Business losses, group taxation and relief

Question 1

what is the mechanism for adjustment/carry forward of business losses?

Answer 1

Section 57
Other than speculation loss the business can only be set-off against the persons income chargeable under the head “income from business”

The loss can be carried to subsequent years but not for more than 6 years immediately succeeding the tax year in which the loss was first computed.

where a person has a loss carried forward for more than one year the loss from earlier tax earlier shall be set off.

Question 2

what are the provisions of taxation related to the adjustment/carry forward of unabsorbed depreciation and amortization

Answer 2

Sec-57, 59A

from tax year 2019 onwards adjustment of unabsorbed depreciation and amortization would be only available against income from business only.

Only up to the extent of 50% of taxable income for the year (after offsetting b/f business losses if any) in a year.
Business loss B/f shall added as line item before deductions u/s 22, 23, 23A, 23B, & 24

there is exception if business income is less than 10 million the unabsorbed depreciation and amortization would be sett off without any limit i.e to the extent of such income.

deductions u/s 22, 23, 23A, 23B, & 24 shall be taken into account last

Loss is initially considered to comprise of dep and amor balance loss = deductions on other accounts.

Question 3

what are the conditions for group taxation?

Answer 3

• must be 100% owned subsidiary company have owned all equity shares except those held by nominees to meet the statutory requirements of Companies ordinance 1984.
• the option shall be irrevocable.
• companies should be registered locally under companies ordinance 1984 and shall comply with corporate governance rules (holding and sub shall furnish certificate issued by SECP verifying that company has been complying with CCG.
• application with declaration of irrevocable option for group taxation shall be made separately by CEO of each Holding and Subsidiary companies.

- No loss shall be allowed to set off which has been incurred by group company prior to exercise of this option

• Holding and sub company shall continue to be independent withholding agent and file quarterly withholding statements when group is taxed as one fiscal unit.
• all companies opting for group taxation shall have similar accounting period for computation of income.

Question 4

what are the exemptions under group taxation

Answer 4

• inter corporate dividend with group companies entitled to group taxation shall be exempt
• deduction at source in respect of inter corporate profit on debt with the group companies entitled for group taxation.

condition that return of the group has been filed for the tax year.

Question 5

what is the criteria for the group tax relief for companies?

Answer 5

Section 59-B
A subsidiary company or holding company may surrender its tax losses in favor of its holding company or its subsidiary or in favor of any subsidiary of its holding company.

Holding percentage condition
1. If one of the company in group is public listed then 55% or more.

2. If none of the company in the group is public listed company then 75% or more

Types of losses
1. Any b/f loss (Business plus unabsorbed depreciation) and capital loss for the year and b/f.

Amount of loss
percentage of share capital held of holding company in Subsidiary company/100 * loss of the subsidiary company

Question 6

What is the time limit for the claim of tax losses under group relief and what are the underlying conditions for it?

Answer 6

The other loss surrendered by the subsidiary company may be claimed by the holding company or any subsidiary company under the head income from business in the tax year in which the loss has been surrendered and in the following 2 tax years subject to the conditions that;

1. ownership for 5 years (reversal of availed relief shall take place if equity interest falls below the minimum required in such 5 years)
2. no trading company.
3. if holding company = pvt then list in 3 years
4. approval of BOD of both companies.
5. corporate governance requirement.
6. Subsidiary co shall continue the same business during the specified period of 3 years.
7. The subsidiary company cannot surrender its assessed losses for more than 3 tax years. Any unadjusted loss of subsidiary company after the specified period shall be carried forward by the subsidiary in the normal manner.

Question 7

What is the relief for loss claiming company in group tax relief?

Answer 7

Loss claiming company Shell with approval of board of directors to transfer cash to. the loss surrendering company equal to the amount of tax payable on the profits to be set off against quad loss at the applicable tax rate. The transfer of cash would not be taken as taxable event in case of either of the two companies.

Question 8

What exemption available in case of transfer of shares for group formation for group tax relief?

Answer 8

Transfer of shares between the company and shareholder in one direction would not be taxable, capital gain provided the transfer is to acquire share capital for the formation of a group and approval of SECP and SBP has been obtained in his respect, sale and purchase from 3rd party be would be taken as taxable event.

Question 9

Income from property

1. treatment of loss for the year?
2. whether the loss can be carried forward?
3. whether losses for the year of other heads can be adjusted?

Answer 9

1. loss can be adjusted against any other head of income except salary
2. loss under this head cannot be carried forward
3. loss under the head income from business and income from other sources can be adjusted with income from property.

Question 10

Income from business

1. treatment of loss for the year?
2. whether the loss can be carried forward?
3. whether losses for the year of other heads can be adjusted?

Answer 10

1. Business loss can be adjusted any other head of income except salary.
2. Business loss
   loss can be c/f for 6 years and adjusted only against future business profits.

Unabsorbed Dep
can be c/f until full set off subject to adjustment of 50% of total income.

3. loss under following heads can be adjusted against business profit.
   - income from property
   - income from other sources.

Question 11

Capital gain

1. treatment of loss for the year?
2. whether the loss can be carried forward?
3. whether losses for the year of other heads can be adjusted?

Answer 11

1. other than securities

loss can be adjusted only against any other speculation business profit earned during the year . it cannot be adjusted against income of any other head.

securities
capital loss on securities can be set off only against the gain from any other securities.

2. Other than securities
   loss can be carried forward for 6 years and adjusted only against capital gain other than securities

securities
any unadjusted loss can be carried forward to subsequent 3 tax years.

3. Other than securities

loss under the following heads can be adjusted:
- IFP
- IFOS
- Income from non speculation business.

Securities
No loss other than securities itself can be adjusted with securities gain.

Question 12

Income from other sources

1. treatment of loss for the year?
2. whether the loss can be carried forward?
3. whether losses for the year of other heads can be adjusted?

Answer 12

1. loss can be adjusted against any other head of income except salary.
2. Any unadjusted loss cannot be carried forward/
3. loss under following heads can be adjusted against income from other sources
   - income from property
   - income from non speculation business.