TAXATION

Suggested Answers
Intermediate Examinations Autumn 2009

Ans.1

Mr. Zulfiqar
Computation of Taxable Income
for Tax Year 2009

Rupees
Income from salary
- Basic salary for nine months (Rs. 280,000 x 9)
- Medical allowance (Rs. 45,000 x 9)
Less: Exempt up to 10% of basic salary

2,520,000
405,000
(252,000)

153,000

- Utilities allowance - fully taxable (Rs. 45,000 x 9)

405,000

- Cost of living allowance - fully taxable (Rs. 25,000 x 9)

225,000

- Rent free accommodation [(45% x Rs. 2,520,000) = Rs. 1,134,000] or

market value [Rs. 120,000 x 9 = Rs. 1,080,000] whichever is higher

1,134,000

- Tax borne by the employer

200,000

- Gratuity (Rs. 2,660,000 - Rs. 75,000)

- Pension received - taxable lower of the following
from MPL (Rs. 50,000 x 3)
from multinational company (Rs. 12,000 x 12)

2,585,000

150,000
144,000

Taxable income
Computation of tax liability
Tax liability - Income from salary (lower of the following)
- Tax liability at applicable rate i.e. @ 19%
- Tax liability at marginal relief formula (W-1)

144,000
7,366,000

1,399,540
2,531,350

1,399,540

Less: Tax credit for investment in shares restricted to Rs. 300,000

300,000 x 19%

(57,000)

Less: Tax credit relating to mark up on housing loan

250,000 x 19%

(47,500)

Tax liability - Income from property

Tax liability = 12,500 + [(Rs. 600,000 - 400,000) x 10%)]
Total tax liability

32,500
1,327,540

W-1: Tax liability under marginal relief formula

Maximum amount taxable in last bracket

Rupees
4,550,000

Tax on above (Rs. 4,550,000 x 18.5%)

60% of incremental amount (60% x (7,366,000 - 4,550,000))
Tax liability under marginal relief formula

841,750
1,689,600
2,531,350

Inherited plot
Immovable property is not covered by the definition of capital asset and, therefore, gain on disposal
of the same is not chargeable to tax.
Loss on sale of a painting
Under the ITO-2001, loss on sale of painting is not allowed as adjustment against any head of income.
4-Jan-10 - 9:50:31 AM

Page 1 of 5

TAXATION

Ans.2

Ans.3

(a)

Suggested Answers
Intermediate Examinations Autumn 2009

(i)

If the company is private limited company

Tax implications on shareholders
The term dividend includes any payment by a private limited company by way of loan to its
shareholder for the individual benefit of shareholder to the extent of accumulated profits.
Accordingly, amount received by the shareholder shall be construed as dividend in the hands
of the shareholder and taxable under the provisions of the ITO-2001.
Tax implications on private limited company
Being a resident company, it is responsible to deduct withholding tax on the payment of
dividend at the rates specified in the First Schedule.

(ii)

If the company is an unlisted public company, the payment made to the shareholders will
not be construed as dividend. So no tax implication on the company or the shareholder.

(b)

Rules relevant to foreign tax credit are as follows:

(i)
The amount of tax credit available to a resident taxpayer will be lesser of:
Income tax paid abroad; and
Pakistan tax payable on foreign-sourced income.
(ii) For calculating foreign tax credit, the amount of Pakistan tax on foreign-sourced income is
arrived at by using the average rate of tax applicable to taxpayer in Pakistan for the relevant
tax year.
(iii) Tax credit is not allowed for tax paid outside Pakistan on foreign-sourced income which is
not chargeable to tax or is exempt from tax in Pakistan.
(iv) The amount of tax credit is calculated separately for taxable income under each head of
income.
(v) Foreign tax credit is given only if foreign income tax is paid within two (02) years after the
end of the tax year in which related foreign income was derived. Credit is not given if
foreign tax is paid after the period of two (02) years.
(vi) While determining tax liability for a tax year, the amount of foreign tax credit is reduced
from the gross tax liability before reduction for any other tax credits, such as, those relating
to donations, investments and income tax paid in Pakistan.
(vii) In case credit for foreign tax is not fully utilized in the year it is generated, the excess
amount is neither refundable nor can it be carried to another tax year.

