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Fundamentals Level – Skills Module

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Tax rates and allowances are on pages 2–3.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
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Taxation
(Pakistan)
Tuesday 4 June 2013
The Association of Chartered Certified Accountants
SUPPLEMENTARY INSTRUCTIONS
1. Calculations and workings need only be made to the nearest rupee.
2. All apportionments should be made to the nearest month except where the exact number of days is given in the
question.
3. All workings should be shown.
TAX RATES AND ALLOWANCES
The following tax rates and allowances for the tax year 2013 are to be used in answering all questions on this
paper.
A. Tax rates for salaried individuals – where salary income exceeds 50% of taxable income
Taxable income Rate of tax on taxable income
0 to Rs. 400,000 0%
Rs. 400,001 to Rs. 750,000 5% of the amount exceeding Rs. 400,000
Rs. 750,001 to Rs. 1,500,000 Rs. 17,500 plus 10% of the amount exceeding Rs. 750,000
Rs. 1,500,001 – Rs. 2,000,000 Rs. 95,000 plus 15% of the amount exceeding Rs. 1,500,000
Rs. 2,000,001 – Rs. 2,500,000 Rs. 175,000 plus 17·5% of the amount exceeding Rs. 2,000,000
Rs. 2,500,001 and above Rs. 420,000 plus 20% of the amount exceeding Rs. 2,500,000
B. Tax rates for associations of persons and non-salaried individuals to whom the rates given in A are not applicable
Taxable income Rate of tax on taxable income
0 to Rs. 400,000 0%
Rs. 400,001 to Rs. 750,000 10% of the amount exceeding Rs. 400,000
Rs. 750,001 to Rs. 1,500,000 Rs. 35,000 plus 15% of the amount exceeding Rs. 750,000
Rs. 1,500,001 – Rs. 2,500,000 Rs. 147,500 plus 20% of the amount exceeding Rs. 1,500,000
Rs. 2,500,001 and above Rs. 347,500 plus 25% of the amount exceeding Rs. 2,500,000
C. Tax rates for companies
Small company 25% of taxable income
Public company/private company 35% of taxable income
D. Tax rates on capital gains on the disposal of securities
Where the holding period of a security is
– less than six months 10%
– more than six months but less than 12 months 8%
– 12 months or more 0%
E. Tax rates on capital gains on the disposal of immovable properties
Where the holding period of immovable property is
– up to one year 10%
– more than one year but not more than two years 5%
2
F. Tax rates for income from property
(i) For individuals and associations of persons
Up to Rs. 150,000 0%
Rs. 150,001 to Rs. 400,000 5% of the gross amount exceeding Rs. 150,000
Rs. 400,001 to Rs. 1,000,000 Rs. 12,500 plus 7·5% of the gross amount exceeding
Rs. 400,000
Above Rs. 1,000,000 Rs. 57,500 plus 10% of the gross amount exceeding
Rs. 1,000,000
(ii) For companies
Up to Rs. 400,000 5% of the gross amount
Rs. 400,001 to Rs. 1,000,000 Rs. 20,000 plus 7·5% of the gross amount exceeding
Rs. 400,000
Above Rs. 1,000,000 Rs. 65,000 plus 10% of the gross amount exceeding
Rs. 1,000,000
G. Other tax rates
On dividends received from a company 10%
H. Rates of deduction/collection of tax at source
Sale of goods (general rate) 3·5%
Sale of immovable property 0·5%
Services (other than transport) 6%
Contracts 6%
Commission or brokerage 10%
Profit on debt 10%
Import of goods (general rate) 5%
I. Depreciation rates
Buildings (all types) 10%
Furniture and fittings 15%
Plant and machinery (not otherwise specified) 15% of the tax written down value
Motor vehicles (all types) 15%
Computer hardware 30%
}
J. Initial allowance
Eligible depreciable assets other than buildings 50% of cost
Eligible buildings 25% of cost
K. Pre-commencement expenditure
Amortisation rate for pre-commencement expenditure 20%
L. Benchmark rate
Interest free loans to employees 10% per annum
3 [P.T.O.
This is a blank page.
Question 1 begins on page 5.
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ALL FIVE questions are compulsory and MUST be attempted
1 For the purpose of this question, you should assume that today’s date is 15 July 2013.
Sahiwal Engineering Limited (SEL) is a public company incorporated under the Companies Ordinance, 1984 whose
shares were traded on the Lahore stock exchange from 1 July 2012 until 30 April 2013, on which date SEL was
delisted from the exchange. The control and management of the affairs of SEL was situated partly outside Pakistan
during the year ended 30 June 2013. More than 500 persons remained on the payroll of SEL during the year ended
30 June 2013.
SEL is engaged in the manufacture of engineering goods and its summarised income statement for the accounting
year ended 30 June 2013 is as follows:
Note Rs. Rs.
Turnover 1 90,000,000
Cost of sales 2 (58,000,000)
–––––––––––
Gross profit 32,000,000
Less Expenditure
Administration expenses 3 7,000,000
Selling and distribution expenses 4 5,000,000
Financial charges 5 2,000,000
Provision for bad debts 6 1,500,000
Other expenditure 7 8,000,000
––––––––––
(23,500,000)
–––––––––––
8,500,000
Other income 8 2,050,000
–––––––––––
Net profit 10,550,000
–––––––––––
Unless stated otherwise, SEL paid for all the expenditure through crossed cheques and tax was deducted and
deposited as required under the law. The goods manufactured by SEL are exempt from sales tax and SEL has not
opted to be assessed on the final tax basis on income arising from the sales of goods it manufactures.
Notes:
Note 1
Goods of Rs. 1,000,000 were sold to a public limited company which deducted tax from the payment made to SEL.
Due to an accounting error, only the net amount was recorded in the turnover.
Note 2
Cost of sales includes the following:
Rs.
Write off of obsolete stock 500,000
Cess paid to the local government on the profits of the company 50,000
Note 3
Administration expenses include:
Rs.
Accounting depreciation 1,000,000
Contribution to an unapproved superannuation fund 300,000
Amount paid to a non-resident company for securing the exclusive rights to
manufacture ‘water-kits’ for cars in Pakistan for a period of eight years commencing
from 19 April 2013 1,600,000
Donation in kind to a relief fund run by the Government of Sindh 1,000,000
Compulsory annual fee, paid in cash, to the Engineering Development Board
established by the Federal Government 200,000
5 [P.T.O.
Note 4
Selling and distribution expenses include:
Rs.
Payment to Monsoon Hotel for holding the annual get-together function for the
employees of the company and their families 600,000
Salaries paid, in cash, to temporary employees in rural areas. Tax was deducted
as required under the law. The monthly salary of each employee was Rs. 16,000 800,000
Note 5
Financial charges include:
Rs.
Profit on debt paid to a subsidiary company of SEL on which no tax was deducted.
SEL and its subsidiary are entitled to group taxation under the provisions of the
Income Tax Ordinance, 2001 700,000
Note 6
The bad debts account comprises:
Rs.
