Professional Documents
Culture Documents
ICAP
Practice Kit
Note:
Updated for the Finance Act 2020-21
Fifth edition published by
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C
Advanced Taxation
Contents
Page
Section A Questions 1
Section B Answers 63
I
Advanced Taxation
Question Answer
page page
Chapter 1 – INDIVIDUAL
1 Mr. Khan 1 63
2 Mr.Yaqeen 2 65
3 Mr.Sohail 3 67
4 Mr.Iqbal 3 68
5 Mr.Saif 5 71
6 Mr.Pansari 5 73
7 MH Associates 6 75
Chapter 2 – Association of Persons and Company Taxation
9 Big Pharma 9 80
Question Answer
page page
22 ZJ Limited 21 104
26 RM Associates 25 110
27 Loyal (Pvt) Limited 26 112
Chapter 3 – Sales Tax
Question Answer
page page
64 Associates 49 151
65 Tax Evasion and Avoidance 49 151
66 Derivative Product, Wash Sales, Tax Swap Sales (Rule 13F) 49 152
Question Answer
page page
Question Answer
page page
Chapter 7 –Other areas federal excise act.
A
Advanced Taxation
SECTION
Questions
CHAPTER 01 – INDIVIDUAL
1 MR. KHAN
Mr. Khan has been working for a listed company Turtle Limited (TL) for the last many years. The details
of his emoluments during the tax year ended June 30, 2021 are as under:
Rupees
In addition to the above cash emoluments, Mr. Khan was also provided with the following:
(a) A rent free furnished accommodation with a fair market rent of Rs. 100,000 per month.
(b) An 1800CC company maintained car, both for business and private use. The car was purchased
by TL on July 1, 2018 at a fair market value of Rs. 2,000,000.
(c) On July 1, 2020 he was provided with an interest free loan of Rs. 2,500,000 which is repayable
in lump sum in December 2021. The prescribed benchmark rate is 10% per annum. On
December 1, 2020 Mr. Khan utilized 60% of the amount of loan for purchasing a double storey
bungalow. The total cost of the bungalow was Rs. 25,000,000. The bungalow, on its ground
floor, also had a suitable space for opening a departmental store.
In order to increase its operational efficiency, TL announced a redundancy scheme to its employees.
Mr. Khan opting for the scheme resigned from TL with effect from January 1, 2021. Upon resignation,
25% of his outstanding loan balance was waived by TL and the remaining loan amount was adjusted
from his final settlement. He received the following payments from TL:
Rupees
Compensation under the redundancy scheme 4,000,000
(ii) Mr. Khan was allowed to purchase the 1800CC car at an accounting book value of Rs. 1,000,000
which he sold in the open market at a price of Rs. 1,500,000.
(iii) On March 1, 2021, Mr. Khan rented out the ground floor of his bungalow to Mr.Riaz, for
establishing a departmental store, at a monthly rent of Rs. 137,500. Due to the strategic location
of the store, he also received adjustable and non-adjustable deposits of Rs. 600,000 and
Rs.500,000 respectively.
(iv) On April 1, 2021, he rented out the residential portion of the bungalow to a Commercial Bank
for their marketing executive. He received gross amount of Rs. 2,400,000 as two year’s advance
rent. The Bank deducted tax of Rs. 197,500 from such payment.
(v) A donation of Rs. 500,000 was made to an un-approved trust for the construction of mosque.
(vi) In July 2018, Mr. Khan was issued shares in TL. The fair market value of shares at the time of
issue was Rs. 500,000. He disposed off these shares in June 2021 at a gain of Rs. 500,000.
Required:
Compute the taxable income, tax liability and tax payable/ refundable, if any, to Mr. Khan for the tax year
2021. The average rate of tax of Mr. Khan for the last three years was 14%.
Note: Show all exemptions, exclusions and disallowances where relevant.
2 MR.YAQEEN
Mr.Yaqeen, a Pakistani citizen, returned to Pakistan on 30 June 2020 after residing for six years in
Norway. On 1 July 2020 he joined a private hospital KKUH and received following emoluments:
Rupees
Basic salary (per month) 500,000
Medical allowance (per month) 60,000
Leave fare assistance 240,000
On 1 January 2021, Mr.Yaqeen resigned from the hospital and joined Dil (Private) Limited (DPL), a
company engaged in production of health care and dental products. Mr.Yaqeen received Rs. 3,000,000
from DPL as consideration for joining the company. DPL agreed to pay following emoluments to
Mr.Yaqeen for the tax year 2021:
Rupees
Basic salary (per month) 800,000
Medical allowance (per month) 80,000
Utilities allowance (per month) 100,000
On 1 January 2021, DPL provided him with refrigerator, cooking range and washing machine for his use
at home. The book value of these appliances was Rs. 200,000 and these were returnable to the
company after four years. 15% depreciation was charged by DPL on these appliances.
On 31 March 2021, he was given an option to purchase 2,000 shares of DPL at Rs. 50 per share. The
breakup value of the company on that date was Rs. 150 per share.
On 1 April 2021, he received a loan of Rs. 5,000,000 from DPL for the purchase of a house. The profit
on loan was payable at the rate of 8% per annum. The prescribed bench mark rate is 10% per annum.
Other information relevant to Mr.Yaqeen for the tax year 2021 is as under:
(i) On 15 April 2021, he fell ill and was admitted to KKUH where he had been working during his
employment. The hospital incurred Rs. 50,000 on his treatment but charged nothing to him.
(ii) On 30 April 2021, he received salary arrears of Rs. 900,000 from his ex-employer in Norway.
(iii) Mr.Yaqeen had 30 acres of agricultural land in Dheer which he did not cultivate himself. During
tax year 2021, he received annual rent of Rs. 600,000 from the tenant cultivating the land.
(iv) On 1 May 2021, he spent Rs. 800,000 on the renovation of his residential house. The entire
amount was obtained as a loan from a scheduled bank on which a profit of Rs. 20,000 was paid
to the bank during the tax year 2021.
(v) On 15 June 2021, he received insurance claim of Rs. 600,000 against theft of a painting which
was stolen on 31 May 2021. The painting was purchased by him on 1 January 2021 for
Rs.350,000. He had paid insurance premium of Rs. 24,000 and also paid lawyer’s fee of
Rs. 50,000 who represented him in the settlement proceedings.
(vi) On 15 July 2020, Mr.Yaqeen received 20,000 shares in AB (Private) Limited (ABL), a company
incorporated under the Companies Ordinance, 1984 as a dividend in specie. On 30 June 2021,
he sold 15,000 shares in ABL for Rs. 425,000. The fair market value of these shares, on the date
of issue, was estimated at Rs. 25 per share.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and net tax payable
for the tax year 2021. Give brief reasons for the treatment of items in (v) and (vi) above. Also explain the
treatment of any items that are not appearing in your computation.
