SET OFF OF LOSSES S 56 a) Loss under any head of income except capital loss and speculation loss can

n be set off against any other head of income other than PTR. Loss under business shall be set off last i.e. priority of set off shall be given to losses other than business loss. Speculation loss can not be set off against any non-speculative income. Ho ever! any non-speculative loss "other than capital loss) can be set off against speculative gain. Same principles are applicable for capital gains. b) #t is a considered opinion that if an activity is holly exempt then loss under this activity can not be ad$usted against any taxable activity e.g. loss under agricultural income or capital loss on shares of a public company can not be ad$usted against any taxable activity. CARRY FORWARD OF LOSSES a) Head- ise situation of c%f is as under& Heads of income Salary 'ther source C/f provisions Loss can not arise Loss in a tax year can be set-off against any other head of income other than PTR but any unad$usted loss can not be c%f. (apital loss can be c%f only against future capital gains up to ) years next follo ing the tax year in hich the loss occurred. + Speculation loss can be c%f only against future speculation gains up to ) years next follo ing the tax year in hich the loss occurred. Speculation business means any business in hich purchase and sale transaction of any commodity including shares is settled other ise than actual delivery or transfer of the commodity but does not include a contract& a) to cover future price fluctuation of any commodity to be manufactured or sold in future thru actual delivery or transfer of the commodity b) to cover loss on account of future price fluctuation of shares held by an investor or dealer. c) by a member of for ard mar,et or stoc, exchange to cover any loss hich may arise in the ordinary course of his business as a member.

(apital gain

*usiness speculation

*usiness + other than speculation "i.e. normal business) .oreign income /01

-ormal business loss in a tax year can be ad$usted against any head of income other than PTR but it can be c%f only against future business income up to ) years next follo ing the tax year in hich the loss occurred.

source of .oreign loss under a particular head of income + section shall be treated as a separate head of income. .oreign loss can not be ad$usted against any Pa,istan-source income and it shall be c%f only against foreign source income up to ) years next follo ing the tax year in hich the loss occurred.

! E"amp#e of se$ off and c/f of norma# Tax year 2003 + Taxable salary -ormal business loss Tax year 2005 + Taxable salary *usiness income So#%$ion&
TAX YEAR 2007

%siness #oss& 200!000 450!000 210!000 //0!000

Taxable salary -ormal business loss *usiness loss of tax year 2003 c%f to tax year 2005
TAX YEAR 2008

200!000 450!000 /50!000 210!000

Taxable salary *usiness income Less& *%f business loss Taxable income

//0!000 /50!000

nil 210!000 30!000

*usiness loss of tax year 2003 c%f to tax year 2006

c) 'na sor ed dep and amor$i(a$ion of in$an)i #es* Tax dep "including initial allo ance) and amorti7ation for the tax year or any portion thereof hich could not be absorbed against available profits represent unabsorbed dep%amorti7ation hich is a part of business loss and normal rules for set-off and c%f shall apply except that there is no time limit for the purpose of c%f of this amount. +riori$,& *%f normal business loss has a priority over dep! initial allo ance and amorti7ation for the tax year as ell as unabsorbed amount. Taxable income of year 2 before tax depreciation Less& *%f normal business loss of year / Tax depreciation of year 2 9nabsorbed depreciation of year / 9nabsorbed depreciation to be c%f 850!000 1/0!000 800!000 140!000 30!000 660!000 620!000

-*6A a) :ssessments completed

Ta" ,ear C/f #oss for $.e ,ear inc#%din) %na sor ed dep 'na sor e d dep

2000 200/ 2002 2004 2001

200!000 40!000 20!000 /0!000 /0!000

+rofi$ efore $a" dep

8!000 8!000 /0!000 8!000 8!000

b) :ssessments under audit

Ta" ,ear Ta" dep

2008 200) 2003

40!000 /0!000 220!000

/0!000 40!000 20!000

(alculate taxable income for the tax year 2003 after ad$ustment of losses. So#%$ion& Taxable income for the tax year 2003 Rs.;;;;;;; d) Losses of tax holiday period can be c%f to post tax holiday period. e) AO+& Loss incurred by an :'P shall not be available for its members and the :'P shall c%f its losses in the subse<uent years in the normal manner. f! /%siness #oss 0i$. reference $o ama#)ama$ion sec$ion 51A& i. :malgamation means merger of ban,ing companies! nonban,ing financial institutions! insurance companies or companies o ning industrial underta,ings or providing services "not being a trading company) to ta,eover all assets and liabilities + section 2"/:) 'ne of the companies must be a public company and the scheme of amalgamation shall be approved by the State *an,! S=(P or any court. ii. :ssessed loss "other than b%f loss and capital loss) for the tax year of amalgamating company shall be set-off against business income of amalgamated company and vice versa in the year of amalgamation. 9nad$usted loss shall be c%f up to ) years next follo ing the tax year in hich the loss occurred. -o time limit for unabsorbed depreciation % amorti7ation hich shall be set-off last.