Balance on 1 July 2012 2,000,000
Provision made during the year (2% of debtors) 1,500,000
––––––––––
3,500,000
Trade debts written off being irrecoverable (800,000)
Loan to an associate written off being irrecoverable (300,000)
––––––––––
Balance on 30 June 2013 2,400,000
––––––––––
Note 7
Other expenditure comprises:
Rs.
Accounting loss on sale of machinery 500,000
Provision for taxation 5,500,000
Provision for anticipated losses 2,000,000
––––––––––
8,000,000
––––––––––
Note 8
Other income comprises:
Rs.
Recoveries against bad debts written off but not allowed as a deduction in the prior years 750,000
Additional payment received on the delayed payment of a tax refund by the Federal
Board of Revenue 1,300,000
––––––––––
2,050,000
––––––––––
Note 9
Creditors include:
Rs.
Rent payable which was allowed as a deduction, on the accrual basis, against the
income for the year ended 30 June 2009 400,000
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Note 10
The tax written down values (TWDV) of SEL’s fixed assets on 1 July 2012 were:
Rs.
Land 15,000,000
Office and factory buildings 9,000,000
Plant and machinery 4,000,000
Motor vehicles 1,500,000
Further information about SEL’s fixed asset transactions during the year to 30 June 2013:
(i) The construction of residential quarters for the factory workers was completed on 31 January 2013 at a cost of
Rs. 10,000,000 and the workers were allowed occupation on 15 March 2013. The cost includes the price of
the land paid at Rs. 3,000,000.
(ii) A new car for the business use of the chief executive was purchased on 15 February 2013 for Rs. 2,300,000.
The company incurred a further Rs. 200,000 to enhance the security and safety features of the car before
handing it over to the chief executive on 1 March 2013.
(iii) It is a consistent accounting policy of SEL that any item of furniture costing less than Rs. 75,000 is written off
immediately in the accounts as expense. Purchases of such items in the accounting year ended 30 June 2013
amounted to Rs. 750,000.
(iv) Machinery having TWDV of Rs. 500,000 on 1 July 2012 was sold for Rs. 300,000 on 31 December 2012.
Note 11
In addition to the advance tax referred to in Note 1, tax paid by or collected from SEL during the year ended 30 June
2013 was:
Rs.
Income tax paid on the registration of the new car (as in Note 10(ii)) 50,000
Income tax paid along with electricity bills 900,000
Advance tax paid in cash in four equal instalments on the due dates 5,000,000
Required:
(a) State, with reasons, whether you consider Sahiwal Engineering Ltd (SEL) to be a resident or a non-resident
company. (2 marks)
(b) Compute the taxable income of SEL for the tax year 2013, giving clear explanations for the inclusion or
exclusion of each of the items listed in the notes.
Note: The reasons/explanations for the items not listed in the computation of taxable income should be shown
separately. Specific marks are allocated for this part of the requirement. (24 marks)
(c) Calculate the tax payable by/refundable to SEL for the tax year 2013.
Note: Ignore the minimum tax provisions. (4 marks)
(30 marks)
7 [P.T.O.
2 For the purpose of this question, you should assume that today’s date is 15 July 2013.
Mr Rizwan, resident in Pakistan, has provided the following information in respect of his tax affairs for the year ended
30 June 2013.
From employment with Highgrowth Ltd as technical officer
Mr Rizwan worked with Highgrowth Ltd (‘Highgrowth’) throughout the year ended 30 June 2013. On reaching the
age of 55 years, he opted for early retirement with effect from 20 July 2013. He has provided the following
information relating to his employment with Highgrowth:
(i) Emoluments received in cash:
– annual basic salary of Rs. 1,200,000;
– technical allowance at 5% of his basic salary;
– Rs. 50,000 in lieu of availing of his annual recreational leave;
– utility allowance at 6% of his basic salary; and
– Rs. 100,000 as consideration for consenting to a restrictive covenant refraining him from entering into
employment with any other competitive company for a period of one year.
(ii) Highgrowth provided Rizwan with fully furnished accommodation for his family in Lahore. The fair rent of the
accommodation was estimated to be Rs. 50,000 per month. Had the company not provided him with this
accommodation, he would have been entitled to a house rent allowance at 60% of his basic salary.
(iii) A new car was taken on a finance lease on 1 January 2013 by Highgrowth exclusively for Rizwan’s private use.
The fair market value of the leased car at the commencement of the lease was Rs. 2,000,000. The total
payments to be made over the lease term of three years were Rs. 2,500,000. The company deducted
Rs. 72,000 from Rizwan’s salary for his personal use of the car for the six months to 30 June 2013.
(iv) Another car was provided for the business use of Rizwan. On 25 June 2013, in accordance with the terms of
his employment, Rizwan purchased this car from Highgrowth for Rs. 400,000. The fair market value of the car
on 25 June 2013 was Rs. 500,000.
(v) Highgrowth gave Rizwan a loan of Rs. 400,000 at a 2% mark-up on 1 October 2012 for the education of his
children. On 30 June 2013, Rizwan returned the principal amount of Rs. 350,000 along with the mark-up
payable on the total loan. The balance amount of Rs. 50,000 was, however, waived by Highgrowth on that
day.
(vi) Rizwan was provided with the services of a domestic servant for the full year. The monthly cost to Highgrowth
for the provision of this service was Rs. 7,000.
(vii) Rizwan was issued 1,000 shares in Highgrowth on 25 June 2013 under the company’s employee share
scheme. There is a restriction on Rizwan not to sell or transfer the shares before 25 June 2014. On 25 June
2013, the breakup value of each share of Highgrowth was Rs. 15 per share against a face value of Rs. 10 per
share. Rizwan did not sell any of the shares during the year ended 30 June 2013.
(viii) Highgrowth deducted Rs. 125,000 as tax from Rizwan’s salary and this was deposited with the Commissioner
Inland Revenue as required under the law.
(ix) Rizwan incurred expenses of Rs. 150,000 relating to self-education which was directly connected with his
employment at Highgrowth. The expenses included fees, books and travel, etc.
Share of income from Agrofriends
On 1 January 2013, Rizwan commenced a partnership with Mr Aqeel running a small consultancy firm, ‘Agrofriends’.
Profits are shared 40% to Rizwan and 60% to Aqeel.
The accounting year of Agrofriends ends on 30 June. The taxable income of the firm for the year ended 30 June 2013
was computed at Rs. 1,600,000 before adjustment on account of capital allowances (initial allowance and
depreciation) on computers purchased on 25 June 2013. The computers were put into use for the first time in
Pakistan on 30 June 2013. The total cost incurred on these computers was Rs. 200,000. Agrofriends has already
paid income tax on its income as required under the law.
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Share of income from property
Rizwan and his brother, Saeed, jointly own a freehold house in Islamabad which is let out. Each brother has a 50%
share in the house. The house was let throughout the tax year 2013 to Mr Waseem, at a monthly rent of US$ 1,500.
The total rent amount was paid in advance on 1 July 2012, on which date the exchange rates were:
State Bank of Pakistan rate 1 US$ = Rs. 88·5
Open market rate 1 US$ = Rs. 90·0
Required:
Compute Mr Rizwan’s taxable income and income assessable under the final/fixed tax regime and his total tax
payable for the tax year 2013. Give reasons for the treatment of any items excluded from the taxable income or
for which no expense/deduction is allowed.
