Question 1

a) State the provisions of the Income Tax Ordinance, 2001 with regards to the residential status of
individuals and companies.
b) Ms. Margaret, a German national was employed as a Technical Manager of Faiza Chemicals
Limited, a resident company, on 1 October 2016for a term of two years. Under the terms of
employment, she was allowed to deliver lectures at various professional organizations. During tax
year 2018, she conducted three workshop sessions, the details of which are as follows:
 Workshop Session in Lahore: A fee of US$ 15,000 in equivalent Pak Rupees was received from a
local event manager. The fee was credited to her bank account maintained in Karachi.
 Workshop Session in Munich: A fee of US$ 25,000 was received in Germany in her Munich bank
account.
 Workshop Session in Dubai: A fee of US$ 20,000 was remitted to her bank account in Karachi.

Required:

i. Discuss the taxability of the amounts received by Margaret for conducting the workshop sessions
during tax year 2018.
ii. Explain the provisions of the Income Tax Ordinance, 2001 pertaining to foreign tax credit available
to a resident taxpayer.

Solution to Question 1

a) An individual shall be a resident individual for a tax year if the individual is:
i. Present in Pakistan for a period of, or periods amounting in aggregate to, one hundred
and eighty three days or more in the tax year; or
ii. An employee or official of the Federal Government, or a Provincial Government posted
abroad in the tax year.

A company shall be resident company in a tax year if it is:

i. Incorporated or formed by or under any law in force in Pakistan.

ii. The control and management of the affairs of the company is situated wholly in Pakistan
at any time in the year, or
iii. A Provincial Government or Local Authority in Pakistan.

b) (i) The foreign-source income of a short term resident individual shall be exempt from tax if he/she
is:
 A resident individual solely by reason of the individual‘s employment; and
 Present in Pakistan for a period or periods not exceeding three years

However, the above rule is not applicable to:

 Any income derived from a business of the person established in Pakistan; or

 Any foreign-source income brought into or received in Pakistan.

Ms. Margaret is a short term resident individual as she is in Pakistan for employment and her stay
is less than three years. Based on the above rule:
 1. Receipt of US$ 15,000 in equivalent Pak Rupees for conduction the workshop session at
Lahore shall be taxable as it is received in Pakistan.
2. Receipt of US$ 25,000 for conducting the workshop session at Munich shall not be taxable as
it has neither been received in nor brought into Pakistan.
3. Receipt of US$ 20,000 for conducting the workshop session at Dubai shall be taxable as it has
been brought into Pakistan.

(ii) Following are the provisions regarding claiming of foreign tax credit available to a resident taxpayer:

The amount of tax credit available to a resident taxpayer in respect of his foreign source income which is
chargeable to tax under the Ordinance, will be lesser of:
 Income tax paid abroad; and
 Pakistan tax payable on foreign-sourced income.

The Pakistan tax payable in respect of foreign source income derived by a taxpayer in a tax year shall be
computed by applying the average rate of Pakistan income tax applicable to the taxpayer for the year
against the taxpayer‘s net foreign source income for that year.

The amount of tax credit is calculated separately for taxable income under each head of income. Foreign
tax credit is allowed 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.

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. If 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.

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.

Question 2
a) Mr. A has recently started his business as a General Order Supplier. His primary task is to provide
the products to the ultimate customer at his door step. He supplied the Shoes worth Rs. 35,000
to M/s Shoukat Khanum Memorial Hospital and Research Centre during the year 2019 for their
security staff. The hospital has deducted income tax amounting to Rs. 1,225 under section 153 of
the Income Tax Ordinance, 2001.
b) Mr. B opened a shoe shop and his sales during the year were Rs. 5,500,000. He made his purchases
from M/s AGK Distributors.
c) Mr. C is working for the Service Industries Ltd. He is engaged in the project shoe sales. During the
year, he forwarded orders worth Rs. 25,000,000 to the company. The company directly made the
deliveries according to the orders and paid his commission (@ 5%) amounting to Rs.1,250,000.
d) Mr. D is running a shoe showroom. He has made sale of shoes of Service Industries worth Rs.
7,500,000. During the year, Mr. D purchased leather from the market and get it manufactured
from the small shoe makers. The sale proceeds from the said produced goods were Rs. 5,500,000.
e) Mr. E is running a hotel. In the first year, his sole income was from the hiring of room and his gross
receipts aggregates to Rs. 6,000,000 during the year.
Required:

State whether the above persons are required to be registered under the sales tax laws. If yes, then in
which category (manufacturer, retailer, etc.) and in which scheme of taxation (registration, services etc.)

Solution to Question 2

14. Registration.— (1) Every person engaged in making taxable supplies in Pakistan, including zero-
rated supplies, in the course or furtherance of any taxable activity carried on by him, falling in any of
the following categories, if not already registered, is required to be registered under this Act, namely:-
a) a manufacturer who is not running a cottage industry;
b) a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such
retailer required to pay sales tax through his electricity bill under sub-section (9) of section 3;
c) an importer;
d) an exporter who intends to obtain sales tax refund against his zero-rated supplies;
e) a wholesaler, dealer or distributor; and
f) a person who is required, under any other Federal law or Provincial law, to be registered for the
purpose of any duty or tax collected or paid as if it were a levy of sales tax to be collected under
the Act.

a) Mr. A is a wholesaler. He is required to be registered. Mr. A delivers good to the customers at

their doorsteps.

“Wholesaler” includes a dealer and means any person who carries on, whether regularly or
otherwise, the business of buying and selling goods by wholesale or of supplying or distributing
goods, directly or indirectly, by wholesale for cash or deferred payment or for commission or
other valuable consideration or stores such goods belonging to others as an agent for the
purpose of sale; and includes a person supplying taxable goods to a person who deducts income
tax at source under the Income Tax Ordinance, 2001 (XLIX of 2001)
b) Mr. B is Retailer. He is required to be registered.

“Retailer” means a person supplying goods to general public for the purpose of consumption

c) Mr. C is only a commission agent. He does not deliver goods at all. He is not required to be
registered as he is not a manufacturer, wholesaler, distributor or retailer.
d) Mr. D manufactures his own shows as well as sell shoes manufactured by “Service Industries”. He
is required to be registered as he is a manufacturer and retailer.
e) Mr. E. is a service provider. He does not supply goods. He is not required to be registered for Sales
Tax, but as he is providing services – giving rooms on rent, room service, food at hotel, he is
required to register for Provincial Sales Tax. (Provinces are allowed to charge provincial sales tax
on services – Federal Government collects sales tax on goods).

Question 3
M/s ABC is engaged in diversified businesses. During the tax period March 2019, the gross commercial
billing from sale/rendering of services was as under:

Nature of Business Gross Billing Discount to dealers

 Export of garments manufacturing 1,200,000
Ice Cream 1,000,000 20%
1. The aforesaid billing is on gross basis, however, the firm offers discount to its dealers / agents in
accordance with market norms. It is the policy of the company to raise invoice net of discount to
the dealers.
2. The company paid the following input tax in respect of each business:
Nature of business Input Tax
Export of garments manufacturing 142,292
Ice Cream 75,000

3. The input sales tax on electricity of manufacturing premises was Rs. 75,000 during the tax period.
4. The input tax relating to garments business includes input tax amounting to Rs. 12,292 levied on
the hotel bills of a meeting held with the foreign customers.

Required:
The management of the company hired your services to know what would be the sales tax liability for
these activities.

Solution to Question 3

Particulars Export Local Total

Sales 1,200,000 1,000,000 2,200,000
Output tax (17%) 0 170,000
Less Directly attributable input tax:
- Export related (142,292 – 12,292) (130,000)
- Local sale (ice cream) related (75,000)
Less: Allocated – Electricity (40,909) (34,091) 75,000
Net tax payable / (refundable) (170,909) 60,909

Note – 1: Exports are zero-rated. Local sale of ice cream will be taxable at 17%.