3 MR.SOHAIL
Mr.Sohail, a resident individual, owns a building in Clifton area of Karachi. On 1 October 2020, he rented
out the building to Mr.Baqir at an annual rent of Rs. 1,200,000. This amount included Rs. 15,000 per
month for arranging two security guards for the building. Following expenses were incurred by Mr.Sohail
on the building during the tax year 2021.
Rupees
Repairs and renovation 35,000
Property tax 20,000
Insurance premium 10,000
Mr.Sohail also paid a salary of Rs. 4,000 per month to each of the two security guards at the building.
Required:
Under the provision of Income Tax Ordinance, 2001 calculate the taxable income of Mr.Sohail under
both options available for the tax year 2021 and tax payable thereon. Comment on which option is
suitable to Mr. Sohail?
4 MR.IQBAL
Mr.Iqbal, aged 45 years, is working as a Chief Engineer in a listed company Tameer Limited (TL). The
company is engaged in the manufacture of chipboards for the local market. He derived following
emoluments during the tax year ended 30 June 2021:
Rupees
Basic salary (per month) 300,000
Cost of living allowance (per month) 50,000
Milk allowance (per month) 10,000
In addition to the above emoluments, Mr.Iqbal was also provided the following:
(i) Special bonus equal to one month’s basic salary paid on 5 June 2021.
(ii) A new company maintained car exclusively for his personal use. The car was purchased on
1 March 2021 at a cost of Rs. 1,800,000. However, the cost of the car would have been
Rs.3,000,000 had the company obtained it on finance lease. Mr.Iqbal, in accordance with the
terms of his employment, purchased his previous car from TL for Rs. 250,000. This car was
provided to him solely for business purposes. The fair market value of the car at the time of sale
to Mr.Iqbal was Rs. 600,000.
(iii) A reimbursement of Rs. 36,000 in respect of driver’s salary. Mr.Iqbal paid Rs. 60,000 to the driver
for four months.
(iv) A fully furnished accommodation in DHA, Karachi. The fair market value of the rent was estimated
to be Rs. 85,000 per month.
(v) An option to acquire 4,000 shares in TL’s parent company, Tameer Inc. which is listed on New
York Stock Exchange was granted to him in May 2020. Mr.Iqbal exercised the option on
5 January 2021 at a price of USD 1.5 per share. The market value of the shares at the close of
business on 5 January 2021 was USD 2.5 per share. He sold 3,000 shares on 30 June 2021 at a
price of USD 3 per share. The dollar rupee parity on both the above dates was USD 1 = Rs.100.
(vi) On 15 May 2021 Mr.Iqbal was provided 800 shares in TL as a reward for his excellent
performance. However, he was restricted from selling or transferring these shares before
16 November 2021. The market value of these shares at the close of business on 15 May 2021
was Rs. 12.5 per share.
Mr.Iqbal received additional income from the following sources, for the tax year 2021:
(i) Brokerage fee of Rs. 200,000 in connection with the transfer of two apartments in Islamabad.
The brokerage fee was received in cash. Mr.Iqbal incurred an expense of Rs. 30,000 against
telephone costs and air travel to Islamabad in connection with the above deal. He also paid
Rs. 10,000 as a gift to his brother for showing the apartments to his clients in Islamabad.
(ii) Profit of Rs. 150,000 on a savings account maintained with an Islamic bank. The bank deducted
withholding tax of Rs. 15,000 and Zakat of Rs. 25,000.
(iii) He also received an income tax refund of Rs. 225,000 related to tax year 2019. The amount
included Rs. 25,000 being compensation for delayed refund.
(iv) Annual rent of Rs. 800,000 from letting out a building to KK Enterprise. Following expenses were
incurred by Mr.Iqbal in relation to the building: repairs Rs. 200,000, fire insurance premium
Rs. 30,000, ground rent Rs. 10,000, watchman’s salary Rs. 8,000 and interest of Rs. 15,000 on
a loan obtained for building renovation by creating first charge on the building in favour of a
scheduled bank.
Other related information is as under:
TL deducted withholding tax of Rs. 1,200,000 from Mr.Iqbal’s salary during tax year 2021.
On 1 July 2020, Mr.Iqbal acquired a life insurance policy and paid a premium of Rs. 500,000.
He also contributed Rs. 1,600,000 to an approved pension fund.
On 1 August 2020, he purchased 50,000 shares in a listed company AB Limited at a price of
Rs. 20 each. On 1 January 2021, AB Limited announced 20% right shares to existing
shareholders at a price of Rs. 18 per share. On 25 January 2021, Mr.Iqbal subscribed the right
issue in full.
During tax year 2020 his assessed taxable income was Rs. 3,000,000.
Required:
Under the Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable income and
income tax payable by or refundable to Mr.Iqbal for the tax year ended30 June 2021.
5 MR.SAIF
Mr.Saif is an Assistant Manager – Supply Chain in Rio (Pvt.) Limited (RPL), a company engaged in the
business of manufacturing and supply of Biscuits. During tax year 2021, RPL paid him a monthly basic
salary of Rs. 60,000. He is also entitled to a bonus of Rs. 90,000 to be paid in July 2021.
(i) A company maintained 800CC. Mehran Car for both his personal and official use. The car was
obtained on lease in 2020 at total rentals of Rs. 1,200,000 to be paid over the 5 years lease term.
The fair market value of the car at the commencement of lease was Rs. 1,000,000. RPL also
paid Rs. 50,000 for its maintenance to a local workshop.
(ii) A fully furnished two storey bungalow in Gulistane Johar. The annual rental value of the bungalow
was Rs. 800,000.
On 1 January 2021, Mr.Saif let out the first floor of the bungalow to his brother Mr.Moiz at a
monthly rent of Rs. 25,000 and also insured it against the risk of fire. The premium payable to
the insurance company amounted to Rs. 25,000. Mr.Saif paid 50% of the premium immediately
and agreed to pay the balance on 1 July 2021. He also bought an LCD TV for Rs. 50,000 for the
first floor.
(iii) On 1 January 2021, RPL sold certain items of old stock to Mr.Saif for Rs. 5,000. The net realizable
value of the stock in RPL’s books as on 30 June 2020 and 31 December 2020 were Rs. 12,000
and Rs. 14,000 respectively. The original cost of the stock was Rs. 25,000.
(iv) Withholding tax deducted by RPL from Saif’s salary amounted to Rs. 60,000.
(i) On 1 May 2021 he sold 1,200 shares in Mio Limited at Rs. 50 per share and incurred incidental
expenses of 0.5% of sale proceeds. Mio Limited is an unlisted company in which 55% of the
shares are held by Chinese Government. Mr.Saif had received these shares on 30 June 2020
as dividend in specie from Rahat (Pvt.) Limited. He holds 12,800 shares in Rahat (Pvt.) Limited
costing Rs. 35 each.