(25 marks)
9 [P.T.O.
3 For the purpose of this question, you should assume that today’s date is 15 July 2013.
(a) List the conditions which need to be fulfilled in order that no enquiries as to the nature and sources of an
amount invested in the shares of a public company traded on a registered stock exchange in Pakistan can
be made by the Commissioner Inland Revenue. (4 marks)
(b) Mr Bilal, aged 45 and resident in Pakistan, disposed of the following assets during the year ended 30 June 2013:
Immovable assets
(1) 5 July 2012: Sold agricultural land for Rs. 9,000,000 which he had bought on 15 September 2011 for
Rs. 6,500,000, along with paying transfer fees of Rs. 160,000.
The following expenses were also made by Bilal in relation to the property:
– Rs. 40,000 for a valuation of the property;
– Rs. 80,000 on account of brokerage to a real estate agent; and
– Rs. 200,000 on improving the fertility of the land by better drainage.
Although the above amounts were all paid through a crossed bank draft, no tax was deducted by Bilal.
The registration authority collected tax on the sale proceeds of land from Bilal as required under the law.
(2) 15 July 2012: Exchanged his plot of land in Lahore which had a fair market value of Rs. 7,500,000 for a
plot in Okara, owned by Mr Asad, which had an estimated value of Rs. 6,500,000. Bilal had bought his
plot in Lahore on 15 February 2011 for Rs. 6,000,000. It is expected that due to future development in
the area, the price of the plot in Okara will rise to Rs. 8,000,000 in 2014.
No tax was collected by the transferring authority at the time of this transaction.
(3) 10 August 2012: Sold a flat in Karachi for Rs. 5,000,000 which he had bought on 1 January 1995 for
Rs. 4, 000,000.
Securities and other shares
(1) 25 June 2013: Sold 100,000 call options (right to purchase shares) in a public company listed on the
Islamabad Stock Exchange at Rs. 2·5 per call option. He had purchased these call options on 20 June 2013
at Rs. 1·90 per call option. Other admissible expenses incurred on these transactions were Rs. 10,000.
(2) 30 June 2013: Sold 5,000 shares in Turbo Motors Limited, an unlisted company in which 50% of the
shares are held by the Government of Balochistan, at Rs. 170 per share. He had purchased these shares
on 1 November 2012 at Rs. 120 per share. The following expenses were incurred in connection with these
shares:
– capital value tax paid at 0·01% of the purchase price of the shares; and
– commission of Rs. 0·10 per share on each side of the trade.
(3) 1 January 2013: Sold 150,000 shares in Farid Sugar Mills (Pvt) Ltd (FSM) for Rs. 3,000,000. He had
received these shares on 1 January 2011 as a dividend in specie from United Sugar Mills Ltd. On 1 January
2011, the fair market value of the shares in FSM was estimated to be Rs. 10 per share.
Additional information:
(1) Bilal had suffered a loss of Rs. 440,500 under the head ‘capital gains’ in the tax year 2010 from a sale of
shares in a private limited company. The loss has remained unadjusted as he had no capital gains in the
tax years 2011 and 2012.
(2) Tax on cash withdrawals from his bank during the year ended 30 June 2013 is Rs. 12,000.
(3) With the prior approval of the Commissioner, Bilal has opted that his capital gains may NOT be determined
and taxed under the Eighth Schedule to the Income Tax Ordinance, 2001.
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Required:
Compute the tax payable by Mr Bilal for the tax year 2013 on the taxable income arising from the above
transactions. Give brief reasons for your treatment of each item. (16 marks)
(20 marks)
11 [P.T.O.
4 (a) Briefly explain the basic features of direct and indirect taxes. Give two examples of each. (4 marks)
(b) Mr Naveed, a businessman, filed his return for the tax year 2012 on 30 September 2012. The Federal Board of
Revenue (FBR) selected him for an audit of his income tax affairs. During the audit proceedings, it was found
that he had failed to maintain records as required under the Income Tax Ordinance, 2001. As a result of the audit
proceedings, his taxable income and tax thereon were determined at Rs. 1,500,000 and Rs. 300,000,
respectively. The Commissioner has issued him a show cause notice to levy a penalty for non-maintenance of
the records.
Required:
(i) Calculate the amount of penalty which can be levied on Mr Naveed for non-maintenance of the records
as required under the Income Tax Ordinance, 2001;
(ii) State the time periods for which records are required to be maintained for a tax year in different
situations.
Note: The total marks will be split equally between each part. (4 marks)
(c) Briefly explain the procedure to be followed when the Federal Board of Revenue (FBR) exercises its powers
to exempt a taxpayer from penalty and default surcharges. (3 marks)
(d) For the purpose of this part, you should assume that today’s date is 15 July 2013.
Ms Kausar filed her return of income for the tax year 2011 on 30 September 2011 at Rs. 700,000. Today, she
has discovered that, due to an omission, a taxable amount of Rs. 100,000 had not been declared in the original
return. Although no notice for audit or amendment has yet been received from the Commissioner Inland Revenue,
she intends to revise the return immediately.
Required:
State:
(i) the documents Ms Kausar will be required to file with the revised return;
(ii) whether it will be necessary to submit reasons for the revision of the return along with revised return;
(iii) whether Ms Kausar will be liable to pay any default surcharge or penalty on account of revision of her
return; and
(iv) whether Ms Kausar can revise the return without seeking the permission of the Commissioner Inland
Revenue.
Notes:
1. No computation is required in this part of the question.
2. The total marks will be split equally between each part. (4 marks)
(15 marks)
12
5 For the purpose of this question, you should assume that today’s date is 5 April 2013.
Mr Usman, a registered person under the Sales Tax Act, 1990, is engaged in the manufacture and supply of consumer
goods. His business transactions for March 2013 were as below:
Rs.
Payments for the purchase of raw materials from registered persons 70,000,000
Payments for the purchase of raw materials from unregistered persons 30,000,000
Payment for the purchase of machinery from a registered person 10,000,000
Sale of taxable goods to registered persons 80,000,000
Sale of taxable goods to unregistered persons 16,000,000
Sale of goods against an international tender to the Punjab Government 10,000,000
Sale of exempt goods to a local charity 10,000,000
Exports of goods to Turkey 5,000,000
Purchases made in February 2013 returned to the vendor for being substandard 1,000,000
Additional information:
(1) All the payments to registered persons were made inclusive of sales tax and through a mode admissible in the
Sales Tax Act, 1990.
(2) The raw materials purchased were used for the manufacture of both taxable and exempt supplies.
(3) The machinery purchased during the last week of March 2013 was used for the manufacture of taxable goods
only.
(4) The figures for the sales of goods (including exports) are all stated exclusive of sales tax.
(5) In the case of the purchase returns, the debit/credit notes have been issued in conformity with the provisions of
the Sales Tax Act, 1990.
