ADVANCED TAXATION

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Certified Finance and Accounting Professional Examination – Summer 2019

Ans.1 Computation of taxable income and net tax payable by SL

Rs. in ‘000
Scheme of taxation: NTR FTR Exempt Total
Gross sales: as per P&L
Durable goods 105,327 - - 105,327
Canned food items 7,000 - - 7,000
Beverages - 32,500 - 32,500
Paint - 9,594 - 9,594
IT enabled services - - 3,750 3,750
Total gross sales 112,327 42,094 3,750 158,171
Less: Sales tax @17% (17/117×9,594) - (1,394) - (1,394)
Sales (adjusted for tax purposes) 112,327 40,700 3,750 156,777
Sales ratio excluding IT enabled services 73.40% 26.60% - 100%
Less: Cost of sales:
Durable goods (53,200 + 9,700) (62,900) - - (62,900)
Canned food (SRO 586(I)/91) WHT
exempt) (7,300) - - (7,300)
Beverages - (28,150) - (28,150)
Paint (6,900 × 80%) – 20% disallowed - (5,520) - (5,520)
IT enabled services- direct expense - - (1,200) (1,200)
Amortization of rights (2,850/10) (285) - - (285)
Gross profit 41,842 7,030 2,550 51,422
Administrative and selling expenses:
Allocation of common expenses – (W-1) (24,433) (8,855) - (33,288)
Wages paid to daily wage workers in cash (3,492) - - (3,492)
Financial charges:
Profit on debt related to durable goods (1,900) - - (1,900)
Bank charges (36.70) (13.30) - (50)
Other income:
Excess bad debts written off (330–220–130) 20 - - 20

Total business income 12,000.30 (1,838.30) 2,550.00 12,712.00

Capital Gain
Gain on sale of securities in MTL (82–75 × 30,000) – FTR 210
Total income 12,922

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 ADVANCED TAXATION
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Certified Finance and Accounting Professional Examination – Summer 2019

Add/(Less): FTR/Exempt/Separate block loss/income:

Gain on sale of securities in MTL – Separate block (210)
Loss on paint and beverage sale – FTR 1,838
IT enabled services – exempt (2,550)
(922)
Taxable income 12,000
Computation of net tax liability:
Tax on taxable income [12,000 @ 29%] 3,480.00
Tax on sale of beverages - FTR [32,500×1.17×2%] u/s 153(1)(a) – (charged on gross
sales) 760.50
Tax on sale of paint - FTR [9,594 × 4%] u/s 153(1)(a) read with S.153(3)(a) 383.76
Tax on disposal of shares in MTL as dividend-in-specie – separate block u/s 37A
(210×7.5%) 15.75
Gross tax payable for the year 4,640.01
Less: Tax deduction at source:
Paid u/s 153 (durable goods) (4,212.00)
Paid u/s 153 (beverages) from above (760.50)
Paid u/s 153(1)(a) read with 153(3)(a)(i) (adjustable) (canned food) (7,000×1.17×4%) (327.60)
Deductible u/s 153(1)(a) on paint @ 4% - not deducted by the retailers. -
Paid u/s 147 (860.00)
Collected u/s 236G by manufacturer on beverages (28,150×1.17×0.1%) (32.94)
Collection to be made u/s 236G by commercial importer of paint @ 0.1% - not
collected -
(6,193.04)
(1,553.03)
Add: Tax not collected on sale of paint to retailers u/s 236H [(9,594 × 0.5%] 47.97
Tax not deducted on purchase of vegetables, live fowls etc.- WHT exempt -
Net tax refundable (1,505.06)
W-1: Determination of common administrative and selling expense Rs. in ‘000
Administrative and selling expenses 42,555
Less: Inadmissible expenses:
Salesmen salary paid in cash (1,725)
Wages paid to daily wage workers in cash -
Right to use latest food canning technology (2,850)
Less: Reclassification/allocation of direct expenses
Wages paid to daily wage workers in cash (3,492)
Expenditure on remote monitoring of food can process (1,200)
33,288

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 ADVANCED TAXATION
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Certified Finance and Accounting Professional Examination – Summer 2019