(ii) On 15 June 2021, Mr.Saif donated Rs. 20,000 in cash to Shaukat Khannum Cancer Hospital
Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable
income and income tax payable by or refundable to Mr.Saif for the tax year 2021.
6 MR.PANSARI
Mr.Pansari, a Pakistani citizen, is working as a company secretary in Sukoon Limited (SL), an un-listed
public company, engaged in the business of production and supply of olive oil. Following are the details
of his emoluments during the year ended 30 June 2021.
Rupees
In addition to the above cash emoluments, Mr.Pansari was also provided with the following:
(i) A 1800CC company maintained Honda Civic car both for business and private use. The car was
purchased at the 1st day of tax year 2020 at a cost of Rs. 3,000,000. However, the current market
value of the car is Rs. 3,500,000.
(ii) A special payment of Rs. 75,000 in lieu of leave was made available to him. Mr.Pansari,
however, voluntarily waived his right to receive such payment.
(iii) Free provision of two cans of olive oil per month. The market value of each can was Rs. 5,000.
(iv) In July 2019, he was granted an employee stock option to purchase up to 15,000 shares in SL’s
holding company, Trio Limited, situated in Bermuda, at an option price of USD 3 per share. The
shares were required to be purchased within eighteen months from the option date. Mr.Pansari
exercised the option in September 2020 to purchase 8,000 shares when the market price of the
shares was USD 5 per share. After two months of the acquisition, Mr.Pansari sold 6,000 shares
at a price of USD 8.5 per share. (Assume the dollar rupee parity on the above dates was
USD 1 = PKR 102).
(i) Received a royalty of Rs. 2,000,000 from K Publishing on a book written on Wild Hunting.
Mr.Pansari completed the book in nineteen months and all the costs relating to its publication
were borne by the publisher. The applicable tax rates in tax years 2019 and 2020 were 16% and
18% respectively.
(iii) Received a fee of Rs. 200,000 for attending a directors’ meeting of SL’s associated company
Nice (Pvt.) Limited held in July 2020.
(iv) There was a brought forward capital loss of Rs. 25,000. The loss was suffered by Mr.Pansari on
sale of shares in Ghareeb (Pvt.) Limited.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income of Mr.Pansari for the tax year 2021.
7 MH ASSOCIATES
For the purpose of this question, assume that the date today is 15 August 2020.
Masood and Ali Hassan established a consultancy firm, MH Associates (MHA), for providing accounting
and taxation services to SMEs in Punjab. They share profits and losses in the ratio of 60:40 respectively.
During the year ended 30 June 2021 MHA earned profit before tax of Rs. 6,000,000 which included of
an exempt income of Rs. 800,000. MHA’s tax liability for the year amounted to Rs. 1,079,500. However,
MHA paid Rs. 1,100,000 as advance tax against the tax liability.
Following further information is available about Masood for the year ended 30 June 2021:
(i) On 1 May 2020 Masood received 3,000 shares, by way of a gift from his father, in Lucky Inc., a
company registered on Toronto Stock Exchange. On 1 January 2018 his father had bought
these shares at a price of CAD 20 per share (equivalent to PKR 1,300 per share). The market
value of each share at the time of transfer to Masood was CAD 28 (equivalent to PKR 2,100 per
share).
On 15 June 2021 Masood sold 2,500 shares in Lucky Inc. to an investor for CAD 32 per share
and paid a brokerage commission of CAD 0.2 per share to the stock broker. He also paid income
tax of CAD 1,500 to the tax authorities in Toronto. The exchange rate at the time of above
transaction was CAD 1 = PKR 90.
(ii) On 10 June 2021 Masood received royalty of Rs. 2,300,000 on publication of his book ‘Slum-
Dwellers’ on children living in urban slums. It took him nineteen months to complete the book.
The entire cost of publication was borne by the publisher. Masood’s average rates of tax for the
last two tax years were 17% and 19% respectively.
(iii) On 20 June 2021 Masood earned gross rent of Rs. 120,000 from a construction company for
using his fork lifter on their site. The company withheld tax of Rs. 12,000 from the payment.
Masood incurred Rs. 15,000 for repair of the fork lifter.
(iv) On 30 June 2021 Masood paid Rs. 50,000 in cash on account of Zakat to an approved NGO.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made there under, compute the
total income, taxable income and tax payable by or refundable to Masood for tax year 2021.
Note: Show all relevant exemptions, exclusions and disallowances.
Rs. in
thousands
Sales of imported generators 574,200
Receipts from consultancy services 55,000
Total revenue 629,200
Cost of sales (generators) (429,520)
Gross profit 199,680
Administrative and selling expenses (96,300)
Finance cost (9,000)
Profit before taxation 94,380
9 BIG PHARMA
Big Pharma Limited (BPL) is engaged in the manufacturing of pharmaceuticals products. The Company
has three branches in Pakistan and one branch each in Qatar and Oman. BPL sells its products through
various distributors. Assume that the company’s profit and loss account and the related details for the
period ending June 30, 2021 are as under:
Rs. in ‘000
Sales 96,000
Small items of office equipment charged off (Useful life is more than 1 year) 1,400
Opening and closing balance of provision for bad debt account was Rs. 2.50 million and Rs. 3.10 million
respectively. Bad debts written off during the year include an interest free loan of Rs. 0.20 million
provided to Oman branch.
Finance cost includes unrealized exchange loss of Rs. 1.35 million and interest of Rs. 1.30 million paid
on a working capital loan acquired from a non-resident foreign bank. No tax was deducted by the
company on payment of interest considering the bank did not have any permanent establishment in
Pakistan.
Tax depreciation for the year was Rs. 6.00 million. There was also a carried forward tax loss of
Rs. 6.10 million and an unadjusted foreign tax credit of Rs. 0.12 million from tax year 2019. Following
taxes were paid by the company during the year:
Rs. in ‘000
Deducted and paid by distributors 2,450
Paid on import of raw material 2,000
Taxes paid in Qatar 225
Unadjusted minimum tax for prior years 450
Required:
Compute the income tax liability of the company for the tax year 2021. Tax rate applicable to the
company is 29%.
Rs. in million
Assets 2,900
Liabilities 2,670
Net profit after taxation for the year 150
Interim dividend paid during the year 100
Assume that the dollar rupee parity during the year ended June 30, 2021 remained constant at
US$1 = Rs. 85.
Required:
(a) State, with reasons, which of the above lenders can be classified as “Foreign controller” in relation
to the thin capitalisation rules under the Income Tax Ordinance, 2001.
(b) Calculate the deductible profit on debt for the tax year ended June 30, 2021.
Rupees
Sales 10,500,000
Cost of sales (4,410,000)
Gross profit 6,090,000
Salaries and wages (3,165,000)
Rent and rates (582,000)
Travelling and entertainment (273,000)
Depreciation (975,000)
Profit before taxation 1,095,000
Salaries and wages include salaries of Rs. 1,100,000 and Rs. 970,000 to be paid to Mateen and Vaqas
respectively.