Required:
(a) Calculate the sales tax payable by, or refundable to, Mr Usman, for the month of March 2013, giving an
explanation for the treatment of input tax on the purchase of the machinery during the month. (7 marks)
(b) Define the ‘time of supply’ in relation to the following:
(i) a supply of goods under a hire purchase agreement;
(ii) a supply of goods other than under a hire purchase agreement; and
(iii) the rendering of services.
Note: The total marks will be split equally between each part. (3 marks)
(10 marks)
End of Question Paper
13
Answers
Fundamentals Level – Skills Module, Paper F6 (PKN) June 2013 Answers
Taxation (Pakistan) and Marking Scheme
Notes:
1. The suggested answers provide detailed guidance on the subject for use as a study aid to the question paper. Candidates were
not expected to produce answers with this extensive detail, which would not be possible in a three hour exam.
2. All references to legislation shown in square brackets are for information only and do not form part of the answer expected from
candidates.
Marks
1 Sahiwal Engineering Limited
(a) Since Sahiwal Engineering Ltd (SEL) is a company incorporated in Pakistan under the Companies Ordinance,
1984, it shall be treated as a resident taxpayer in Pakistan. For a company incorporated under the
Companies Ordinance, 1984, the other test that the place of control and management of the company should
be wholly situated in Pakistan at any time in a tax year needs not to be satisfied to qualify as a resident
company. 2·0
––––
(b) Taxable income for the tax year 2013 (accounting year ended 30 June 2013)
Note Rs. Rs.
Income from business
Net profit as per income statement 10,550,000 0·5
Add:
Sales under recorded due to an accounting error (1) 35,000 1·0
Cess paid to the local government (2) 50,000 0·5
Accounting depreciation (3) 1,000,000 0·5
Contribution to an unapproved superannuation fund (4) 300,000 0·5
Acquisition of manufacturing rights (5) 1,600,000 0·5
Charitable donation made in kind (6) 1,000,000 1·0
Salaries paid in cash (7) 800,000 1·0
Provision for bad debts (8) 1,500,000 0·5
Other expenditure (9) 8,000,000 1·5
Rent payable since the tax year 2009 (10) 400,000 1·0
Purchase of furniture (11) 750,000 0·5
––––––––––
15,435,000
Less:
Amortisation of acquisition of manufacturing rights (5) 40,000 1·5
Trade debts written off (12) 800,000 1·0
Recoveries against bad debts written off in prior years (13) 750,000 1·0
Additional payment for delayed tax refunds (14) 1,300,000 0·5
Tax loss on sale of machinery (11) 200,000 1·0
Initial allowance (11) 1,750,000 1·0
Tax depreciation (11) 2,662,500 3·0
––––––––––
(7,502,500)
–––––––––––
Income from business 18,482,500
Income from other sources (14) 1,300,000 1·0
–––––––––––
Total/taxable income 19,782,500
–––––––––––
–––––––––––
Items not included in the computation of taxable income
(i) Write off of obsolete stock – Rs. 500,000
Writing off of obsolete stock is incidental to the carrying out of the business and allowable as a
deduction. [s.20 and general principles of taxation] 1·0
(ii) Compulsory annual fee to the Engineering Development Board – Rs. 200,000
Any expenditure, in aggregate, under a single accounting heading in excess of Rs. 50,000 other than
by crossed bank cheque or crossed bank draft or any other banking instrument is not deductible with
certain exceptions. One of the exceptions is any fee expenditure. Hence, the Rs. 200,000 paid, in cash,
to the Engineering Development Board established by the Federal Government is deductible and no
adjustment is required. [2nd proviso to s.21(l)] 1·0
17
Marks
(iii) Expenditure on the annual get-together function for the employees – Rs. 600,000
In order to promote harmony and cohesiveness among the employees, businesses arrange such
functions in which employees and their families gather together and get to know each other better. Any
expenditure incurred on such functions is allowable expenditure on the ground of commercial
expediency, being expenditure incurred wholly and exclusively for the purposes of business. [s.20(1)] 1·0
(iv) Profit on debt paid to a subsidiary company of SEL – Rs. 700,000
The withholding tax provisions do not apply in respect of inter-company profit on debt within a group
of companies which are entitled to group taxation. Therefore, SEL was not required to deduct tax. So,
no adjustment is required. [ Cl.(11C) of Pt IV of 2nd Sch] 1·0
(v) Loan to associate written off – Rs. 300,000
A loan to an associate written off against the bad debt provision is not deductible since it is not the
business of SEL to lend money and it does not fulfil the condition that the debt should have previously
been included in the person’s income from business chargeable to tax. Since it has not been claimed
as a deduction, no adjustment is required. [s.29(1)(a)] 1·0
––––
24
––––
Notes:
Note 1
The amount of any tax from any payment received is treated as income derived by the person to whom such
payment is made. Therefore, the amount of tax deducted at source from the sale proceeds was part of the
sale proceeds and taxable. The amount of tax deducted at Rs. 35,000 (1,000,000 x 3·5%) is, therefore,
added to the income and allowed as advance tax paid when computing the tax payable by SEL. [ss.21(b) &
168(1)(a)]
Note 2
Any cess which is levied on the profits or gains of the business is assessed as a percentage or otherwise on
the basis that such profits or gains are inadmissible against ‘Income from Business’. [s.21(a)]
Note 3
Accounting depreciation is not a deductible charge. Tax depreciation and initial allowance are deductible at
the rates prescribed in the Third Schedule and subject to the conditions mentioned in the relevant provisions
[ss.22 & 23] of the Ordinance.
Note 4
Any contribution to a superannuation fund which is not approved is not admissible for deduction. [s.21(e)]
Note 5
Acquisition of the contractual right to manufacture ‘water-kits’ for cars in Pakistan is an intangible for income
tax purposes. The total amount cannot be deducted in one year. It has to be amortised over its useful life (in
years) and allowed on the basis of the number of days it is used in a year as below:
Total amount paid for the intangible Rs. 1,600,000
Useful life of the intangible 8 years
Per year deduction (1,600,000/8) Rs. 200,000
Proportionate allowable deduction for 73 days during the tax year 2013
(73/365 x 200,000) Rs. 40,000
[ss.24(4), (6) and (11)]
Note 6
A donation in kind to a relief fund run by the Government of Sindh is not for the purpose of business, hence
not allowable as expenditure. However, it is eligible for tax credit under the law. [s.20(1)]
Note 7
If the salary of an employee exceeds Rs. 15,000 per month, it should be paid through a crossed cheque or
by direct transfer of funds to the employee’s bank account, otherwise such an expense becomes
inadmissible. Since the salaries of the temporary workers were paid in cash, the whole amount of
Rs. 800,000 is inadmissible despite the fact that tax was deducted from such salaries. [s.21(m)]
Note 8
Since the provision made for bad debts is a general provision and there are no reasonable grounds to believe
that the debts have become irrecoverable, the provision of Rs. 1,500,000 is inadmissible. [s.29(1)(c)]
18
Marks
Note 9
Other expenditure
(1) Accounting loss on sale of machinery Rs. 500,000
An accounting loss or profit resulting from the disposal of an asset is tax neutral. Therefore, to nullify
its effect, the amount of the accounting loss is added back in the total income. A loss is only allowable
where the consideration received on the disposal of a fixed asset is less than the tax written down of
the asset. [s.22(8)(b)]
(2) Provision for taxation Rs. 5,500,000
Provision for taxation is in the nature of an appropriation of profit and not expenditure to earn business
income. Hence, it is not allowable under the law. [s.21(a)]
(3) Provision for anticipated losses Rs. 2,000,000
Tax law allows only losses which are revenue in nature and which have occurred during the relevant
tax year. Anticipated losses are not allowable. [s.34(1)]
Note 10
Where a taxpayer is allowed a deduction for any expenditure in deriving income under the head ‘Income from
Business’ and the person has not paid the liability to which the deduction relates within three years of the
end of the tax year in which the deduction was allowed, the unpaid amount of the liability is chargeable to
tax in the first year following the end of the three years.