Ans.2 (a) Tax treatment in each of the following cases under the Sales Tax Act, 1990 and Rules made
thereunder:
(i) Since the distributor is unregistered under the Sales Tax Act, no sales tax invoice
would be issued by the distributor on sale of taxable goods to Sigma Limited.
Therefore, Sigma Limited, is required to withhold sales tax at the rate of 1% of the
gross value of taxable supply from the distributor who is liable to be registered but not
actually registered under Chapter I of the Sales Tax Rules, 2006.The amount of
withholding sales tax would be Rs. 12,991. (1,520,000 × 1/117).
(ii) Since CL did not claim adjustment of input tax in the relevant tax period, they will now
have to file an application to the Commissioner having jurisdiction giving him reasons
for such delay, and such Commissioner, on being satisfied that:
 the tax invoice or bill of entry on which input tax is claimed is genuine, in the name
of CL, and contains all details specified in section 23 of the Sales Tax Act, 1990;
 no input tax adjustment was earlier taken on the same tax invoice or bill of entry;
 payment in respect of the tax invoice was made in terms of section 73 of the
Sales Tax Act, 1990; and
 supplier has declared such supply in his return and has paid the amount of tax
due as indicated in his return.
issue a written order permitting such adjustment in the tax period as specified by the
Commissioner.
(b) (i) Since GL inadvertently failed to levy sales tax and issue tax invoice to its associate it
would be liable to pay the following amounts to the sales tax authorities:
Computation of sales tax, penalty and default surcharge:
Value of supply (for sales tax purposes) 1,287,000
Sales tax to be recovered as tax fraction of the value of supply (17/117) 187,000
Penalty:
 For not depositing sales tax in time (higher of ) Rs. 10,000
Or 5% of the amount of tax involved (187,000 × 5%) Rs. 9,350 10,000
 For non-issuance of tax invoice Rs. 5,000
Or 3% of the amount of tax involved (187,000 × 3%) Rs. 5,610 5,610

Default surcharge non-payment of sales tax u/s 3:

Period of default 114 days
Rate of default surcharge 12% p.a
Default surcharge (187,000 ×12%×114/365) 7,009
Net amount payable 209,619
(ii) GL would not be liable to pay the amount of penalty and default surcharge only if either
Federal Government, by a notification in the official gazette, or the Board by a special
order published in gazette for reasons to be recorded in writing, exempt GL from the
payment of the whole or part of the penalty and default surcharge subject to such
conditions and limitations as may be specified in such notification or special order.

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 ADVANCED TAXATION
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Certified Finance and Accounting Professional Examination – Summer 2019

Ans.3 (a) (i) Section 153(10)(b) and Section 161

As BPL received the payment through AF (an agent), and AF retained service charges
of Rs. 193,200 from the payment remitted to BPL, AF shall be treated to have been
paid the service charges and BPL should collect tax of Rs. 15,456 from AF along with
the payment of Rs. 9,466,800. Moreover, in addition to the tax withheld by BPL’s clients
u/s 153(1)(b) of Rs. 840,000 on gross receipts of Rs. 10,500,000 @ 8%, BPL is also
liable to pay withholding tax of Rs. 2,640,000 on the balance of receipts of Rs.
33,000,000 @ 8% (Rs. 43,500,000 – Rs. 10,500,000).
(ii) Computation of tax payable by BPL: Rupees
Corporate tax on taxable income (2,745,000 × 24%)-NTR 658,800
Tax deducted/deductible @ 8% by clients’ u/s 153(1)(b)- min. tax. 3,480,000
(Since tax withheld on web design and hosting services is more than
tax under normal tax regime, withholding tax would be payable as
minimum tax
(iii) Test for the eligibility of BPL to carry forward the excess of
Rupees
minimum tax over corporate tax.
Gross turnover 43,500,000
2% of gross turnover 870,000
Since tax paid on web design and hosting services is less than 2% of
the gross turnover from all sources, therefore provisions of section
153(3)(b) are applicable on BPL and is entitled to carry forward the
excess of minimum tax over corporate tax to the next year for
adjustment. Irrespective of the fact that BPL had filed an irrevocable
undertaking by November 2018 for presenting its accounts to the
Commissioner. The amount of tax to be carried forward for adjustment
against the tax liability of the subsequent tax year would be Rs.
2,821,200 (Rs. 3,480,000–658,800).
(b) Provision allowable in Tax Year 2019
Allowable deduction for the tax year 2018 and 2019 will be arrived as follows:
2019 2018
---- Rs. in million ----
Allowable provision for the year
Rs. 58 million × 3% 1.74
Rs. 50 million × 3% 1.50

Provision already made 2.10 3.20

Unadjusted provision from last year 1.70 -
3.80 3.20
Excess provision carried forward (2.06) (1.70)
(c) (i) The extinguishment of 30,000 shares in GPL will be treated as tax neutral event (as
there is no change in ownership of Jamal Nasir is involved) and 18,000 shares in EPL
will have the same cost base i.e. Rs. 2,550,000.Therefore, no CGT incidence will arise
on such transfer.

