1

ACCT-370

Assignment 2

Rimsha Naeem

20110216

Q3) Set-off and carry forward of losses is a tricky matter. Explain with examples how losses
under different heads are to be dealt with under the Ordinance.

ANS)

Sections 56 to 59 of the Ordinance relates to losses in persons’ income, how they may be set
off and related limitations to the treatments. This rule actually benefits tax payers in a way
since setting off losses of one head by gains of another head helps to reduce the amount of
taxable income that is computed. If this was not allowed, people would end up having to pay
way higher taxes which would act as a dis-incentive for people to get involved in business
activities. Set off and carry forward of losses is done for incomes from four heads. This
includes business income under section 18, from speculation under section 19, capital gains
under section 37 and other sources under section 39. Set off and carry forward cannot be
done for income under head of salary or property.

First I will discuss how loss under business income is treated. In the first year of loss in
business, we can use gains under any of the other three heads to set it off. So if for instance in
2018 there a loss of 300,000 in business and a gain of 80,000 under each head, speculation,
capital gains and other sources, then we can set off the business loss for the year against the
gains from the other incomes. So the loss being set off equals 240,000 (80,000*3). This
leaves a loss in business income of 60,000 (300,000-240,000) which will then be carried
forward to the next year. Once business loss is carried forward, it can then be set off only
under head of business income. This means under section 18 and 19 both. So if in 2019 the
business makes a gain of 30,000 under section 18 and 19 combined and has a carried forward
business loss of 60,000 it can only setoff 30,000 of the loss and the remaining will be carried
forward to the next period. This will hold regardless of if there is a gain under other two
 2

heads as they can only be used to setoff business losses in the first year. On the other hand, if
in 2019 the business is able to set off all the business loss then in 2020 if there is a business
loss it will again be the first year of losses and so all heads can be used to setoff loss under
the business head. Additionally, for this process, losses can be carried forward for up to six
consecutive tax years. So a loss made in 2018 can be carried forward and set off until 2024
(2018+6=2024) but not after that.

Furthermore, if there is a business loss as well as a loss under another head then we always
set off the business loss in the end.

Business Speculation Capital Gain Other source

Current year (400,000) 200,000 100,000 200,000
Brought forward - (100,000) (50,000)

As in the table there are losses under three heads including business income. However, we
must first set off speculation and capital losses as the Ordinance states. So then we are left
with:

Business Speculation Capital Gain Other source

(400,000) 100,000 50,000 200,000

Now we can set off the business loss as it is the only one left. (100,000+50,000+200,000-
400,000) We will be left with a 50,000 business loss that can be carried forward to the next
tax year. The need to set off business losses last makes more sense once treatment for losses
under the rest of the heads is discussed as they are, in a way, stricter.

Additionally, losses for the earliest tax year are supposed to be set off first. So if a loss of
50,000 in 2018 is carried forward and of 100,000 in 2019 to 2020 where there is a gain of
100,000, we first set off the loss in 2018 and then 2019. This way all of the loss in 2018 is set
off and 50,000 of loss in 2019 remains as of in 2020. Following table used to depict this:

Tax Year Business Set off amount Remaining

2018 (50,000) 50,000 -
2019 (100,000) 50,000 (50,000)
2020 100,000 - -
 3

If we talk about speculation as under section 19 then it is important to know that losses under
this head can only be set off by itself. We cannot set off speculation losses with gains from
business, capital gains or other sources. This basically concludes that first year speculation
losses always end up getting carried forward to the following tax year. A loss of 200,000 in
2018 will be carried forward to 2019. If there is additional loss, say of 300,000 in 2019 then
the loss accumulates to a total 500,000 and is carried forward to tax year 2020. This keeps on
happening until the loss can be set off by gains made under the head. Otherwise speculation
losses can be carried forward and set off for six consecutive tax years after which they must
be left and may not be carried forward any longer.