Since the liability on account of rent payable was allowed in the tax year 2009 and it has not been paid by
the end of the tax year 2012, it is added back in the tax year 2013. [s.34(5)]
Note 11
Fixed assets
(1) Initial allowance and tax depreciation:
Asset TWDV on Addition/ Initial TWDV Rate of Depreciation
1 July 2012 (deletion) allowance for depreciation
during at 25% of depreciation
the year addition
of eligible
buildings
(1) (2) (3) (4) = (5) = (2 + 3) (6) (7)
(3) x 25% – (4)
Rs. Rs. Rs. Rs.
Land 15,000,000 3,000,000 – – – –
(see (a))
Office and
factory
buildings 9,000,000 – – 9,000,000 10% 900,000
Residential
quarters – 7,000,000 1,750,000 5,250,000 10% 525,000
(see (a)) (see (b))
Plant and
machinery 4,000,000 (500,000) – 3,500,000 15% 525,000
Motor vehicles 1,500,000 2,500,000 – 4,000,000 15% 600,000
(see (c))
Furniture – 750,000 – 750,000 15% 112,500
(see (d))
–––––––––– ––––––––––
Total 1,750,000 2,662,500
–––––––––– ––––––––––
[ss.22 and 23 read with 3rd Sch]
Sub-notes to Note 11 (1)
(a) Land is not eligible for depreciation. The cost of construction of the residential quarters is,
therefore, reduced by Rs. 3,000,000, being the price of land. [s.22(15)]
(b) Only the cost representing the construction of the residential quarters is eligible for initial allowance
and depreciation. The rate of initial allowance in the tax year 2013 is 25% [previously it was
50%]. Depreciation is charged on the cost of construction of the residential quarters after the initial
allowance has been deducted. Use of the eligible asset for even one day is sufficient for a valid
claim of depreciation and initial allowance.
19
Marks
(c) For the tax year 2013 and onwards, a car having a cost of Rs. 2,500,000 is eligible for
depreciation on its full cost [the previous maximum cost was Rs. 1,500,000]. Further, a car is not
eligible for initial allowance. [ss.22(13)(a) and 23(5)]
The cost incurred to enhance the security and safety features of the car is capitalised and eligible
for depreciation.
(d) Furniture is eligible for tax depreciation but not for an initial allowance. [ss.22 & 23(5)(b)]
(2) Debiting of the cost of the furniture purchased during the year to the income statement is not allowable,
hence Rs. 750,000 must be added back in the total income, being capital expenditure. [s.21(n)]
(3) The loss on the sale of machinery of Rs. 200,000 (representing excess TWDV of Rs. 500,000 over the
sale proceeds of Rs. 300,000) is an admissible deduction. [s.22(8)]
Note 12
Trade debts written off – Rs. 800,000
Since trade debts are irrecoverable and have actually been written off (and not merely provided for) in the
books of accounts, the amount is allowable as a deduction. [ss.29(1) & (2)]
Note 13
Recoveries against bad debts – Rs. 750,000
Since the amount recovered belongs to the bad debt of prior years, its recovery in the current tax year would
only be taxable if it had previously been allowed as a deduction. Since the amount was not allowed as a
deduction in previous years, taxable income is reduced by the same amount to avoid double taxation.
[s.29(3) & s.73]
Note 14
Additional payment for delayed refund – Rs. 1,300,000
Under the law, if an excess amount of tax paid by a taxpayer is not refunded by the tax department within
the prescribed time limit, the taxpayer is entitled to an additional amount from the tax department. Taxability
of such additional amount was disputable. Through an amendment in the Finance Act, 2012, it has been
made taxable under the head ‘Income from Other Sources’. Therefore, it is deducted from the head ‘Income
from Business’ and taxed under the head ‘Income from Other Sources’.
(c) Tax liability for the tax year 2013
Rs. Rs.
Taxable income for the tax year 2013 (from (b)) 19,782,500
–––––––––––
–––––––––––
Tax at 35% 6,923,875 0·5
Tax credit admissible on the donation in kind to the relief fund run by the
Government of Sindh.
The value of the donation in kind (Rs. 1,000,000) is 5·05% of the
taxable income which is within the allowable upper limit of 20% of taxable
income. Hence a tax credit is allowable on this amount as below:
Tax assessed
x Value of donation in kind –––––––––––––
Taxable income
6,923,875
x 1,000,000 [ss.61(1) & (2)] (350,000) 1·5 –––––––––––
19,782,500
–––––––––––
6,573,875
Less tax already paid
Tax deducted from payment on account of sales to a public company 35,000 0·5
[ss.153(3) & 168]
Tax paid at the time of registration of car [ss.168 & 231B] 50,000 0·5
Tax collected along with electricity bills [ss.168 & 235] 900,000 0·5
Advance tax paid in four instalments [s.147] 5,000,000 0·5
–––––––––––
(5,985,000)
–––––––––––
Tax payable with return [s.137] 588,875
––––––––––– ––––
4·0
––––
30
––––
20
Marks
2 Mr Rizwan
Taxable income and tax payable for the tax year 2013 (accounting year ended 30 June 2013)
Rs.
Income from salary
Basic salary [s.12(2)(a)] 1,200,000 0·5
Technical allowance (Rs. 1,200,000 x 5%) [s.12(2)(c)] 60,000 1·0
Payment in lieu of recreational leave [s.12(2)(a)] 50,000 1·0
Utilities allowance (Rs. 1,200,000 x 6%) [s.12(2)(c)] 72,000 1·0
Payment for honouring restrictive covenant [s.12(2)(e)(v)] 100,000 2·0
Perquisite representing accommodation (working 1) 720,000 2·0
Perquisite representing car (working 2) 27,178 2·0
Benefit on purchase of car (working 3) 100,000 1·0
Waiver of outstanding loan of Rs. 50,000 [s.13(9)] 50,000 0·5
Services of domestic servant to Rizwan (working 4) 84,000 1·0
––––––––––
Income under the head ‘salary’ 2,463,178
Income from business
Share of profit from AOP ‘Agrofriends’ (working 5) 0 2·5
Income from property [taxable under fixed tax regime] (working 6) 796,500 2·0
––––––––––
Total taxable income 3,259,678
––––––––––
––––––––––
Tax payable on taxable income
Rs. Rs.
