Income Tax Bar Association Karachi WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August TAX CREDITS & SET-OFF AND CARRY FORWARD OF LOSSES By Shabbir H. Vejlani

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August CONTENTS Tax credits & set-off and carry forward of losses  Tax Credits  Set­off of losses  Carry forward of losses  Amalgamation  Group Relief  Foreign losses  Limitations

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August TAX CREDIT – [Section 61] TAX CREDIT – [Section 61] Charitable Donations  Admissible amount and entities: –Amount paid by crossed cheque –or Fair market value of property given –as donation to –Non-profit organization –or Board of Education or University established under a Federal / Provincial law –or Educational institution / hospital / relief fund established or run by Federal / Provincial Govt. / local authority  Clause 61 of Part I of 2 nd Schedule allows direct deductions in respect of specified donations

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August TAX CREDIT – [Section 62] TAX CREDIT – [Section 62] Investment in Shares  Cost of acquiring new shares of –a public listed company –being original allottee –or from privatization commission –by a person other than a company  Credit to be recouped if shares are disposed off within 12 months.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August TAX CREDIT [Section 63] TAX CREDIT [Section 63] Approved Pension Fund  Contribution or premium paid in –approved pension fund –under the Voluntary Pension System Rules 2005 –by a Pakistani individual –having a valid NTN –not entitled to benefit under any other approved employment pension or annuity scheme –deriving income under the head “Salary” or “Business income”

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August TAX CREDIT [Section 64] TAX CREDIT [Section 64] Profit on debt  Profit or share in rent  and share in appreciation of value of house  paid on a loan –by a scheduled bank –or NBFI regulated by SECP –or advanced by Govt., local authority, statutory body –or listed company  for construction / acquisition of house.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August TAX CREDIT- Computation [Section 61 to 64] Formula = (A /B) x C where A is tax assessed and B is taxable income for the tax year, whereas C refers to lesser of: Charitable Donations  Total amount of donation (FMV of property); or  In case of individual & AOP 30% and in case of company 15% of taxable income Investment in Shares  Total cost of acquiring the shares; or  10% of taxable income; or  Rs. 150,000 Approved Pension Fund  Total contribution or premium; or  20% of the taxable income (22% to 50% for persons above 40 years of age); or  Rs. 500,000 Profit on debt  Total Profit paid; or  40% of the taxable income for the year; or  Rs. 500,000

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August TAX CREDIT- Miscellaneous provisions [Section 65]  The member’s share in the income of an AOP (other than professional AOP) will be included in the component “A”  In component “B” the amount of tax in the case of a member of an AOP (other than professional AOP) will be taken as if the member’s share in the income of AOP was liable to tax.  The tax credits shall be applied in the following order: –Foreign tax credit –Tax credit allowed under sections 61 to 64 –Tax credit for tax paid in advance and tax collected / deducted at source

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August TAX CREDIT- Miscellaneous provisions [Section 65]  The tax credits under sections 61 to 64 not able to be credited during the year will lapse, i.e. will neither be refunded nor carried forward nor carried back.  Excess tax credit, that cannot be absorbed by member of an AOP (other than professional AOP), may be claimed by the association for that year. –However, an agreement in writing to this effect between the member and the association must be furnished alongwith association’s return.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August LOSS  “Income” includes loss of income [S. 2(29)]  Loss in a tax year is the excess of total deductions under a head of income over the amounts chargeable to tax under that head [S. 11(3)]

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Set off of Losses Set off of Losses [Section 56]  Loss in a tax year under any head of income, except for capital loss or speculation business loss, can be set off against income chargeable to tax under any other head of income in that year  Loss under “Income from Business” shall be set off last  Capital loss can be set off against capital gains only  Loss on disposal of capital asset will not be allowed where gain on disposal of such asset would be exempt.  Loss from a speculation business can be set off only against gains from any other speculation business

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Following losses can only be carried forward  Business losses [S. 57 & 57A]  Speculation losses [S. 58]  Capital losses [S. 59] Carry Forward of Losses Carry Forward of Losses [Section 56(2)]

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August  Carried forward business loss, other then speculation losses, shall be set off against business income  Set-off of loss of earliest year first  Statue of limitation - Six years Carry Forward of Business Losses [Section 57]