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 ADVANCED TAXATION
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Certified Finance and Accounting Professional Examination – Summer 2019

(ii) Where the owner of any security disposes of the security and thereafter re-acquires
the security and the result of the transaction is that any income payable in respect of
the security is receivable by any person other than the owner, the income shall be
treated as the income of the owner and not of the other person.
Therefore, in view of the above provision, Rs. 112,500 would be treated as Kashif’s
income chargeable to tax under the head ‘Income from other sources’ in tax year 2019.

Ans.4 Caramel Limited (CL)

Computation of Net Sales Tax Liability
For the tax period May 2019
Taxable Sales Tax Amount of
SALES TAX CREDIT (INPUT TAX)
Value Rate Sales Tax
Purchases from registered suppliers (8,064–2,564–
1,800) 3,700,000 17% 629,000
Raw material from MA- MA is not in ATL 2,564,000 17% 435,880
Fork lifter 1,800,000 17% 306,000
Purchases from un-registered suppliers 2,476,000 Inadmissible
(1,246,000+1,230,000) -
Import of food packaging material 1,387,500 17% 235,875
Value addition 3% 41,625
Advance against purchase of detergents 300,000 Inadmissible -
Life insurance premium 200,000 Inadmissible -
Share registration services 700,000 16% 112,000
Input Tax for the month 1,760,380

SALES TAX DEBIT (OUTPUT TAX)

Taxable supplies to registered persons 1,000,000 17% 170,000
Auto parts and accessories 3,205,000 17% 544,850
Rock phosphate 1,952,000 17% 331,840
Supply of parts and components for LED bulb 3,435,000 17% 583,950
*Fumigation services. 1,290,000 13% -
Finished fabrics to - un-registered 625,000 9% 56,250
Iron bars- un-registered 238,000 Exempt -
Second hand and worn footwear 175,000 5% 8,750
Supply to un-registered retailers- not liable to be 332,000 17%
registered 56,440
Output tax for the month 1,752,080

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 ADVANCED TAXATION
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Certified Finance and Accounting Professional Examination – Summer 2019

Sales tax withheld from MA on raw material- not in ATL. (435,880 /10) 43,588
Sales tax withheld on water – liable to be registered. (1,230,000 x 1/117) 10,513
Sales tax withheld from un-registered supplier – cottage industry not liable to be
registered -
Extra tax on auto parts -
Further tax on finished fabrics - [625,000×1%] 6,250
Further tax on sale of second hand and worn footwear – exempt -
Further tax on sale to retailers- not liable to be registered -
Admissible credit (lower of (1,760,380-306,000= 1,454,380) or 90% of 1,752,080 =
1,576,872 (1,454,380)
525,751
Less: Input Tax on purchase of fixed assets [S.8B(1) 1st proviso, STA] (306,000)
Sales tax payable 219,751
Input tax to be carried forward Nil
Note: *Services tax of Rs. 167,700 on fumigation services cannot be paid with federal return.

Ans.5 In the given situation, Bader may be in breach of the following fundamental principles of Code of
Ethics for Chartered Accountants:
Professional behavior
This principle imposes an obligation on all chartered accountants to comply with relevant laws and
regulations and avoid any action that discredits the profession. Bader has breached the fundamental
principle of professional behavior as his proposed suggestion in respect of ignoring the appropriate
adjustments to the income tax return would affect the good reputation of the profession.
Integrity
The principle of integrity imposes an obligation on all chartered accountants to be straightforward
and honest in all professional and business relationships. Bader has breached the fundamental
principle of integrity as he has knowingly ignored the required adjustments to be made in the income
tax return which may render it materially false.
Potential threats:
Salman may face intimidation threat from Bader as refusal to obey instruction may risk his job.
Safeguards:
Identified threats are significant as Salman is being instructed from the highest level of management.
In order to reduce the threat to an acceptable level, one or more of the following safeguards should
be applied:
 Discuss the matter with Bader and persuade him to follow code of ethics/contact the tax client
to make necessary adjustments.
 Consider informing appropriate authorities like a senior partner in the firm.
 Refuse to implement the given proposals.
 Seek legal advice.
 In case threat could not be reduced consider resigning from the job.