(a)

A tangible movable or immovable asset will be considered a depreciable asset when all the
following conditions are met:
It has a normal useful life exceeding one year;
It is likely to lose value as a result of normal wear and tear, or obsolescence; and
It is used wholly or partly by the person in deriving income from business chargeable to tax.

(b)
(i)

Sale proceeds (equivalent to cost)

Less: Cost of land and WDV of building (100 - 10)
Gain on disposal

(ii)

Cost (equivalent to sale proceeds)

Less: WDV of plant
Gain on disposal

(iii) Sale proceeds

Less: WDV at beginning of the year
Less: Depreciation not allowed in tax year 2008 [(2.40 0.80) 2.40] x 40%
Loss on disposal

4-Jan-10 - 9:50:31 AM

Rs. in million
100
(90)
10
25
(18)
7
2.50
(2.40)
(0.24)
(0.14)

Page 2 of 5

TAXATION

Ans.4

(a)

Suggested Answers
Intermediate Examinations Autumn 2009

The Commissioner or the Commissioner (Appeals) or the Appellate Tribunal may, by an order
in writing, amend any order passed by him or it to rectify any apparent mistake:
o on his or its own motion; or
o brought to his or its notice by a taxpayer.
If the result of any rectification is likely to adversely affect the taxpayer in any manner, an
order will not be rectified unless the taxpayer is given a reasonable opportunity of being heard.
Where a mistake apparent from record is brought to the notice of the designated tax authorities
and he or it does not take a corrective order before expiry of the financial year next following
the date on which the mistake was brought to his notice, the mistake will be considered to have
been rectified.
An order can be rectified for mistakes within five years from the date of the order.

(b)

A person has been audited in a year shall not preclude the person from being audited again in the
next year where there are reasonable grounds for such audits, particularly having regard to the
following factors:
The persons history of compliance or non-compliance with this Ordinance;
The amount of tax payable by the person;
The class of business conducted by the person;
Any other matter which in the opinion of the Commissioner is material for determination of
correct income.
So, the company may be selected for the second consecutive year for the audit.

Ans.5

(a)

Since his stay in Pakistan during the tax year 2009 was not more than 183 days, he is considered
to be non-resident for this year.
However, he will stay more than 183 days during the tax year 2010, he will be treated as resident
for the year 2010.

(b)

Amount in
Rupees

Taxable/
exempt

Taxable
amount

Tax Year 2009

Pakistan source income
Foreign source income
Taxable income

5,750,000
12,000,000

Taxable
Exempt

5,750,000
Note 1
5,750,000

Tax Year 2010

Pakistan source income
Foreign source income
Taxable income

17,250,000
3,000,000

Taxable
Exempt

17,250,000
Note 2
17,250,000

Nature of income

Note 1
Since he is non-resident for the tax year 2009, only his Pakistan source income is taxable.
Note 2
Foreign source income of Mr. Abdullah is exempt from tax because:
he is a resident individual in Pakistan solely by reason of the individuals employment;
he is present in Pakistan for a period or periods not exceeding three years. and
his foreign source income was not received in Pakistan.

4-Jan-10 - 9:50:31 AM

Page 3 of 5

TAXATION

Suggested Answers
Intermediate Examinations Autumn 2009
Ans.6

(a)

Mr. Zia is the legal representative of his father within the meaning of the ITO-2001. He is liable
for:
any tax that his father would have become liable for if he had not died; and
any tax payable in respect of the income of his fathers estate.
However, Mr. Zias liability shall be limited to the extent to which his fathers estate is capable of
meeting the liability.
Any proceedings taken against his father before his death shall be treated as taken against him and
may be continued against him from the stage at which the proceedings stood on the date of his
fathers death.
Furthermore, any proceedings which could have been taken his father if he had survived may be
taken against him.