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August STATUE OF LIMITATIONS – EXCEPTIONS  Depreciation, initial allowance and amortization of intangibles – For indefinite period and to be taken as last deduction  Banking Company – Ten years if:  Loss pertains to assessment years to  Wholly owned by the Federal Government  Approved by State Bank of Pakistan for this purpose  Industrial undertaking set up in EPZ – Indefinite period [Clause (2) P. IV 2 nd Schedule] Carry Forward of Business Losses [Section 57]

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August  Carried forward speculation loss, shall be set off against speculation income  Set-off of loss of earliest year first  Statue of limitation - Six years Carry Forward of Speculation Losses [Section 58]

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August  Carried forward capital loss, shall be set off against capital gains  Set-off of loss of earliest year first  Statue of limitation - Six years Carry Forward of Capital Losses [Section 59]

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Set off/Carry Forward of Losses – Amalgamation [Section 57A]  Entitlement – Business losses of Amalgamating company /companies including unabsorbed depreciation, initial allowance and amortization of intangibles  Limitation – Upto Six years from the tax year in which loss ascertained in the case of Amalgamating company  Condition 1 – Amalgamated company should continue the business of amalgamating company for at least 5 years from the date of amalgamation.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August  Condition 2 – Compliance of all conditions imposed by SBP or SECP in the Scheme of Amalgamation  Default – Non-compliance of any condition imposed by SBP or SECP  Repercussions of Default – Addition of loss allowed to Amalgamated Company to the income in the year of discovery of default Set off/Carry Forward of Losses – Amalgamation [Section 57A]

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Group Relief [Section 59B]  Subsidiary of a public company listed on stock exchange in Pakistan- –owning and managing an industrial undertaking –may surrender its tax losses for the year other than brought forward losses –in favour of its holding company.  Holding company should own or acquire 75% or more of share capital of the subsidiary.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Group Relief [Section 59B]  Loss surrendered may be claimed for a maximum period of three tax years- –if 75% ownership remains with the holding company for 5 years –and subsidiary continues the same business for 5 years.  After 3 years the subsidiary company shall carry forward the losses.  If holding company disposes of shares during the 5 years period- –so as to bring the ownership at less than 75% –then holding company will in the year of disposal –offer the profit on which tax was not paid due to set-off of subsidiary losses.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Group Relief [Section 59B] Issues  Whether loss surrendered in year 1 may be carried forward upto 3 years, or losses for 3 consecutive year, or three totally different years may be surrendered? – In my humble opinion it is all of these due to language of sub-section (2) and (3)  If holding company has its own brought forward losses but income for the year, can it keep those brought forward losses on hold and first adjust the loss surrendered by subsidiary. – In my humble opinion, yes, as there is no restriction in law.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Limitations [Section 59A]  Ordinary AOP entitled to carry forward and set- off losses but its members not entitled to do so.  AOP of Professionals – Members entitled to carry forward and set-off losses but the AOP not entitled to do so.  Successor in business, otherwise than by inheritance, not entitled to carry forward and set-off losses.  Only assessed and determined losses can be carried forward and set-off.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Losses in case of Change in Control of an Entity [Section 98 ] If 50% or more of underlying ownership is changed:  Loss incurred in a tax year before the change shall be allowable in a tax year after the change only if the entity: continues to conduct the same business after the change as it conducted before the change until the loss has been fully set off; & does not, until the loss has been fully set off, engage in any new business or investment after the change.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Foreign losses [Section 104]  Where deductible expenditure exceeds foreign source income under a head of income, such foreign loss shall be carried forward to following tax year and can only be set off against foreign source income under that head of income  Limitation for carry forward - six tax years  Provisions of apportionment of deductions shall apply in case of foreign losses  Income from speculation business shall be treated as a separate head of income.  Foreign source income chargeable under a head of income shall be a separate head of income.

Income Tax Bar Association Karachi Workshop on Income Tax Hotel Sheraton August Losses sustained during exemption period [Section 55(2)] Where a person’s income from business is exempt from tax, any loss sustained in the exemption period can be set off against income chargeable to tax after the exemption expires. Section 55 (2) debarring such set-off was deleted by Finance Act 2003.

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