Depreciation relates to delivery vehicles. In the first year, tax depreciation allowance on these vehicles
is estimated at Rs. 1,462,500.
Required:
Under the provisions of Income Tax Ordinance, 2001 advice Mateen and Vaqas on the preferable
structure of their business, whether it should be a partnership or a limited liability company, in terms of
the amount of tax payable, for the tax year 2021 assuming that they have no other sources of income.
Rs. in ‘000
Sales 1,100,000
Cost of sales (792,000)
Gross profit 308,000
Administrative and selling expenses (135,000)
Financial charges (110,000)
Other charges (27,500)
Other income 117,000
Profit before taxation 152,500
Additional information:
(i) In July 2020, ML purchased and installed plant and machinery for the purpose of balancing,
modernization and replacement of existing plant and machinery from an Austrian based non-resident
supplier at a cost of Rs. 52 million. The title in goods was transferred outside Pakistan. ML did not
deduct any tax from payments made to the supplier. The plant is depreciated on a straight line basis
over its useful life of ten years. The investment in plant was made with borrowed funds.
(ii) Cost of sales includes a penalty of Rs. 0.5 million paid in respect of breach of customs regulations.
(iii) Administrative expenses include amounts of Rs. 4.8 million, paid against purchase of industrial
software having a useful life of three years and Rs. 5 million paid in cash for electricity expenses. The
software was installed and used with effect from 1 April 2021.
(iv) Other charges include a donation of Rs. 13 million paid to a university established under provincial law
by the Government of Punjab.
(v) Other income includes the following:
An amount of Rs. 27 million earned from consultancy services provided to the UAE Government.
The gross receipts from such services were Rs. 90 million. No tax was paid by the company in
UAE on such income.
A royalty of Rs. 50 million which was received from Solar Pte Limited, a company based in
Singapore, for providing scientific and commercial knowledge under an agreement. Withholding
tax of Rs. 10 million was deducted by Solar Pte Limited from such payment. This amount is
included in other charges.
The above amounts were brought into Pakistan in foreign exchange through normal banking channels
in compliance with the foreign exchange regulations of the State Bank of Pakistan.
(vi) Unadjusted business loss, brought forward from tax year 2014, amounted to Rs. 50 million. This loss
is inclusive of an unabsorbed tax depreciation of Rs.11 million and amortisation of pre-commencement
expenditure of Rs. 7.7 million.
(vii) Following taxes were deducted / paid by the company during the year:
Rs. in ‘000
Advance tax paid under section 147 5,000
Paid on import of raw material 55
Paid on import of plant and machinery 1,560
Deducted by banks on profit on debt 250
(viii) Assume that tax depreciation on all assets acquired before July 2020 is the same as their accounting
depreciation.
Required:
(a) Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and net tax liability
of ML for the tax year 2021.
(Show all exemptions, exclusions and disallowances where relevant.)
(b) Based on the computation of tax liability in (a) above, briefly explain whether the advance tax paid
quarterly by ML under section 147 could result in any further tax liability to the company with reference
to the provisions of Income Tax Ordinance, 2001.
Receipts Costs
Tax Year
Rupees
(i) SL VL ML
Rs. in ‘000
Sales 17,000 6,000 3,500
Profit/(loss) before taxation 3,700 (1,400) 1,300
(ii) The above profit/(loss) for each company has been arrived at after inclusion/adjustment of the
following:
In case of SL:
Rs. 1,000,000 paid by SL towards a scientific research conducted in Belgium. The research
helped SL in improving the quality of its products.
Income of Rs. 150,000 on account of profit on debt.
Gain of Rs. 100,000 on sale of machinery to VL. The cost of machinery was Rs. 300,000 and
its tax written down value at the time of transfer to VL was Rs. 200,000.
In case of VL:
Rs. 80,000 written off against a loan provided to an employee.
Sales promotion expenses of Rs. 600,000 paid by VL to Moon Advertisers. The benefits are
expected to extend to three years.
A loss of Rs. 500,000 on disposal of shares in a private company. These shares were
acquired by VL on 31 March 2019.
In case of ML:
Net income of Rs. 600,000 from a goods transportation business. ML started this business
during the year and earned gross revenue of Rs. 1,500,000. Withholding tax of Rs. 30,000
was deducted by customers from ML’s gross receipts.
A gain of Rs. 400,000 on disposal of shares in a private company. These shares were
acquired by ML on 01 April 2019.
Income of Rs. 300,000 on account of profit on debt.
(iii) Accounting depreciation of SL, VL and ML amounted to Rs. 760,000, Rs. 660,000 and
Rs. 100,000 respectively.
(iv) A delivery truck costing Rs. 1,500,000 was purchased by ML during the year for its new
transportation business.
(v) The tax written down values of the plant and machinery of SL, VL and ML as at 01 April 2020
were Rs. 4,500,000, Rs. 4,200,000 and Rs. Nil respectively.
(vi) Tax depreciation on all assets, other than plant and machinery and delivery truck, of SL, VL and
ML amounted to Rs. 495,000, Rs. 330,000 and Rs. 135,000 respectively.
(vii) The assessed losses brought forward from tax year 2019 were as follows:
SL VL ML
Rs. in ‘000
Business loss 200 500 50
Unabsorbed tax depreciation 250 500 100
Capital loss 750 250 200
SL VL ML
Rs. in ‘000
Advance tax u/s 147, 148 and 153 789 275 -
Motor vehicle tax under u/s 234 - - 40
Required:
Assuming SL wants to avail the benefits of group relief as envisaged under the Income Tax Ordinance,
2001, compute the taxable income, net tax payable / refundable and unabsorbed losses, if any, to be
carried forward for each of the above three companies for the tax year 2021.
Note: Show all relevant exemptions, exclusions and disallowances.
Rs. in ‘000
Sales 39,150
Cost of sales (25,700)
Gross profit 13,450
Administrative and selling expenses (5,350)
Financial charges (1,500)
Other charges (2,000)
Other income 900
Profit before taxation 5,500
Additional information:
(i) 20% of the above sales are made to customers in Indonesia and Singapore. Export sales are
stated after deduction of foreign withholding tax of Rs. 1,170,000.
(ii) Local sales are inclusive of 17% sales tax. All the above expenses, other than cost of sales, are
related only to the company’s local sales.
(iii) On 1 January 2020, Capsule plc. a Malaysian company which owns 60% of the share capital in
PPL, granted a loan of Rs. 8,500,000 to PPL at a mark-up of 12% per annum. The loan was
given for the production of Hepatitis vaccines in Swat, a project fully approved by the Federal
Government. The principal repayment is due to commence from July 2021. Mark-up on above
loan, included in financial charges, amounted to Rs. 1,020,000. PPL’s equity at the beginning of
the year amounted to Rs. 4,000,000.