The amalgamated company shall continue the business of amalgamating company for at least 8 years from the date of amalgamation. iii. #f any of the conditions laid do n by State *an,! S=(P or any court are not fulfilled subse<uent to the ad$ustment of loss then the same shall be reversed in the year in hich such default is discovered by the tax authorities.

2RO'+ TA3AT4O5 as a sin)#e fisca# %ni$& S 56AA The salient features of Group Taxation are as follows: (i) 100% owned group of companies locally incorporated under the Companies Ordinance 1!"# may $e taxed as a single fiscal unit pro%ided an irre%oca$le option is exercised to $e taxed as a group& (ii) 'osses incurred $y any of the group companies will $e off(set against income of other group companies& (iii) Consolidated group accounts as re)uired under the Companies Ordinance 1!"# will form& (a) the $asis of computation of income& and ($) tax paya$le $y the group* (i%) Group taxation relief will not $e a%aila$le to losses prior to the formation of the group* +t means that $,f losses if any will $e lapsed& (%) +nter corporate di%idend income within the group companies entitled to group taxation shall $e exempt* 2RO'+ REL4EF& S 56/ 7S%rrender of $a" #oss , a s% sidiar, compan,! (1) - su$sidiary company may surrender its assessed loss (excluding $,f loss and capital loss) for the tax year in fa%our of its holding company or any su$sidiary of the holding company* The holding company shall directly hold share capital of the su$sidiary company as under: Shareholding ( one of the companies in the group is listed in .a/istan 00% or more ( none of the companies in the group is listed in .a/istan 10% or more (2) The loss surrendered $y the su$sidiary company may $e ad3usted $y the holding or a su$sidiary company against its $usiness income in the tax year and the following two tax years* -ny unad3usted loss shall $e re%ert $ac/ to the su$sidiary company and shall $e c,f in the normal manner* Group relief is su$3ect to the following conditions: (a) there is continued ownership for 0 years of share capital of the su$sidiary company to the extent of 10% (or 00%)* ($) a trading company within the group shall not $e entitled to a%ail group relief*

(c) if the holding company is a pri%ate company it is re)uired to $e listed within 4 years from the year in which loss is claimed* (d) the group companies are locally incorporated companies under the Companies Ordinance 1!"#* (e) 5oard of 6irectors7 appro%al of $oth the companies is re)uired* (f) the su$sidiary continues the same $usiness during the said period of 4 years* (g) all the companies in the group shall comply with the specified corporate go%ernance re)uirements* (4) The su$sidiary company can not surrender its assessed losses for more than 4 tax years* (#) This tax relief a%ailed would $e re%ersed if holding company7s e)uity interest falls $elow 10% (or 00%) as a conse)uence of disposal of shares during the stipulated period of 0 years* (0) 'oss claiming company may with the appro%al of 5O6 transfer cash to loss surrendering company e)ual to the amount of tax sa%ing in this respect* This transfer of cash would not $e allowa$le tax expense for the loss claiming company or taxa$le income for the loss surrendering company* (8) The transfer of shares $etween companies and the share holders in one direction would not $e taxa$le capital gain pro%ided the transfer is to ac)uire share capital for formation of the group and appro%al of the 9:C. or 9tate 5an/ has $een o$tained in this effect* -*17 ! 8arc. 9::6 8FC C& The records of >r. : sho the follo ing results& Rs* "20!00 0) /0!000 20!000 1/0!00 0

+ar$ic%#ars Loss under the head ?income from other source@ after setting off dividend income of Rs.40!000 #ncome from speculation business (apital gains on disposal of shares of private limited companies Loss from textile business after considering tax depreciation of Rs.260!000 Aou i. ii. iii. are re<uired to or, out the follo ing& taxable incomeB tax liabilityB and amount of loss that can be& - ad$usted against any other head of incomeB - carried for ard for a maximum of six yearsB - carried for ard for indefinite period.

78ar;s 6!

-*6/& (alculate taxable income of >r. C from the follo ing& Salary income + taxable 213!000

#ncome from business o *usiness : o *usiness * o Speculative transaction / o Speculative transaction 2 (apital gains o Sale of o Sale of o Sale of o Sale of o Sale of o Sale of o Sale of o Sale

64!000 "/00!000) "/28!000) )8!000 )6!000 55!000 "33!000) ")5!000) /05!000 "66!000) 60!000 ) years

shares of :* "Pvt) Ltd + holding period /0 months shares of (D "Pvt) Ltd + holding period 4 years shares of =. "Pvt) Ltd + holding period 5 months shares of EH "Pvt) Ltd + holding period /6 months modaraba certificates + holding period 2 months listed shares + holding period // months painting + holding period 3 years of anti<ue + holding period

"/30!000)