Tax on income from property (working 6) 42,238 0·5
Tax on taxable income other than income from property (working 7) 428,053 2·5
––––––––
Total tax payable 470,291
Less tax deducted at source by the employer [s.149] (125,000) 0·5
––––––––
Tax payable with return [s.137] 345,291
––––––––
––––––––
Explanation of items not included in the computation of taxable income
(i) Car provided for business use
A car was provided to Rizwan for business use. No personal benefit is derived by him, hence, no amount is
taxable as a perquisite. [ss.12 & 13] 1·0
(ii) Concessional loan – Rs. 400,000
Any loan advanced at a profit rate which is less than the benchmark rate constitutes a perquisite. However,
by virtue of an amendment in the Finance Act, 2012, no amount on account of the concessional rate of profit
is taxable if the loan amount does not exceed Rs. 500,000. [2nd proviso to s.13(7)] 1·0
(iii) Benefit of shares allotted to Rizwan under an employee share scheme
Although the shares of the company were allotted to him at a price lower than the breakup value (which is
assumed to be the fair market value in the absence of any other information about their valuation), there was
a restriction on the sale or transfer of the shares. Where the issuance of shares is subject to a restriction on
the transfer of the allotted shares, no amount is chargeable to tax to the employee until the earlier of:
(a) the time the restriction is removed; or
(b) the time the employee actually disposes of the shares.
Neither of these events occurred before 30 June 2013. Hence, no amount is taxable as salary of Rizwan for
the tax year 2013. [s.14(3)] 1·0
(iv) Expenditure on self-education
No deduction is allowable for any expenditure incurred by an employee in deriving his salary income.
[s.12(4)] 1·0
(v) Share from association of persons (AOP), Agrofriends
As an AOP is taxed separately from its members, where the AOP has paid the tax, the share of profit received
by a member of the AOP out of the income of the AOP is exempt from tax. However, it shall be added for
the determination of the tax rate applicable to his other income (working 7). [s.92(1)] 1·0
––––
25
––––
21
Marks
Workings:
Working 1
Accommodation provided to Rizwan’s family is a perquisite of Rizwan provided by his employer and is taxable.
The value of this perquisite is equal to the amount that would have been paid by the employer if such
accommodation were not provided, subject to a minimum value being equal to 45% of the basic salary. Since
Rizwan was entitled to a 60% house rent allowance, had he not been provided with the accommodation, the same
amount is taken as the value of the perquisite as computed below:
Rs.
Basic salary 1,200,000
Value of the perquisite (1,200,000 x 60%) 720,000
The fair rent of the accommodation at Rs. 50,000 per month is not relevant for the purposes of computing the
value of the perquisite representing accommodation. [s.13(12) read with rule 4 of the income tax rules, 2002]
Working 2
The car was provided for Rizwan’s exclusive personal use on 1 January 2013 by leasing it on the same day.
According to the tax law, 10% of the fair market value (FMV) of the car on 1 January 2013 shall be treated as a
perquisite received by him. The lease rentals to be paid by the company are not taken into consideration when
computing the value of the perquisite. Since the car was provided for half of the year, the value of the perquisite
is worked out proportionately. Further, the amount paid by the employee is also to be deducted. Therefore, the
perquisite shall be computed as below:
Rs.
FMV of the car 2,000,000
10% of the FMV (2,000,000 x 10%) 200,000
Restricted to the number of days (181) it was used during the tax year 2013
(200,000 x 181/365) 99,178
Less amount paid by Rizwan (72,000)
–––––––––
Amount to be treated as salary 27,178
–––––––––
[ss.13(3) & (6) read with rule 5 of the income tax rules, 2002]
Working 3
Rs.
Fair market value of the car on 25 June 2013 500,000
Less:
Amount paid by Rizwan (400,000)
––––––––
Perquisite on account of acquisition of car 100,000
––––––––
[s.13(11)]
Working 4
Since the services of a domestic servant were provided to Rizwan by the employer, the amount Rizwan will be
chargeable to tax will include the total amount paid to the domestic servant as computed below:
Rs.
Monthly salary of domestic servant 7,000
Annual salary (7,000 x 12) 84,000
[s.13(5)]
Working 5
Share from ‘Agrofriends’
Agrofriends is an AOP of which Rizwan has a 40% share in the profits.
Rs.
Taxable income before adjustment on account of capital allowances on computers 1,600,000
Initial allowance on computers (Rs. 200,000 x 50%) [s.23] (100,000)
Tax depreciation on computers (Rs. 200,000 – 100,000) x 30% [s.22] (30,000)
––––––––––
Taxable income of the AOP 1,470,000
––––––––––
Rizwan’s share (1,470,000 x 40%) 588,000
Working 6
Income from property
The property is jointly owned with his brother and each has a specific share; therefore, the share in property
income is to be assessed in the hands of individual partners and not as an association of persons. [s.66]
22
Marks
Since the rent is received in foreign currency, it must be converted into Pakistan rupees at the State Bank of
Pakistan rate prevailing on the day the amount was received, i.e. on 1 July 2012 as below:
Total annual rent of the property in US$ (1,500 x 12) US$ 18,000
Rs.
Total rent in Pakistan Rupees (18,000 x 88·5) [s.71] 1,593,000
Rizwan’s 50% share 796,500
Tax payable on Rs. 796,500
[Rs. 12,500 plus 7·5% of the gross amount exceeding Rs. 400,000]
(12,500 + 7·5% x (796,500 – 400,000)) 42,238
–––––––––
[s.15 read with Div VI of Pt I of the 1st Sch]
Working 7
Rs.
Taxable income including ‘Income from property’ 3,259,678
Less ‘Income from property’ to be taxed separately [working 6] (796,500)
––––––––––
2,463,178
Add share from the Agrofriends for rate purposes [working 5] 588,000
––––––––––
Taxable income plus share from Agrofriends 3,051,178
––––––––––
Rs. 588,000 being the share of profit [working 5] received by Rizwan from the AOP ‘Agrofriends’ is exempt from
tax. [s.92(1)] However, for the purpose of determining the rate of tax applicable to the other taxable income
(Rs. 2,463,178), Rs. 588,000 is included in Rizwan’s income as if it were chargeable to tax. [s.88] The
computation is as below:
Rs. Rs.
Tax payable on taxable income including share from AOP
[Rs. 420,000 plus 20% of the amount exceeding Rs. 2,500,000]
(420,000 + 20% x (3,051,178 – 2,500,000)) (A) 530,236
Taxable income if the share of profits from the AOP were chargeable to tax (B) 3,051,178
Actual taxable income (C) 2,463,178
Tax on taxable income
A/B x C
(530,236/3,051,178 x 2,463,178) 428,053
3 (a) Immunity from enquiries into the nature and sources of amounts invested in shares
No enquiries as to the nature and sources of an amount invested in the shares of a public company traded
at a registered stock exchange in Pakistan shall be made provided that the following conditions are fulfilled:
(1) the investment is made any time between 24 April 2012 and 30 June 2014;
(2) the amount remains invested for a minimum period of 120 days in the prescribed manner;
(3) tax on the capital gains, if any, is discharged in accordance with the rules provided in the Eighth
Schedule to the Income Tax Ordinance, 2001; and
(4) a statement of investments is filed with the Commissioner Inland Revenue along with the return of
income and wealth statement for the relevant tax year within the due date as provided in the law.
