing the carry-forward of business losses for Tax Year 2027, including the general six-year limit and special periods applicable to certain taxpayers.
The FBR has issued the Income Tax Ordinance, 2001, updated up to June 30, 2026, containing the provisions applicable to Tax Year 2027.
Section 57: Carry-forward of business losses
Under Section 57 of the Income Tax Ordinance, 2001, where a person sustains a loss under the head “Income from Business” and the loss cannot be fully set off under Section 56, the unadjusted amount may be carried forward to the following tax year.
The carried-forward business loss can be set off against the person’s income chargeable under the head “Income from Business” in the subsequent tax year.
If the loss cannot be completely adjusted in that year, the remaining amount may continue to be carried forward and set off against eligible business income in subsequent years.
However, under the general rule, a business loss cannot be carried forward for more than six tax years immediately succeeding the tax year in which the loss was first computed.
Special carry-forward periods
The Income Tax Ordinance provides extended carry-forward periods for certain taxpayers and categories of losses.
A qualifying banking company wholly owned by the Federal Government as of June 1, 2002, and approved by the State Bank of Pakistan for this purpose, may carry forward specified losses relating to assessment years from July 1, 1995, to June 30, 2001, for a period of 10 years.
A resident company engaged in the hotel business in Pakistan may carry forward a qualifying business loss relating to a tax year commencing on or after July 1, 2020, for eight years.
Similarly, a loss sustained by Pakistan International Airlines Corporation Limited (PIACL) relating to a tax year commencing on or after January 1, 2017, may be carried forward for 10 years.
Earlier losses to be adjusted first
The law also prescribes the order in which carried-forward business losses are to be adjusted.
Where a taxpayer has business losses carried forward from more than one tax year, the loss relating to the earliest tax year must be set off first.
This rule determines the priority of losses where multiple years’ losses remain available for adjustment.
Special rules for depreciation-related losses
Section 57 contains additional provisions for losses attributable to deductions allowed under Sections 22, 23, 23B and 24 of the Income Tax Ordinance.
Where a loss attributable to these specified deductions remains unadjusted, it is generally set off against 50% of the person’s remaining income chargeable under the head “Income from Business”, after adjustment of the loss under Section 57(1).
The adjustment may continue in subsequent tax years until the relevant loss has been fully set off.
However, where the person’s taxable income for the relevant year is less than Rs10 million, the specified loss may be set off against 100% of the remaining business income.
For determining whether deductions under Sections 22, 23, 23B and 24 have been fully adjusted, these deductions are taken into account last.
Key rules for Tax Year 2027
The provisions under Section 57 establish the framework for carrying forward and adjusting business losses. While the general carry-forward period is six tax years, the law provides longer periods for specified banking companies, hotel businesses and PIACL.
Taxpayers with losses from multiple years must also ensure that earlier losses are adjusted before later losses, while businesses with losses attributable to specified depreciation and other deductions must follow the separate adjustment mechanism prescribed under the Ordinance.
These rules are important for businesses preparing their tax computations for Tax Year 2027, particularly where losses from previous years remain available for adjustment against business income.