(iv) On 15 June 2020, Capsule plc., under a group scheme, awarded its own shares to some of the
senior employees of PPL. As the shares were vested immediately, PPL recognised an expense
of Rs. 1,758,000 at a grant date fair value of the award, with a credit recognised in equity. The
expense is included in other charges.
(v) Administrative and selling expenses include the following:
Rs. 800,000 paid against professional books purchased from a website of a company in UK.
No tax was withheld by PPL from such payment.
Rs. 200,000 paid as donation to a hospital established under a private trust.
Rs. 600,000 payable as rent to the landlord for PPL’s parking area. Withholding tax has not
been deducted from this amount.
(vi) On 1 July 2020, PPL granted an interest free loan of Rs. 500,000 to one of its shareholders.
(vii) Financial charges include interest of Rs. 180,000 on account of machinery obtained on finance
lease. Total lease rentals paid during the year amounted to Rs. 500,000. At the end of the lease
term which expired on 31 August 2020, the machinery was transferred to PPL at a residual value
of Rs. 640,000. The market value of the machinery on the date of its transfer amounted to
Rs. 760,000.
(viii) Other income includes gain on sales of delivery van of Rs. 130,000. The van was acquired on
1 January 2019 at a cost of Rs. 900,000 and was depreciated at the rate of 20% per annum. No
depreciation is charged by PPL in the year of disposal.
(ix) Accounting depreciation charged to cost of sales and administrative and selling expenses
amounted to Rs. 1,440,000 and Rs. 810,000 respectively.
(x) Tax depreciation on assets acquired before January 2020 amounted to Rs. 1,800,000.
(xi) Tax paid u/s 147 amounted to Rs. 400,000 whereas tax deducted u/s 154 by banks from export
proceeds amounted to Rs. 78,300.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and net tax payable
for the tax year 2021. Give reasons for the treatment of items in (iii) and (vii) above. Also explain the
treatment of items not appearing in your computation.
The actual costs incurred by ML for the tax years 2020 and 2021 were Rs. 33,000,000 and
Rs. 27,000,000 respectively.
Required:
Under the provisions of Income Tax Ordinance, 2001 calculate ML’s taxable income and withholding tax
credit, if any, for the tax years 2020 and 2021.
Rs. in ‘000
Income from business 500
Capital gain 800
Income from other sources 100
Total income before tax 1,400
ZL is engaged in the business of manufacturing scaffoldings since its incorporation. Following further
information is available from ZL’s records:
(i) The income from business includes deemed income in respect of a loan of Rs. 85,000 received
otherwise than by a crossed cheque.
(ii) Business losses brought forward from tax years 2019 and 2020 amounted to Rs. 130,000 and
Rs. 200,000 respectively. ZL’s tax assessment has been finalized up to tax year 2019.
(iii) Capital losses brought forward from assessment years 2019 and 2020 amounted to Rs. 50,000
and Rs. 65,000 respectively.
(iv) The amount of tax depreciation adjusted during the year against income from business amounted
to Rs. 490,000. Unabsorbed tax depreciation brought forward from previous assessment years
amounted to Rs. 135,000.
(v) A loss from speculation business brought forward from tax year 2019 amounted to Rs. 100,000.
(vi) One of BL’s subsidiary company, which is qualified for group relief, surrendered its proportionate
assessed losses of Rs. 250,000 in favour of ZL. These losses include brought forward business
loss of Rs. 25,000, capital loss of Rs. 45,000 and an unabsorbed tax depreciation of Rs. 10,000.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income of Zeta Limited for
the tax year 2021 and the amount of loss, if any, to be carried forward to next tax year. State the reason
where any of the loss cannot be adjusted against the given income.
Note: The order in which various deductions are to be set-off against ZL’s income should be
followed.
Rupees
Sales 24,900,000
Cost of sales (13,718,000)
Gross profit 11,182,000
Administrative and selling expenses (6,900,000)
Financial charges (980,000)
Other income 1,500,000
Profit before taxation 4,802,000
Additional information:
(i) Sales include insurance compensation of Rs. 5,000,000 received from Big Insurance Limited
against the loss of one of BL’s factory buildings which was destroyed by fire due to short circuit.
This building was constructed in July 2018 at a cost of Rs. 6,000,000. The accounting and tax
WDV of the building when it caught fire were Rs. 5,347,000 and Rs. 4,374,000 respectively.
However, no depreciation on this building was charged in the books for the year.
BL reconstructed a similar building at a cost of Rs. 3,800,000. Construction of the new building
was completed in November 2019 and BL installed used plant and machinery therein at a cost
of Rs. 1,500,000. The unit was given on lease to Mr.Marvi on 1 January 2020 at a monthly lease
rent of Rs. 150,000. The relevant depreciation at the rate of 10% and 15% on building and plant
and machinery respectively and property tax of Rs. 96,000 which was paid in respect of the new
building were properly recorded in BL’s books as part of administrative expenses. The amount
of lease rent received from Mr.Marvi is included in sales.
(ii) Cost of sales includes the following:
A compensation of Rs. 100,000 payable annually to a former employee, who was injured
and permanently disabled while on duty.
A penalty of Rs. 25,000 on failure to deposit income tax withheld from the salaries of factory
staff.
Accounting depreciation of Rs. 870,000.
(iii) Administrative and selling expenses include the following:
Impairment loss of Rs. 200,000 on BL’s investment in ABC (Pvt.) Limited. The loss occurred
due to considerable decrease in the breakup value of these shares as compared to their
book value.
Legal fees of Rs. 50,000 and Rs. 125,000 which were paid in connection with the filing of
statements with Karachi and Lahore Stock Exchanges and increase in BL’s authorized
capital respectively.
Scientific research expenditure of Rs. 400,000 which was incurred in Cannes, France. The
research has helped BL in improving the quality of its products.
Rs. 480,000 which was incurred in relation to an advertising campaign launched prior to the
introduction of a new product line in an effort to enhance public awareness.
A donation of Rs. 300,000 was paid to a fund which is listed in the second schedule of the
Income Tax Ordinance, 2001 for the promotion of science and technology in Pakistan.
Workers’ Welfare Fund of Rs. 98,000 and accounting depreciation of Rs. 1,100,000.
(iv) Financial charges include a profit of Rs. 180,000 earned from saving accounts maintained with
banks.
(v) Other income includes sale proceeds of Rs. 700,000 from sale of shares in Nafa (Pvt.) Limited.
BL purchased these shares in June 2019 at a cost of Rs. 230,000.
(vi) The tax written down values of BL’s assets on 1 October 2019 were:
(vii) Tax paid u/s 147 amounted to Rs. 260,000 whereas tax deducted by banks u/s 151 from profit
on debt amounted to Rs. 18,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income and net tax payable by/refundable to BL for the tax year 2021.
Note: Show all relevant exemptions, exclusions and disallowances.