[s.118]
[Rule 2(2) of the 8th Schedule] 4·0
––––
23
Marks
(b) Mr Bilal
Tax payable for the tax year 2013 (accounting year ended 30 June 2013)
Transaction Note Capital gain/(loss) Tax
Rs. Rs.
Capital gains/(losses) and tax on the disposal of
immovable properties taxable as a separate block
On the sale of agricultural land (1) 2,020,000 202,000 3·0
On the exchange of the plot in Lahore (2) 1,500,000 75,000 1·5
On the sale of the flat in Karachi (3) 0 0 1·0
Capital gains on securities taxable as a separate block
On the sale of call options (4) 50,000 5,000 2·0
On the sale of shares in Turbo Motors Ltd (5) 248,940 19,915 3·0
Income under the head ‘Capital gains’ assessable
to tax along with other heads of income
On the sale of shares in Farid Sugar Mills (6) 1,125,000 1·5
Less:
Capital loss brought forward (7) (440,500) 1·0
––––––––––
Total taxable income 684,500
––––––––––
Tax at 10% of the amount exceeding Rs. 400,000
(684,500 – 400,000) x 10% 28,450 0·5
[Para (1) of Div I, Pt I of the 1st Sch]
Tax payable under the final tax regime (FTR)
Rs. Rs.
Dividend income (6) 1,500,000 1·0
Tax on dividend income at 10% (1,500,000 x 10%) (6) 150,000 0·5
––––––––
Total tax 480,365
Less: tax already paid
– on the sale proceeds of agricultural land at 0·5% of total
proceeds Rs. 9,000,000 (9,000,000 x 0·5%) [s.236C] 45,000 0·5
– on cash withdrawals from bank [s.231A] 12,000 0·5
––––––––––
(57,000)
––––––––
Tax payable with return 423,365
––––––––
–––––––– ––––
16
––––
20
––––
Notes:
Note 1
Sale of agricultural land
Through an amendment in the Finance Act, 2012, a gain on the disposal of immovable properties held not
beyond two years has been made chargeable to tax according to the rates prescribed for such capital gains
in the First Schedule to the Income Tax Ordinance, 2001. The capital gain on the disposal of agricultural
land is computed as below:
Rs. Rs.
Consideration received 9,000,000
Less:
Purchase price [s.76(2)(a)] 6,500,000
Transfer fees [s.76(2)(b)] 160,000
Expenditure on the valuation of the property [s.76(2)(b)] 40,000
Brokerage to real estate agent [s.76(2)(b)] 80,000
Expenditure to improve the fertility of the land [s.76(2)(c)] 200,000
––––––––––
(6,980,000)
––––––––––
Capital gain 2,020,000
––––––––––
Tax at 10% as the holding period of the land was less than one year
(2,020,000 x 10%) [Div VIII of Pt I of 1st Sch] 202,000
––––––––––
––––––––––
24
Marks
Note 2
Exchange of a plot of land in Lahore with a plot in Okara
The exchange of an asset is also treated as a disposal of the asset for tax purposes. [s.75(1)(a)]
The fair market value of the plot that was obtained in exchange with Mr Asad is less than the fair market
value of the plot Bilal gave to him. Tax law in such situations prescribes that the fair market value of the asset
disposed of shall be taken as the consideration received. [s.77(1)] Consequently, the capital gain/(loss) is
worked out by taking the consideration received at Rs. 7,500,000. Other factors given in the question, such
as the expected future increase in the value of the plot received in exchange, are not relevant for the
computation of the capital gain.
Rs.
Deemed consideration on the disposal on 15 July 2012 7,500,000
Less:
Cost of the plot on 15 February 2011 (6,000,000)
––––––––––
Capital gain 1,500,000
––––––––––
Tax at 5% as the holding period of the land was more than one year and less than
two years (1,500,000 x 5%) [Div VIII of Pt I of 1st Sch] 75,000
––––––––––
––––––––––
Note 3
Sale of flat in Karachi
Rs.
Consideration received for the sale on 10 August 2012 5,000,000
Less cost incurred at the time of purchase on 1 January 1995 (4,000,000)
––––––––––
1,000,000
––––––––––
Since the disposal was made after holding the flat for more than two years, no gain is taxable under the law.
[s.37(1A)]
Note 4
Sale of call options
Gain on the sale of securities is taxed as a separate block of income. The definition of a ‘security’ includes
derivative products, e.g. call options. [s.37A(3)] The capital gain on the sale of the call options is, therefore,
treated as a gain on securities and tax thereon is computed as below:
Rs. Rs.
Consideration received on the sale of 100,000 call options at
Rs. 2·5 per call option on 25 June 2013 (100,000 x 2·5) 250,000
Less:
Cost incurred on 20 June 2013 at Rs. 1·9 per call option
(100,000 x 1·9) 190,000
Other admissible expenditure 10,000
––––––––
(200,000)
––––––––
Capital gain 50,000
––––––––
Tax on the capital gain of Rs. 50,000 at 10% as the holding period
is less than six months (50,000 x 10%) [Div VII of Pt I of 1st Sch] 5,000
––––––––
––––––––
25
Marks
Note 5
Sale of shares in Turbo Motors Ltd
Since 50% of the shares in Turbo Motors Limited are held by the Government of Balochistan, the company
is treated as a public company for the purposes of the computation of any capital gain/(loss) despite the fact
that it is not a listed company. Shares of a public company are included in the definition of a ‘security’. The
capital gain/(loss) is computed as below:
Rs. Rs.
Consideration received on the sale of 5,000 shares at
Rs. 170 per share (5,000 x 170) 850,000
Less:
Purchase price at Rs. 120 per share (5,000 x 120) 600,000
Capital value tax paid (5,000 x 120 x 0·01%) 60
Commission on purchase of the shares (5,000 x 0·1) 500
Commission on sale of the shares (5,000 x 0·1) 500
––––––––
(601,060)
––––––––
248,940
––––––––
Tax at 8% of the capital gain as the holding period is more than six months
but less than 12 months (248,940 x 8%) [Div VII of Pt I of 1st Sch] 19,915
––––––––
––––––––
Note 6
Sale of FSM shares
A dividend in specie derived in the form of shares of a company registered under the Companies Ordinance,
1984, is taxed at the time of disposal of such shares and not at the time of their receipt. In this instance,
although 150,000 shares were received as a dividend in specie in the tax year 2011, the dividend was not
taxable in that year, but in the tax year 2013, when the shares were disposed of. Therefore, the fair market
value of these shares on the date of acquisition, i.e. Rs. 10 per share, will be taxed as dividend income in
the tax year 2013.
The amount of dividend taxed is treated as the cost of these shares and taken into account for the purpose
of the calculation of the capital gain:
Dividend income
Rs.
