A Guide to Set Off and Carry Forward of losses
Generally, Income tax is complex to understand due to income tax rules, regulations, and their provisions. Understanding key concepts may significantly impact the tax liability of your business. Business sometimes incur inevitable losses, which required to claim as per income tax law. Referring to this loss as Set Off and Carry Forward involves adjusting it with income. This tutorial is a guideline for utilizing losses within the tax framework of Bangladesh.
What is Set Off and Carry Forward?
Set off is the process of reducing the taxable income by offsetting (may refer to adjust) losses with another source of income or gains. In Bangladesh, if a taxpayer (an individual or a company) incurs a loss in a specific source of income (e.g., business income), they can set off that loss with other sources of income in the same tax year. For example, Mr. Y has incurred a loss of Taka 50,000 from his business in the current year. Mr. Y can set off this loss with income from other sources of income.
Carry forward is the process of carrying forward the unutilized losses from one tax year to subsequent tax years. If a taxpayer’s cannot fully set off their losses against their income in a particular tax year (as discussed earlier), they can carry forward the remaining losses subsequent tax years. This allows the taxpayer to offset those losses against their income in those subsequent years, reducing their taxable income. For example, if Mr. Y is not able to fully set off business losses in the current year, Mr. Y can carry forward balance losses in subsequent years.
Key Rules and Regulations:
- Generally, losses are allowed to set off against the same type of income.
- Business loss can be set off against business profit only.
- Capital loss can be set off against capital gain only.
- Speculation business loss can be set off against speculation business profit only.
- Tobacco business loss can be set off against tobacco business profit only.
- Set off and carry forward is not allowed where tax is exempted, tax at a reduced rate, or minimum tax is applicable.
- Losses of a firm can be set off against the income of a firm and cannot be set off and carried forward against the income of partners or persons.
- Set off and carry forward is allowed up to six years.
- Approved depreciation can be brought forward to subsequent years if cannot be set off in the current year. Unabsorbed depreciation can be carried forward until it is completely set off.
- Loss must be incurred from a business carried on in Bangladesh and incurred during the normal course of business.
Filling and Reporting Requirements:
- Taxpayers are required to maintain relevant records and documentation to claim set off and carry forward benefits.
- Taxpayers are required to claim set off and carry forward benefits in the appropriate sections of the tax returns.
Set off and carry forward losses is an essential skill for effective tax planning in Bangladesh. Understanding and utilizing these efficiently can optimize tax liability for your investment and contribute to the growth of the business and economy. In Bangladesh, Income Tax Ordinance 1984 has been replaced by the Income Tax Act 2023 which allows for the provision to Set off and Carry forward.
Notes: Generally tax laws and regulations are subject to change from time to time.
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