Ans.7

(b)

Prescribed persons for the purpose of payment for supply of goods are as follows:
The Federal Government.
A company.
An association of person constituted by law or under law.
Foreign contractor or consultant.
A consortium of joint venture.
An association of person having annual turnover of fifty million rupees or above.

(a)

The following registered persons shall apply for deregistration:

Who ceases to carry on his business
Whose supplies become exempt from tax
A registered person whose total taxable turnover during the last twelve months remain below the
limit may apply for deregistration.
The local Registration Office may de-register a person if that person fails to file tax return for six
continuous months.

(b)

Procedure of de-registration
The application for deregistration should be made to the Local Registration Office.
Local registration office may recommend the same, to the Central Registration Office.
The applicant shall have to discharge any liability that may be outstanding by filing a final
return.
After making any necessary inquiries the person shall be deregistered.

(c)

S. #
(i)
(ii)

Registration
required
Yes
No

(iii)
(iv)
(v)
(vi)

Yes
No
Yes
No

4-Jan-10 - 9:50:31 AM

Reasons
All wholesalers must register irrespective of their total turnover.
A retailer requires registration when his annual turnover exceeds Rs. 5
million.
All importers must register irrespective of their total turnover.
Since he has no input tax to claim, he will not opt for registration.
All distributors must register irrespective of their total turnover.
A manufacturer being a cottage industry is not required to be registered if
its turnover is below Rs. 5 million in last twelve tax periods.

Page 4 of 5

TAXATION

Suggested Answers
Intermediate Examinations Autumn 2009
Ans.8

(a)

(i)

Where the buyer has claimed input tax credit in respect of supplies which have been
returned or whose value has changed, he shall reduce or increase the amount of input tax
by the corresponding amount as mentioned in Debit or Credit note, in the return for the
period in which the respective note was issued.

(ii)

Where the supplier has already accounted for the output tax in the sales tax return for the
supplies against which debit note was issued subsequently, he may increase or reduce the
amount of output tax by the period in which the respective note was issued.

(iii)

In case of return of supplies by an unregistered person, the adjustment as mentioned in (ii)

above can be made against the Credit Note issued by the supplier.

(iv)

The adjustment which lead to reduction in output tax or increase in input tax can only be
made if the corresponding Debit or Credit Note is issued within 120 days of the relevant
supply. However, the Collector may extend the period of 120 days by a further 180 days, at
the written request of the supplier.

(v)

Where the goods relating to a returned or cancelled supply are subsequently supplied with
or without carrying out any repairs, the supplier shall charge sales tax thereon in the normal
manner and account for it in this return for the period in which these goods were supplied.

(b)

Mr. Asif
Computation of Sales Tax Liability
for the Tax Period August 2009
Rupees
1,280,000
1,152,000
128,000

Total output tax (W-1)

Allowable input tax (W-2)
Sales tax payable with return
Amount to be carried forward (Rs. 1,158,095 (A) Rs. 1,152,000 (B))
W-1: OUTPUT TAX
Supplies to registered person
Supplies to unregistered person
Export supplies
Exempt supplies
Total Output Tax
W-2: INPUT TAX
A - Total Input Tax
Purchase from registered person
Purchase from unregistered person
B - Maximum input tax credit allowed
Maximum input tax credit allowed

6,095

(Rs. 5,000,000 x 16%)

(Rs. 3,000,000 x 16%)

800,000
480,000
1,280,000

(Rs. 8m x 16%) x 19m / 21m

1,158,095
1,158,095

Rs. 1,280,000 x 90%

1,152,000

Allowable input tax (Lower of A and B)

1,152,000

(THE END)

4-Jan-10 - 9:50:31 AM

Page 5 of 5