Setting off of Losses attributable to Deductions
Setting off of losses attributable to deductions: Prior to the Finance Act, 2018, sub-section (4) of section 57 and sub-section (5) of section 59A provided that where business loss included deductions allowed under sections 22, 23, 23A, 23B and 24 that had not been set off against income, the amount not set off shall be added to the deductions allowed under those sections in the following tax year, and so on until completely set off.
Through the Finance Act, 2018, sub-section (4) of section 57 and sub-section (5) of section 59A have been substituted and now the loss attributable to deductions allowed under sections 22, 23, 23A, 23B and 24 that has not been set off against income shall be set off against 50 percent of the person’s balance income from business after setting off the business loss under sub-section (1) of section 57.
However, the condition of set off against 50% shall not apply if the taxable income for the year is less than Rs.10 million. This is illustrated through the following examples:-
Example 1 (in Rs.)
Tax Year 1
Sales 50,000,000
Business deductions excluding depreciation/amortization 30,000,000
Deductions u/s 22, 23, 23A, 23B & 24 40,000,000
Loss for the year (20,000,000)
Tax Year 2
Sales 70,000,000
Total admissible deductions for the tax year 2 40,000,000
Business income for the year 30,000,000
Brought forward loss (20,000,000)
Loss set off against 50% of business income 15,000,000
Taxable income after setting off losses 15,000,000
Balance loss to be carried forward to Tax Year 3 (5,000,000)
Example 2
Tax Year 1
Sales 50,000,000
Business deductions excluding depreciation/amortization 30,000,000
Deductions u/s 22, 23, 23A, 23B & 24 40,000,000
Loss for the year (20,000,000)
Tax Year 2
Sales 45,000,000
Total admissible deductions for the tax year 2 40,000,000
Business income for the year 5,000,000
Loss for Tax Year 1 shall be set off against 100% of business income as taxable income for the year is less than Rs.10 million.
Taxable income after setting off losses (15,000,000)
Balance loss to be carried forward to Tax Year 3 (15,000,000)
Example 3
Tax Year 1
Sales 50,000,000
Business deductions excluding depreciation/amortization 80,000,000
Deductions u/s 22, 23, 23A, 23B & 24 0
Business loss for tax year 1 (30,000,000)
Tax Year 2
Sales 70,000,000
Business deductions excluding depreciation/amortization 20,000,000
Deductions u/s 22, 23, 23A, 23B & 24 80,000,000
Loss for the year (30,000,000)
Tax Year 3
Sales 90,000,000
Total admissible deductions 40,000,000
Business income for the year 50,000,000
Setting off business loss for tax year 1 (30,000,000)
Income from business 20,000,000
50% of income from business 10,000,000
Loss for year 2 set off 10,000,000
Taxable income after setting off loss 10,000,000
Balance loss attributable to deductions u/s 22, 23, 23A, 23B 8z 24 to be carried forward to tax year 4 is (Rs. 20,000,000/-
Normal income tax shall be paid on 50% of income from business after setting off business loss i.e. normal income tax shall be paid on Rs. 10,000,000/-.
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