Note – 2: Input tax of 12,292 relates to hotel bills i.e. consumption, therefore this amount will not be
allowed as adjustment from 142,292. Input tax is allowed only if it relates to taxable activity i.e purchase
of raw material, purchase of services, or purchase of plant & machinery.

Note – 3: Electricity is used to manufacture both exported and local products. The input tax on electricity
is allocated based on sales, to exports and local sales. When we incur a direct expense (purchase) to
manufacture, we can claim full adjustment of input tax that was paid while incurring expense (or
purchase). When a purchase or expense is used in manufacture of exempt and taxable sales, we need to
allocate the input tax based on sales – remember that input tax cannot be claimed in case of exempt
supplies. So if this question had exempt sales (instead of exports), then 40,909 was not adjustable, and
34,091 was adjustable.

Definitions:

“Cottage industry” means a manufacturer whose annual turnover from taxable supplies made in any tax
period during the last twelve months ending any tax period does not exceed ten million rupees or whose
annual utility (electricity, gas and telephone) bills during the last twelve months ending any tax period do
not exceed eight hundred thousand rupees;
“Distributor” means a person appointed by a manufacturer, importer or any other person for a specified
area to purchase goods from him for further supply and includes a person who in addition to being a
distributor is also engaged in supply of goods as a wholesaler or a retailer;

Sales Tax Returns are to be submitted by the due date. “Due date” in relation to the furnishing of a return
under section 26, means the 15th day of the month following the end of the tax period, or such other date
as the Board may, by notification in the official Gazette, specify and different dates may be specified for
furnishing of different parts or annexures of the return;

"Input tax”, in relation to a registered person, means –

a) tax levied under this Act on supply of goods to the person;
b) tax levied under this Act on the import of goods by the person;

“manufacture” or “produce” includes –-

a) any process in which an article singly or in combination with other articles, materials,
components, is either converted into another distinct article or product or is so changed,
transformed or reshaped that it becomes capable of being put to use differently or distinctly and
includes any process incidental or ancillary to the completion of a manufactured product;
b) process of printing, publishing, lithography and engraving; and
c) process and operations of assembling, mixing, cutting, diluting, bottling, packaging, repacking or
preparation of goods in any other manner;

“output tax”, in relation to a registered person, means –

a) tax levied under this Act on a supply of goods, made by the person;
b) tax levied under the Federal Excise Act, 2005 in sales tax mode as a duty of excise on the
manufacture or production of the goods, or the rendering or providing of the services, by the
person;
c) Provincial sales tax levied on services rendered or provided by the person;

“Retail price”, with reference to the Third Schedule, means the price fixed by the manufacturer inclusive
of all duties, charges and taxes (other than sales tax) at which any particular brand or variety of any article
should be sold to the general body of consumers or, if more than one such price is so fixed for the same
brand or variety, the highest of such price.

“sales tax” means – –

a) the tax, additional tax, or default surcharge levied under this Act;
b) a fine, penalty or fee imposed or charged under this Act; and
c) any other sum payable under the provisions of this Act or the rules made thereunder;

“Supply” means a sale or other transfer of the right to dispose of goods as owner, including such sale or
transfer under a hire purchase agreement, and also includes –

a) putting to private, business or non-business use of goods produced or manufactured in the course
of taxable activity for purposes other than those of making a taxable supply;
b) auction or disposal of goods to satisfy a debt owed by a person;
c) possession of taxable goods held immediately before a person ceases to be a registered person;
and
 d) in case of manufacture of goods belonging to another person, the transfer or delivery of such
goods to the owner or to a person nominated by him:]

Provided that the Federal Government may, by notification in the official Gazette, specify such other
transactions which shall or shall not constitute supply;

“taxable goods” means all goods other than those which have been exempted under section 13;