Rupees
Sales 2,348,000
Rs. in ‘000
Gross sales 350,500
Cost of sales (245,350)
Gross profit 105,150
Administrative and selling expenses (70,100)
Financial charges (15,515)
Other income 25,850
Profit before taxation 45,385
Additional information:
Gross sales:
(i) 50.2% of the gross sales are related to goods exported to countries in Europe and USA. These
sales reflect the C&F price of the goods exported. 85% of the above export sales were realized
in current year. KL also realized Rs. 20,000,000 from last year’s export sales. No separate
accounts were maintained by KL for the business of export of goods manufactured in Pakistan.
(ii) 3% of the gross sales comprise of receipt from an export house against provision of services of
dying and embroidery to them. However, the export house inadvertently failed to deduct
withholding tax from payments made to KL. These goods were subsequently exported to Japan
by the export house.
(iii) Rest of the sales are inclusive of 17% sales tax and were made to both corporate and individual
customers in the local market.
Cost of sales includes:
(i) Freight of Rs. 500,000 paid in respect of transportation of goods to above export house.
Administrative and selling expenses include the following:
(i) Ocean freight of Rs. 4,700,000, clearing and forwarding expenses of Rs. 485,000. No withholding
tax was deducted from these payments.
(ii) Provision for doubtful export rebate and duty drawback of Rs. 700,000 and Rs. 400,000
respectively.
(iii) Legal expenses of Rs. 1,000,000 in respect of a dispute over territorial rights.
(iv) Rs. 3,000,000 paid in respect of an unsuccessful marketing campaign.
(v) Rs. 800,000 incurred for acquiring a long-term business contract.
(vi) Rs. 2,000,000 contributed to a foreign pension fund.
(vii) Sales tax of Rs. 950,000 paid in respect of entertainment and courier charges relating to KL’s
business. No input tax credit was allowed to KL in respect of such expenditures.
Financial charges include the following:
(i) Mark-up of Rs. 1,200,000 paid on a loan obtained from AB Bank Limited for the purpose of
advancing concessional loans to KL’s staff in accordance with the terms of their employment.
(ii) Mark-up of Rs. 9,000,000 on short term borrowings obtained to finance the working capital
requirements of export sales.
(iii) Rs. 2,150,000 charged by banks for the collection of export proceeds.
22 ZJ LIMITED
ZJ Limited (ZJL) is an unlisted public company engaged in the business of manufacturing, supply and
export of pharmaceutical products. Following information has been extracted from ZJL’s un-audited
financial statements for the year ended 30 September 2020.
Rs. in ‘000
Sales-net 218,500
Cost of sales (157,580)
Gross profit 60,920
Administrative and selling expenses (39,000)
Financial charges (4,700)
Other income 29,280
Profit before taxation 46,500
Additional information:
Sales includes:
(i) Sale of polio vaccines of Rs. 30,000,000 to Red Cross mission in Somalia. The entire amount
was realized during the year.
(ii) Discounted sale of Rs. 3,600,000 to one of the NGO’s operating welfare hospitals in KPK
province. A discount of 25% was allowed to the NGO on their purchases.
Cost of sales includes:
(i) Cost of opening and closing stock-in-trade of Rs. 25,690,000 and Rs. 29,200,000 respectively
comprising of raw and packing materials, work-in-process and finished goods. ZJL computes the
cost of stock-in-trade using marginal cost method. The values of opening and closing stock-in-
trade under absorption cost method were Rs. 28,460,000 and Rs. 32,350,000 respectively.
Note:
Your computation should commence with the profit before tax figure of Rs. 46,500,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the amount of interest on debt that
shall be allowed as expense, for tax year 2021.
24 BISMIL LIMITED
Bismil Limited (BL) is a listed company engaged in the business of manufacturing and supply of multiple
products across the country. Following information has been extracted from BL’s records for the year
ended 31 December 2020.
Rupees
Sales 160,000,000
Cost of sales (112,000,000)
Additional information:
Sales include:
(i) An amount of Rs. 15,000,000 received net of withholding tax at the rate of 4% of the gross value
of sales against sale of electric motors to a person registered under the Sales Tax Act, 1990.
(ii) Sale of a product to an associated company for Rs. 250,000. The fair market value of the product
was Rs. 200,000.
Administrative and selling expenses include:
(i) Rs. 900,000 paid to Shams Associates in respect of financial due diligence of a company which
BL is planning to acquire.
(ii) An amount of Rs. 425,000 in respect of write off of an old machine which is no longer used by
BL in its business operations. The accounting and tax written down values of the machine were
the same. The machine is expected to fetch Rs. 5,000 if sold in the open market.
(iii) A penalty of Rs. 150,000 imposed by the Commissioner for short payment of tax in the year
2016.
(iv) An amount of Rs. 385,000 incurred on entertainment of CEO’s guests at a hotel in Karachi.
(v) Rs. 125,000 incurred on account of industrial training of Murad, a Pakistani citizen working at
BL’s competitors in connection with a scheme approved by the Federal Board of Revenue.
Murad is also the nephew of BL’s CEO.
Financial charges include:
(i) Profit on debt of Rs. 3,230,000 paid to non-resident persons in China. BL had issued securities
in China for the purpose of raising loan to be used for its business in Pakistan. These securities
were approved by the Federal Board of Revenue. BL did not deduct withholding tax from the
payment.
Other income includes:
(i) A monetary award of Rs. 1,000,000 granted by the President of Pakistan for best corporate
practices in the year 2018. Besides, an amount of Rs. 300,000 was conferred by the Governor
of Sindh for BL’s contribution in rural development.
(ii) Rs. 500,000 on account of service charges charged and kept by BL out of tax withheld from
suppliers.
(iii) Rs. 120,000 received in respect of inter-corporate dividend from a subsidiary within the group.
BL owns 75% interest in the subsidiary. No withholding tax was deducted by the subsidiary.
Further information:
(i) Tax paid by BL u/s 147 amounted to Rs. 5,300,000.
(ii) Assume that tax depreciation on all assets is the same as their accounting depreciation.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under
the correct head of income the total income, taxable income and net tax payable by or refundable to
BL for the tax year 2021.
Note:
Your computation should commence with the profit before tax figure of Rs. 25,000 K. Ignore WWF,
WPPF, Minimum tax, Alternative Corporate Tax and default surcharge. Show all relevant exemptions,
exclusions and disallowances.
26 RM ASSOCIATES
For the purpose of this question, assume that the date today is 15 August 2020.
