A company engages in exports of non-traditional products and makes local sales of its products. It has as recently, as of 2018 recorded huge loss on the exports but makes gains on the local sales and intends to offset the loss against the profit from the local sales as both represent its business activities.
Required:
Evaluate the above statement critically in the light of the tax provisions and its effect if any on revenue. (4 marks)
View Solution
- Act 896 requires that income for tax purposes is determined separately. Under section 17 of Act 896, businesses are required to determine business income and investment loss separately and so is business income that is subject to a higher tax rate from losses on a lower tax rate if it were a profit would have been taxed at a lower rate.
- In the case of losses from a lower rate if it were a profit will be taxed at lower rate, should be carried forward and deducted from income on the lower rate and should not be used to offset against income/profit from that which should be taxed at a higher rate.
- Export of non-traditional products is taxed at the rate of 8% whereas the local sales shall be taxed at the rate of 25%. Losses on the exports of non-traditional products shall be carried forward against income in the same exports.
- The effect of this is that, taxes on the higher rate will be reduced when the loss on the lower rate is applied. This will lead to loss in revenue.