WORKSHOP ON INCOME TAX
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WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005. TAX CREDITS & SET-OFF AND CARRY FORWARD OF LOSSES By Shabbir H. Vejlani. CONTENTS. Tax credits & set-off and carry forward of losses Tax Credits Set­off of losses Carry forward of losses Amalgamation Group Relief

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WORKSHOP ON INCOME TAX Hotel Sheraton, Karachi 29 – 30 August, 2005

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Workshop on income tax hotel sheraton karachi 29 30 august 2005

WORKSHOP ON INCOME TAX

Hotel Sheraton, Karachi29 – 30 August,2005


Workshop on income tax hotel sheraton karachi 29 30 august 2005

TAX CREDITS & SET-OFF AND CARRY FORWARD OF LOSSES

By

Shabbir H. Vejlani


Contents

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


Tax credit section 61 charitable donations

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 2nd Schedule allows direct deductions in respect of specified donations


Tax credit section 62 investment in shares

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.


Tax credit section 63 approved pension fund

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”


Tax credit section 64 profit on debt

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.


Workshop on income tax hotel sheraton karachi 29 30 august 2005

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:


Tax credit miscellaneous provisions section 65

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


Tax credit miscellaneous provisions section 651

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.


Workshop on income tax hotel sheraton karachi 29 30 august 2005

LOSS

  • “Income” includes loss of income[S. 2(29)]

  • Loss in a tax year is theexcess of total deductionsunder a head of income over the amounts chargeable to tax under that head[S. 11(3)]


Set off of losses section 56

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


Carry forward of losses section 56 2

Carry Forward of Losses[Section 56(2)]

Following losses can only be carried forward

  • Business losses [S. 57 & 57A]

  • Speculation losses [S. 58]

  • Capital losses [S. 59]


Workshop on income tax hotel sheraton karachi 29 30 august 2005

Carry Forward of Business Losses[Section 57]

  • 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


Workshop on income tax hotel sheraton karachi 29 30 august 2005

Carry Forward of Business Losses[Section 57]

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 1995-96 to 2000-2001

    • 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 2nd Schedule]


Workshop on income tax hotel sheraton karachi 29 30 august 2005

Carry Forward of Speculation Losses[Section 58]

  • Carried forward speculation loss, shall be set off against speculation income

  • Set-off of loss of earliest year first

  • Statue of limitation - Six years


Workshop on income tax hotel sheraton karachi 29 30 august 2005

Carry Forward of Capital Losses[Section 59]

  • Carried forward capital loss, shall be set off against capital gains

  • Set-off of loss of earliest year first

  • Statue of limitation - Six years


Workshop on income tax hotel sheraton karachi 29 30 august 2005

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.


Workshop on income tax hotel sheraton karachi 29 30 august 2005

Set off/Carry Forward of Losses – Amalgamation[Section 57A]

  • 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


Group relief section 59b

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.


Group relief section 59b1

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.


Group relief section 59b2

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.


Limitations section 59a

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.


Losses in case of change in control of an entity section 98

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.


Foreign losses section 104

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.


Losses sustained during exemption period section 55 2

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.


Thank you

Thank you


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