Tax Year Loss + (brought Gain Carried forward

forward)
2018 600,000 - 600,000
2019 200,000 + (600,000) - 800,000
2020 (800,000) 200,000 600,000
2021 (600,000) 400,000 200,000
2022 300,000 + (200,000) - 500,000
2023 (500,000) 100,000 400,000
2024 (400,000) 300,000 -

The table above shows carry forward and set off of losses from 2018 to 2024 under head of
speculation. Losses begin from 2018 and so the last tax year they can be set off in in 2024.
However, gains have not been enough to completely set off the losses and so by 2024 the
400,000 loss is only set off by a 300,000 gain. The remaining loss of 100,000 cannot be
carried forward to the next tax year. If, however there was a gain of 700,000 in 2024 then all
of the loss would be set off and additionally the remaining 300,000 could be used to set off
any loss under business if it is the first year or for other sources. Also, similar to as discussed
for business loss, speculation losses of earliest tax years are supposed to be set off first. The
same table as used above holds relevant for this head.

Treatment for losses under capital gains is exactly the same as has been discussed for
speculation. Capital loss can only be set off by itself and is allowed to be carried forward to
consecutive six years as was for both heads discussed previously. So the table used above is
 4

equally applicable under section 37, capital gains, for carry forward and set off of losses.
Gains under business, speculation and other sources cannot be used to set off capital loss and
so first year capital loss is always carried forward to the next year. Gains, if not needed to set
off own losses, can be used to set off first year loss under business head and other sources
loss for the year. Losses in earliest tax years must be set off first as discussed for both
business and speculation loss.

Lastly we have the head for other sources whose losses can be set off by income from
anything under section 39 (even if it is not the source of loss: meaning if there is a loss under
section 39 it can be set off by a gain from a different source under section 39 even if both are
unrelated) or any other of the three heads. However, the catch is that losses under this head
cannot be carried forward. This implies that losses under head of other sources should be the
first priority in set off of losses since the remaining can be carried forward and set off by
future gains.

Business Speculation Capital Gain Other Sources

(400,000) 600,000 200,000 (550,000)

By the table, total gain for the year totals 800,000 (600,000+200,000). If we give priority to
other sources, we first set off its loss so we are left with a gain of 250,000 (800,000 –
550,000). This remaining amount can be used to set off the business loss which leaves
150,000 (400,000 – 250,000) business loss which can be carried forward to the next tax year.

If, however, we had not given priority to other sources loss then things would work out
differently. Meaning with the 800,000 gain we set off business loss which leaves us with
400,000 (800,000 – 400,000) gain. This remaining 400,000 will then be used to set off the
other sources loss. However only a portion of it will be set off and will leave a loss of
150,000 (550,000 – 400,000) which we cannot even carry forward to the next period. This is
why it is better to give priority to other sources loss since loss under the rest of the heads can
be carried forward and then set off.

Business Speculation Capital gain Other sources

Current year 300,000 150,000 100,000 (500,000)
Brought forward (100,000) (50,000)
 5

Even in situations such as in the table above other sources should be given priority in set off
of losses. Though Speculation and capital gains both have losses that need to be set off and
we already know that they can only set off their losses by own gains, the gains should first be
used to set off other sources loss. This is largely because the two can be carried forward but
other sources cannot.

Q4)

1) When would the firm start submission of its sales tax returns?

ANS) 15th May 2018

2) What is the adjustable input tax related to paper alone?

ANS) Rs. 661,111 [(7,000,000/1.17*0.17*0.65)]

3) Mention the amount of GST/output tax against each period’s supply:

ANS)

Month Taxable Supply GST

June 15,000,000 2,550,000
July 20,000,000 3,400,000
August 5,000,000 850,000
September 4,000,000 680,000
October 6,000,000 1,020,000

4) What would be the amount of tax deposited in the government treasury for tax periods
May, June, July and August?

ANS)

Tax Period Output tax Input tax + (BF) Adjustment Payment to Unadjusted
allowed treasury input tax CF
May - 2,661,611 - 0 2,661,611
June 2,550,000 96,774+(2,661,611) 2,295,000 255,000 463,385
July 3,400,000 38286+(463,385) 3,060,000 2,898,329 0
 6

August 850,000, 15,625 765,000 834,375 0