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 ADVANCED TAXATION
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Certified Finance and Accounting Professional Examination – Summer 2019

Ans.6 (i) Cooking oil falls under Second Schedule of the Federal Excise Act, 2005 and excise duty is
collectible under sales tax mode with entitlement for adjustment with sales tax. However, since
it was supplied to Golden Era Limited in export processing zone for the purpose of packing
into specialized tin packs, the process covered within the definition of manufacturing, it will be
exempt from the levy of excise duty and no input tax adjustment would be allowed to SSL
under the circumstances.

(ii) Services provided or rendered by AIL as a stockbroker in Balochistan is chargeable to excise

duty at the rate of 16% of the charges received. But since AIL is registered with the provincial
sales tax authority and has also paid provincial sales tax on such services, excise duty on
brokerage services shall not be levied.

(iii) Cigars supplied, against payment in foreign exchange, on board international flight by the
Pakistan International Airlines is exempt from the levy of excise duty subject to the same
conditions and procedures as are applicable for the purposes of exemption of customs duty.
ML shall not be entitled to claim any adjustment or duty draw back in respect of input tax of
Rs. 1,423,460 paid at the time of import.

Ans.7 (a) VTF

Computation of Taxable Income and Income Tax Liability
For the tax year 2019
Eligibility for 100% tax credit: Rupees
Total receipts of VTF (70,000,000+2,502,000+5,000,000) 77,502,000
Total administrative and management expenses 12,900,000
15 % of the total receipts (77,502,000×15%) 11,625,300
Surplus funds [(77,502,000-204,000) – (12,900,000+35,000,000)] 29,398,000
 Since 15% of the total receipts of VTF are less than total administrative and management
expenses, therefore VTF does not qualify for 100% tax credit under section 100C of the
Ordinance.
 Although surplus funds are more than 25% of the total receipts (excluding restricted fund
of Rs. 204,000) i.e. Rs. 19,324,500,tax @ 10% on the surplus amount of Rs. 29,398,000
shall not be charged since VTF does not qualify for tax credit in the first place and
corporate tax rate of 29% shall be applicable on the entire income.
Since non-profit organization falls within the definition of company, its income would be
computed as follows:
Income from business:
Restricted as per proviso to section 100C(2)(a) - not applicable 5,000,000
Income from property:
Annual rent (excluding non-adjustable deposit) 2,298,000
Non- adjustable deposit (204,000/10) 20,400
Total 2,318,400

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Certified Finance and Accounting Professional Examination – Summer 2019

Less: admissible deductions:

Repair 1/5th of rent (2,318,400×1/5) (463,680)
Insurance premium (150,000)
Ground rent (53,000)
Fire alarm (administrative expense) restricted up to 6% of rent (139,104)
Salaries of watchmen (admin exp.) - (6% admin. Exp. already claimed) -
(805,784)
1,512,616
Other source income:
Receipts from donations, contributions and subscriptions 70,000,000
Less: expenses
Administrative and management expenses (12,900,000 – *403,000) (12,497,000)
Project expenses (35,000,000)
(47,497,000)
22,503,000
Taxable income 29,015,616

Computation of tax payable:

Tax on taxable income [29,015,616 @ 29%]-NTR (i) 8,414,529
Min. tax–u/s 113 (70,000,000 + 2,502,000 + 5,000,000 × 1.25%) (ii) 968,775
Tax charged would be higher of (i) or (ii) 8,414,529
Less: Tax deduction at source:
u/s 153 (345,000)
Net tax payable 8,069,529
*(150,000+53,000+140,000+60,000)
Assume Rs. 5,000,000 is the gross receipt.
(b) Revised computation of taxable income and tax payable by VTF:

Eligibility for 100% tax credit: Rupees

Total receipts of VTF (70,000,000+2,502,000+5,000,000+16,000,000) 93,502,000
Total administrative and management expenses 12,900,000
15 % of the total receipts (93,502,000×15%) 14,025,300
Surplus funds [(93,502,000–204,000–4,800,000)–(12,900,000+35,000,000)] 40,598,000
 Since 15% of the total receipts of VTF are more than total administrative and
management expenses, therefore VTF qualifies for 100% tax credit under section 100C
of the Ordinance.

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 ADVANCED TAXATION
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Certified Finance and Accounting Professional Examination – Summer 2019

 As VTF has qualified for 100% tax credit and its surplus funds are more than 25% of the
total receipts (excluding restricted funds of Rs. 204,000 and Rs. 4,800,000) i.e.
Rs. 22,124,500, tax @ 10% on the surplus amount of Rs. 40,598,000 shall be charged
The amount of tax payable by VTF would therefore be (40,598,000 @10%) Rs.
4,059,800.
(THE END)

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