Loss carry forward allowed for three years on disposal of securities has been introduced through an amendment to the Income Tax Ordinance, offering relief to investors in the stock exchange.
The Finance Supplementary (Second Amendment) Bill of 2019, presented in the National Assembly on Wednesday, includes the provision for investors to carry forward losses for up to three years on the disposal of securities.
This amendment focuses on Section 37A of the Income Tax Ordinance, 2001, which deals with the taxation of gains and losses from the sale of securities.
According to the amendment:
“Provided that so much of the loss sustained on the disposal of securities in the tax year 2019 and onwards that has not been set off against the gain of the person from the disposal of securities chargeable to tax under this section shall be carried forward to the following tax year and set off only against the gain of the person from the disposal of securities chargeable to tax under this section, but no such loss shall be carried forward to more than three tax years immediately succeeding the tax year for which the loss was first computed.”
This new provision allows investors to carry forward any losses incurred on the disposal of securities in the tax year 2019 and beyond. Such losses can be set off against gains from the disposal of securities chargeable to tax under Section 37A of the Income Tax Ordinance. However, these losses may not be carried forward for more than three tax years immediately following the tax year in which the loss was initially calculated.
The decision to allow for the carryforward of losses in the stock market is expected to have several significant implications for investors and the stock exchange.
Risk Management: Investors can now more effectively manage their risks. The ability to offset future gains against past losses provides a safety net in the case of subsequent market downturns, potentially encouraging more investors to participate in the stock market.
Encouragement of Long-Term Investment: The provision may encourage long-term investment strategies by offering a means to balance losses and gains over multiple tax years. This approach can lead to more stable and informed investment decisions.
Market Confidence: The move is likely to boost confidence in the stock market. Investors may find it more attractive to engage in trading and investments, knowing that they have some protection against potential losses in the future.
Tax Planning: Investors and traders can engage in more effective tax planning. By carrying forward losses, they can strategically manage their tax liabilities and potentially minimize their overall tax burden.
Portfolio Diversification: The ability to offset losses over multiple years might lead to increased diversification of investment portfolios, as investors can take more calculated risks without the fear of immediate losses.
It is important to note that this amendment to the Income Tax Ordinance will need to be approved by the National Assembly to become law. Once enacted, it will be interesting to observe how investors and the stock market respond to the new regulations.
In conclusion, the government’s decision to introduce the provision for carrying forward losses on the disposal of securities for up to three years is a significant development that is expected to provide substantial relief to stock market investors. It can enhance risk management, encourage long-term investment, boost market confidence, promote effective tax planning, and diversify investment portfolios. This move reflects the government’s efforts to create a more investor-friendly environment and stimulate economic growth in Pakistan.