Rahat and Musa are partners in RM Associates (RMA), a firm engaged in the business of providing
consultancy and book keeping services to clients in Pakistan as well as abroad. Rahat and Musa share
profits and losses in the ratio of 4:5 respectively. Following is an extract from RMA’s profit and loss
account for the year ended 30 June 2021:
Rupees
Net revenue 36,500,000
Less:
Salaries (19,780,000)
Rent (1,250,000)
Depreciation/amortization (accounting) (1,680,000)
Software expense (650,000)
Interest expense (135,000)
Other expenses (1,655,000)
Total expenses (25,150,000)
Income before tax for the year 11,350,000
Additional information:
(i) Net revenue includes the following:
Retainership fee of Rs. 19,710,000 from corporate clients. Withholding tax at the rate of 7%
of the gross receipt was deducted by such clients and the amount is included in other
expenses.
An amount of Rs. 6,210,000 received under an agreement from a Doha based company,
Isra Middle East, for providing technical services in Doha. The amount was brought into
Pakistan in foreign exchange in compliance with the regulations of the State Bank. No tax
was deducted from the receipt either in Doha or in Pakistan by the bank.
Rs. 10,580,000 on account of on-line accounting services provided to various clients in Iran
and Afghanistan. The amount was received in foreign exchange through normal banking
channel. Withholding tax at the rate of 1% of the gross receipts was deducted by the
collecting bank and the amount is included in other expenses.
(ii) Salaries include Rs. 290,000 and Rs. 355,000 respectively paid to Rahat and Musa per month.
(iii) The rent was paid in respect of office premises to Lalazar Limited. RMA did not deduct withholding
tax from the payment.
(iv) Software expense represents purchase of a software on 1 January 2021.
(v) Interest expense was in relation to a vehicle obtained on finance lease. Lease rentals paid during
the year amounted to Rs. 800,000. The lease term of the vehicle ended on 1 June 2021, on which
date RMA acquired the vehicle at a residual value of Rs. 950,000. The market value of the vehicle
at the date of its transfer to RMA was estimated at Rs. 1,150,000.
(vi) The tax written down values of RMA’s assets on 1 July 2020 were as follows:
Assets Rupees
Furniture and fixtures 1,700,000
Computers and laptops 840,000
Accounting software (remaining life of 5 years) 5,000,000
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the taxable income and net tax
liability of RMA for the tax year 2021.
Note: Show all relevant exemptions, exclusions and disallowances.
Rupees
Total turnover 54,520,000
Total expenses (47,895,000)
Other income 4,350,000
Accounting profit before tax 10,975,000
Additional information:
Total turnover includes:
(i) Sale of Rs. 21,750,000 (inclusive of sales tax at the rate of 17%) to one of the customers in
Balakot. A special discount of 30% of the gross value of sales was offered to the customer in
defiance of normal business practices.
(ii) Sale of surgical gloves of Rs. 14,931,000 to a government hospital in China. LPL realized the
entire sale proceed during the year after deduction of 1% withholding tax by the authorised dealer.
(iii) Rs. 2,000,000 for providing engineering services to Sami enterprises (SE) in Islamabad.
Withholding tax was deducted u/s 153 at the rate of 3%.
28 OLIVE LIMITED
Olive Limited (OL) is registered at the Large Taxpayer Unit of the Inland Revenue Department. It is
engaged in the manufacture and trading of FMCG in the country. During the month of May 2021 following
activities were carried out by the company:
Rs. in ‘000
Purchases:
Supplies:
Manufactured products:
(i) In order to meet the high consumer demand, OL purchased new machinery for Rs. 1,200,000.
The machinery was put to use during the same month. A motor vehicle of Rs. 1,500,000 was
also acquired for the sales department.
(ii) Sales tax of Rs. 20,000 was paid under the Punjab Provincial Sales Tax Ordinance on services
provided by clearing agents for imports.
(iii) Rs. 650,000 was paid against advertisement services in the province of Punjab.
(iv) Sales tax of Rs. 60,000 was deducted from payments to suppliers of packing material.
Sales tax (other than services) is payable at the rate of 17%. All the above amounts are exclusive of
sales tax, wherever applicable.
Required:
In view of the provisions of Sales Tax Act, 1990, and applicable provincial law, compute the sales tax
liability and net sales tax payable with return for the tax period May 2021. Show computation wherever
necessary.
Rs. in ‘000
Purchases:
Local:
Supplies:
Manufactured goods:
Rs. in ‘000
Purchases:
Steel sheets, copper wire, aluminum and allied raw materials 2,500
Lubricants, spare parts and stores (include cash purchases of Rs. 900,000) 5,400
Supplies:
Supplies:
Local taxable supplies of Beta to wholesalers (250,000 units @ Rs. 20 each) 5,000
Supply of 25,000 units of Beta to Export Processing Zone for further processing 625
Additional information:
(i) Supplies of Alpha to registered persons include sale of Rs. 2,000,000 to an associated company.
The open market price of Alpha at the time of sale was Rs. 4,000,000.
(ii) Free replacement of defective units is made in the case of Alpha, which is sold under warranty.
The market value of replacement units during the month of November 2019 was Rs. 1,000,000.
(iii) SL provided 50,000 units of Beta to its employees free of charge.
(iv) In November 2020, SL imported new machinery from Japan for the purpose of launching a new
product Zeta. The production of Zeta is expected to commence from April 2021. Sales tax paid on
this machinery amounted to Rs. 3,000,000.
(v) Input tax of Rs. 500,000 was inadvertently not adjusted in the return for the month of
October 2020.
(vi) The local supplies of Gama are exempt from the charge of sales tax.
(vii) All purchases are from registered suppliers.
All the above figures are exclusive of sales tax, wherever applicable. Sales tax is payable at the rate of
17%. The above products are not subject to duty under the Federal Excise Act, 2005.
Required:
In the light of the provisions of Sales Tax Act, 1990 and Rules made thereunder, calculate the sales tax
payable/refundable/carried forward, if any, for the tax period November 2020.
Rupees
Purchases:
Local:
Additional information:
(i) Raw materials purchased from a registered supplier in April 2021 were destroyed by fire.
However, UL received full insurance claim of Rs. 1,000,000 against such loss. Input tax paid on
such raw material was however adjusted by UL in its April 2021 return.
(ii) On scrutiny of the company’s previous sales tax returns, the internal auditor has pointed out that
input tax on raw materials of Rs. 200,000 purchased in October 2020 from a local registered
supplier has not been claimed / adjusted by UL.
(iii) UL under misapprehension collected additional sales tax of Rs. 64,000 from one of its customers.
70% of the goods on which additional sales tax was collected are still lying with the customer as
unsold stock.
(iv) Taxable supplies to registered persons include the following:
Goods worth Rs. 500,000 supplied to AB Limited which is registered as an exporter with the
Large Taxpayer Unit.
Supplies of Rs. 2,000,000 to a domestic airline for regular maintenance of an aircraft weighing
8,500 kilograms.
(v) Raw materials purchased from local registered suppliers include an invoice of Rs. 100,000 which
was issued in the name of a director of UL.
All the above amounts are exclusive of sales tax, wherever applicable. Sales tax is payable at the rate
of 17%. The value of imported raw material is inclusive of custom duty and federal excise duty. However,
other goods are not subject to duty under the Federal Excise Act, 2005.