Dividend in the form of 150,000 shares in Farid Sugar Mills (Pvt) Ltd
at Rs. 10 per share taxed in the tax year 2013 1,500,000
––––––––––
Capital gain
Rs.
Consideration received on 1 January 2013 3,000,000
Cost of the dividend in specie (1,500,000)
––––––––––
Capital gain 1,500,000
Since the shares were held by Bilal for more than one year, only 75% of the
capital gain is taxable (1,500,000 x 75%) [s.37(3)] 1,125,000
––––––––––
––––––––––
Note 7
Capital loss
Bilal had a brought forward loss of Rs. 440,500 relating to the tax year 2010 arising from a disposal of
shares in a private company. Bilal is entitled to carry forward this loss for a period of six years following the
year in which it arose and set it off against capital gains (which are not taxable as a separate block). Since
there were no capital gains in the tax years 2011 and 2012, it has rightly been brought forward for offset
against the capital gains accruing to Bilal on the disposal of capital assets (other than immovable properties
and securities). [s.59]
26
Marks
4 (a) Direct and indirect taxes
Taxes are broadly categorised into direct and indirect taxes. Indirect taxes are also called ‘consumption taxes’.
A direct tax is one which is demanded from the very person who it is intended or desired should pay it,
whereas an indirect tax is one which is demanded from one person in the expectation and with the intention
that they shall pass on the burden of the tax to another person, ultimately to the end consumer of the goods
or services. In other words, in the case of indirect taxes, the immediate payer of the tax only acts as an
intermediary or a tax collecting agent.
Examples of direct taxes include: income tax, wealth tax and property tax.
Examples of indirect taxes include: sales tax, federal excise, customs duty and provincial sales tax. 4·0
––––
(b) Mr Naveed
(i) Penalty payable for non-maintenance of records
Where a person does not maintain records as required under the Income Tax Ordinance, 2001 or the
rules made thereunder, a penalty of Rs. 10,000 or 5% of the amount of tax payable on taxable income,
whichever is higher, can be levied by the Commissioner.
On the basis of income tax liability determined by the Commissioner, Mr Naveed is liable to pay the
penalty below:
Rs.
Tax due 300,000
5% of tax 15,000
Since the amount calculated at 5% of the tax is higher than Rs. 10,000, Mr Naveed shall be liable to
pay a penalty of Rs. 15,000 for the non-maintenance of records as required under the Income Tax
Ordinance, 2001. [Sr. No. 7 of table under s.182] 2·0
(ii) Period of maintenance of records
Records are required to be maintained for six years after the end of the tax year to which they relate.
However, where any proceedings are pending before any authority or court, the taxpayer is required to
keep the records until the final decision of the proceedings. [s.174(3)] 2·0
––––
4·0
––––
(c) Exemption from penalty and default surcharge by the Federal Board of Revenue (FBR)
The FBR is empowered to exempt any person or class of persons from payment of the whole or part of any
penalty or default surcharge payable under the Income Tax Ordinance, 2001 in the following manner:
(1) The exemption may be published as a notification or as an order in the official Gazette of Pakistan.
(2) The reasons for the exemption shall be given in the notification or the order so published.
(3) The conditions or limitations, if any, applicable to such exemption from payment of the penalty or
default surcharge shall also be given in the notification or the order. [s.183] 3·0
––––
(d) Ms Kausar
Ms Kausar can revise her return, on her own, without waiting for any notice from the Commissioner for this
omission. The points raised in the question are answered as follows:
(i) The revised return shall be accompanied by the revised accounts or the revised audited accounts, as
the case may be. [s.114(6)(a)]
(ii) Ms Kausar will have to give the reasons for the revision of the return, in writing, duly signed by her.
[s.114(6)(b)]
(iii) Ms Kausar will be liable to pay a default surcharge on the amount of tax evaded by the omission of the
amount for the period starting from the date it was due (30 September 2011) to the date it is actually
paid.
However, she will not be liable to pay any penalty as she is revising the return without receiving any
notice of audit or amendment of the assessment from the Commissioner Inland Revenue. [s.114(6A)]
(iv) Ms Kausar can revise her return to declare the correct amount of income without seeking any
permission from the Commissioner Inland Revenue. [s.114(6)] 4·0
––––
15
––––
27
Marks
5 (a) Mr Usman
Sales tax payable/(refundable) for March 2013
Rs.
Output tax
Sale of taxable goods to the registered and unregistered persons
(Rs. 80,000,000 + Rs. 16,000,000) x 16% 15,360,000 0·5
Sale of goods against international tender Rs. 10,000,000 [exempt] 0 0·5
Sale of exempt goods to a local charity Rs. 10,000,000 0 0·5
Export of goods to Turkey (Rs. 5,000,000 x 0%) 0 0·5
–––––––––––
15,360,000
–––––––––––
Input tax
Purchase of raw materials for the manufacture of both taxable and exempt
supplies (working) 7,944,143 3·0
Input tax relating to the machinery (10,000,000 x 16/116) (also see explanation) 1,379,310 0·5
–––––––––––
9,323,453
–––––––––––
Sales tax payable/(refundable)
Output tax 15,360,000
Input tax (9,323,453)
–––––––––––
Payable 6,036,547 0·5
–––––––––––
–––––––––––
Working:
Rs.
Input tax on the purchase of raw materials from registered persons
for manufacturing both taxable supplies and exempt supplies
(Rs. 70,000,000 x 16/116) 9,655,172
Input tax on the purchase of raw materials from unregistered persons 0
–––––––––––
9,655,172
Less input tax on purchases returned (Rs. 1,000,000 x 16/116) (137,931)
–––––––––––
9,517,241
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Apportionment of Rs. 9,517,241 to taxable supplies
Rs. Rs.
Value of taxable supplies
– sales to registered persons 80,000,000
– sales to unregistered persons 16,000,000
– exports to Turkey 5,000,000
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(A) 101,000,000
– Value of taxable supplies + exempt supplies
(Rs. 101,000,000 + Rs. 20,000,000) (B) 121,000,000
– Input tax to be apportioned (C) 9,517,241
A/B x C
101,000,000/121,000,000 x 9,517,241 7,944,143
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Explanation:
With effect from 1 July 2011, input tax paid on fixed assets is allowable fully in the tax period the input tax
is paid. Further, the restriction on the adjustment of input tax in excess of 90% of the output tax does not
apply in the case of fixed assets or capital assets. [Proviso to s.8B] 1·0
––––
7·0
––––
(b) Time of supply
The Sales Tax Act, 1990 defines ‘time of supply’ as below:
(i) For goods supplied under a hire purchase agreement
The time at which the agreement for the supply of goods under hire purchase is entered into is treated
as the time of supply for such goods. 1·0
28
Marks
(ii) For goods supplied otherwise than under a hire purchase agreement
The time of supply is the time at which the goods are delivered or made available to the buyer. 1·0
(iii) For the rendering of services
The time of supply in relation to services is the time at which the services are rendered or provided to
the person obtaining such services. [s.2(44)] 1·0
––––
3·0
––––
10
––––
29