“taxable supply” means a supply of taxable goods made by an importer, manufacturer, wholesaler
(including dealer), distributor or retailer] other than a supply of goods which is exempt under section 13
and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4;

“time of supply”, in relation to,–

a) a supply of goods, other than under hire purchase agreement, means the time at which the goods
are delivered or made available to the recipient of the supply or the time when any payment is
received by the supplier in respect of that supply, whichever is earlier;
b) a supply of goods under a hire purchase agreement, means the time at which the agreement is
entered into; and
c) services, means the time at which the services are rendered or provided;

Provided that in respect of sub clause (a), (b) or (c), where any part payment is received, –

i. for the supply in a tax period, it shall be accounted for in the return for that tax period; and
ii. in respect of exempt supply, it shall be accounted for in the return for the tax period during
which the exemption is withdrawn from such supply.

“value of supply” means:--

a) in respect of a taxable supply, the consideration in money including all Federal and Provincial
duties and taxes, if any, which the supplier receives from the recipient for that supply but
excluding the amount of tax:

Provided that –

i. in case the consideration for a supply is in kind or is partly in kind and partly in money, the value
of the supply shall mean the open market price of the supply excluding the amount of tax;
ii. in case the supplier and recipient are associated persons and the supply is made for no
consideration or for a consideration which is lower than the open market price, the value of supply
shall mean the open market price of the supply excluding the amount of tax; and
iii. in case a taxable supply is made to a consumer from general public on installment basis on a price
inclusive of mark up or surcharge rendering it higher than open market price, the value of supply
shall mean the open market price of the supply excluding the amount of tax.
b) in case of trade discounts, the discounted price excluding the amount of tax; provided the tax
invoice shows the discounted price and the related tax and the discount allowed is in conformity
with the normal business practices;
c) in case where for any special nature of transaction it is difficult to ascertain the value of a supply,
the open market price;
 d) in case of imported goods, the value determined under section 25 of the Customs Act, including
the amount of customs-duties and central excise duty levied thereon;
e) in case where there is sufficient reason to believe that the value of a supply has not been correctly
declared in the invoice, the value determined by the Valuation Committee comprising
representatives of trade and the Inland Revenue constituted by the Commissioner; and
f) in case the goods other than taxable goods are supplied to a registered person for processing, the
value of supply of such processed goods shall mean the price excluding the amount of sales tax
which such goods will fetch on sale in the market:
g) in case of a taxable supply, with reference to retail tax, the price of taxable goods excluding the
amount of retail tax, which a supplier will charge at the time of making taxable supply by him, or
such other price as the Board may, by a notification in the official Gazette, specify.

8. Adjustable input tax.– (1) Notwithstanding anything contained in this Act, in relation to a tax period, a
registered person shall not be allowed to adjust input tax in excess of ninety per cent of the output tax for
that tax period:

Provided that the restriction on the adjustment of input tax in excess of ninety percent of the output tax,
shall not apply in case of fixed assets or Capital goods:

Provided further that the Board may by notification in the official Gazette, exclude any person or class of
persons from the purview of sub-section (1).

14. Registration.— (1) Every person engaged in making taxable supplies in Pakistan, including zero-rated
supplies, in the course or furtherance of any taxable activity carried on by him, falling in any of the
following categories, if not already registered, is required to be registered under this Act, namely:-

g) a manufacturer who is not running a cottage industry;

h) a retailer who is liable to pay sales tax under the Act or rules made thereunder, excluding such retailer
required to pay sales tax through his electricity bill under sub-section (9) of section 3;
i) an importer;
j) an exporter who intends to obtain sales tax refund against his zero-rated supplies;
k) a wholesaler, dealer or distributor; and
l) a person who is required, under any other Federal law or Provincial law, to be registered for the
purpose of any duty or tax collected or paid as if it were a levy of sales tax to be collected under the
Act.

(2) Persons not engaged in making of taxable supplies in Pakistan, if required to be registered for making
imports or exports, or under any provisions of the Act, or any other Federal law, may apply for registration.