For example, Suppose a company X makes an operating loss of Rs.50,000 in this financial year. Since the taxable income is negative, the company need not pay taxes this year. However in the next year, if the company makes an operating profit of Rs. 1,00,000. Considering a corporate tax rate of 40% the company would have to pay Rs. 1,00,000 * 40% = Rs. 40,000 as taxes.
But by applying the tax loss carry forward concept, the company can show the loss reported last year and thus pay (Rs. 1,00,000 – 50,000) = Rs. 50,000 * 40% = Rs. 20,000 only as taxes. Thus the company has saved Rs. 20,000 from paying as taxes.
This method provides company with extra money that can be used for other purposes. The duration of carry forwarding the loss varies from place to place depending upon the situation.