Carry forward of business losses allowed by the Federal Board of Revenue (FBR) in a move to provide relief to business community.
Section 57 of the Income Tax Ordinance, 2001 allows individuals and entities to carry forward business losses incurred during a tax year. The Federal Board of Revenue (FBR) issued an update to the Income Tax Ordinance, 2001, effective up to June 30, 2021, incorporating amendments through the Finance Act, 2021.
Understanding Section 57: Carry Forward of Business Losses
1. Basic Principle (Sub-section 1 and 2):
• If a person sustains a loss under the head “Income from Business” during a tax year and cannot wholly set off the loss under section 56, the remaining loss can be carried forward to the following tax year.
• The unabsorbed loss can be set off against the person’s income chargeable under the head “Income from Business” for the subsequent year.
• However, no loss can be carried forward for more than six tax years immediately succeeding the year for which the loss was first computed.
2. Special Provisions (Sub-section 2A and 2B):
• For losses sustained by a banking company wholly owned by the Federal Government and approved by the State Bank of Pakistan (applicable from July 1, 1995, to June 30, 2001), the loss can be carried forward for ten years.
• For losses sustained by a resident company engaged in the hotel business in Pakistan (applicable from July 1, 2020), the loss can be carried forward for eight years.
3. Priority in Set Off (Sub-section 3):
• If a person has a loss carried forward for more than one tax year, the loss of the earliest tax year shall be set off first.
4. Set Off of Specific Losses (Sub-section 4):
• Loss attributable to deductions allowed under sections 22, 23, 23B, and 24 that has not been set off against income can be set off against fifty percent of the person’s balance income chargeable under the head “Income from Business” in the following tax year.
• The set-off increases to one hundred percent if the taxable income for the year is less than ten million Rupees.
5. Sequence of Deductions (Sub-section 5):
• In determining whether a person’s deductions under sections 22, 23, 23B, and 24 have been set off against income, the deductions allowed under those sections shall be taken into account last.
Additional Section – 57A: Set Off of Business Loss Consequent to Amalgamation
• This section outlines the set-off of assessed loss (excluding capital loss) for the tax year of an amalgamating company against business profits and gains of the amalgamated company, and vice versa, in the year of amalgamation.
• Unadjusted losses can be carried forward for up to six tax years succeeding the year of amalgamation.
• Specific conditions apply, including the requirement for the amalgamated company to continue the business of the amalgamating company for a minimum period of five years.
Conclusion:
Section 57 of the Income Tax Ordinance, 2001, serves as a crucial provision for businesses facing financial setbacks. By allowing the carry forward of business losses, the tax system provides a mechanism for entities to recover from losses in subsequent years, fostering economic resilience and sustainability. The specific conditions and limitations outlined in the section ensure a balanced approach to the utilization of carried-forward losses, promoting transparency and compliance within the taxation framework.
