Starting a new business or a startup requires significant investments and expenses. Despite the best efforts of entrepreneurs, sometimes these businesses incur losses in the initial years. However, the tax laws in Pakistan provide some relief to businesses by allowing them to carry forward these losses to future years. In this article, we will discuss the types of losses that can be carried forward and the time period for which they can be carried forward.
Types of Losses and Time Period for Carrying Forward:
There are three types of losses that a business can incur:
- Unabsorbed Depreciation: This type of loss can occur due to the depreciation of assets. It can be carried forward for an unlimited time period.
- Unadjusted Losses: These are losses that could not be adjusted in the year they occurred due to insufficient income or profits. These losses can be carried forward for up to six years.
- Some Unadjusted Losses: There are some types of unadjusted losses that can only be adjusted in the year they occurred and cannot be carried forward.
It is important to note that losses can only be carried forward if they have been properly recorded and reported in the tax returns.
Sequence of Adjusting Losses:
When adjusting losses, the sequence followed is as follows:
- First, the current year’s loss is set off against the income of the current year.
- Next, the oldest unadjusted loss is adjusted against the income of the current year.
- Finally, any unabsorbed depreciation is adjusted against the income of the current year.
By following this sequence, businesses can effectively carry forward their losses and reduce their tax liabilities in the future.
Benefits of Carrying Forward Losses:
Carrying forward losses can have several benefits for businesses, such as:
- Reducing Tax Liability: By carrying forward losses, businesses can reduce their tax liability in the future. The losses can be set off against future profits, reducing the tax liability.
- Encouraging Entrepreneurship: Allowing losses to be carried forward encourages entrepreneurship by providing a safety net to businesses in the initial years.
- Encouraging Investment: Carrying forward losses can also encourage investment in new businesses and startups by reducing the risk associated with the initial years.
- Boosting Economic Growth: By encouraging entrepreneurship and investment, carrying forward losses can contribute to the overall economic growth of the country.
In conclusion, carrying forward losses can be a valuable tool for businesses in Pakistan, especially new businesses and startups. By properly recording and reporting losses, businesses can effectively reduce their tax liability in the future, encouraging entrepreneurship and investment. However, it is important to understand the types of losses that can be carried forward and the time period for which they can be carried forward. By following the proper sequence for adjusting losses, businesses can take advantage of this benefit provided by the tax laws in Pakistan.