Required:
In the light of the provisions of Sales Tax Act, 1990 and Rules made thereunder, calculate the sales tax
payable by or refundable to UL for the tax period May 2021. Give brief reasons for the treatment of:
The input tax not claimed in the return for the month of October 2020; and
Additional sales tax collected from the customer.
Rupees
Sales 700,000
Less: Cost of sales
Opening stock 125,000
Purchases 250,000
375,000
Less: Closing stock (95,000)
280,000
Add: Engraving charges 50,000
(330,000)
Gross profit 370,000
Less: Operating expenses
Salaries and wages (45,000)
Rent (25,000)
Insurance (30,000)
Bank charges (15,000)
General expenses (25,000)
Depreciation (15,000)
(155,000)
Net profit 215,000
Additional information:
(i) 20% of the sales relates to goods purchased locally and exported to customers in Iran whereas
5% of the sales were made against international tenders.
(ii) Opening stock is verifiable and consists of purchases made in different months as follows:
15 August = Rs. 50,000 (import)
(v) General expenses comprises of charges paid against inland carriage of furniture by air, purchase
of shoes for field staff, expenses incurred on the purchase of printed stationery and staff
entertainment expenses in the ratio of 40:25:20:15 respectively.
(vi) 65% of the depreciation relates to a car which was acquired for Rs. 780,000 whereas 25%
depreciation pertains to a wood engraving machine purchased for Rs. 300,000. The car as well
as engraving machine was acquired at the beginning of November 2019.
(vii) All purchases, unless otherwise mentioned, are from local registered suppliers against prescribed
sales tax invoices.
All the above figures are exclusive of sales tax, wherever applicable. Sales tax (other than services)
is payable at the rate of 17%.The goods supplied by MF are not subject to duty under the Federal Excise
Act, 2005.
Required:
Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, calculate the following for
filing the sales tax return for November 2020.
(a) Sales tax payable/refundable/carried forward, if any. Also compute the amount of withholding tax,
if any.
(b) Give brief reasons for the treatment accorded to opening stock.
Rupees
Purchases:
Raw material from local registered suppliers 20,000,000
Local items governed under third schedule (75,000 @ Rs. 150 each) 11,250,000
Packing material from a local cottage industry 2,000,000
Supplies:
Masawi Limited (ML) is engaged in the business of production and supply of packaged fruit and vegetable
juices. ML is incorporated under the Companies Ordinance, 1984 and is duly registered with the Inland
Revenue Department for sales tax purposes. Following data has been extracted from ML’s records for
the month of November 2020:
3 Rupees
Purchases:
Raw material:
From local registered suppliers 5,000,000
From local un-registered suppliers 1,000,000
Import 800,000
Supplies:
Taxable supplies to registered persons 4,675,000
Taxable supplies to un-registered persons 2,125,000
Taxable supplies to duty free shops 1,020,000
Export to Qatar 680,000
Required:
In the light of the provisions of Sales Tax Act, 1990 / relevant provincial laws and Rules made
thereunder, compute the sales tax payable by or refundable to OL for filing the sales tax return for the
tax period May 2021.
(i) Taxable purchases of raw material of Rs. 8,750,000 were made from registered AOP.
(ii) Packing materials of Rs. 450,000 were purchased from registered distributors.
(iii) Rs. 158,000 was paid to a local beverage company for providing mineral water at HL’s annual
dinner arranged for the entertainment of its customers and employees.
(iv) Preservatives of Rs. 589,000 were purchased from a cottage industry.
(v) Mango and banana worth Rs. 1,500,000 were purchased from local registered person for further
processing.
(vi) 3,000 boxes of Lemon and Mango squashes were imported from Malaysia at the price of
Rs. 550 per box. The value determined by custom authorities under section 25 of the Customs
Act, 1969 amounted to Rs. 680 per box. The retail price however was fixed at Rs. 625 per box.
HL sold 2,800 boxes of squashes to BM Limited.
(vii) For the purpose of generating steam for one of its production processes, HL purchased fuel
wood from registered wholesalers for Rs. 1,050,000.
(viii) HL also purchased a fiscal electronic cash register and office equipments from a corporate
supplier at a price of Rs. 650,000 and Rs. 375,000 respectively. These items were purchased
on 60 days credit.
(ix) A mixing machine was acquired by HL on finance lease. The total lease rentals to be paid to the
lessor are Rs. 3,000,000. The fair value of the machine at the inception of the lease amounted
to Rs. 2,500,000. HL has the option to purchase the machine at the end of the lease term (in
three years’ time) and the directors estimate that it is more likely that this option to purchase will
be exercised.
(x) Delivery trucks worth Rs. 2,340,000 were purchased for timely distribution of goods to customers.
(xi) Cool day light energy saver lamps were sold to AF Engineering for Rs. 500,000.
(xii) Locally produced squashes worth Rs. 13,800,000 were sold to corporate distributors.
All the above figures are exclusive of sales tax, wherever applicable. Sales tax is payable at the rate
of 17%.
Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the
amount of sales tax payable by or refundable to HL for the tax period November 2020.
Rs. in ‘000
Purchases:
Raw material:
Import 900
Local:
Additional information:
(i) RL imported specific machinery at Rs. 1,000,000 from Taiwan for the purpose of production of
shampoo. The machinery is covered under Eight Schedule of the Sales Tax Act, 1990.
(ii) Purchases from local registered suppliers include purchase of waste papers of Rs. 300,000 from
Parsa Limited.
(iii) 7,500 boxes of tissue papers were purchased from registered suppliers, not included above, at
a wholesale price of Rs. 60 per box. The retail price of these boxes was Rs. 90 per box. These
tissue papers were used by RL as a packing material.
(iv) Taxable supplies to registered persons include the following:
Shampoo worth Rs. 700,000 supplied to a registered exporter Baramad Limited.
Tiles of Rs. 650,000 supplied to Raja (Pvt.) Limited. These tiles were purchased directly from
the manufacturer in April 2021.
(v) Taxable supplies to un-registered persons include supply of storage batteries worth Rs. 400,000
to a private school. Purchase invoice confirms that these batteries were purchased in
March 2021 from an importer for Rs. 325,000 against payment of sales tax at the rate of 17%.
(vi) Shampoo, tissue papers, foam, tiles and storage batteries are covered under Third Schedule
and waste papers are covered under Eighth Schedule of the Sales Tax Act, 1990. All the other
items are not specified in the Third Schedule of the Sales Tax Act, 1990.
(vii) At the end of May 2021, there was no outstanding liability against items mentioned in (ii), (iii)
and (iv) above.
All the above figures are exclusive of sales tax, wherever applicable. Except for the item specified
under Eight Schedule, sales tax is payable at the rate of 17%.
Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the amount
of sales tax payable by or refundable to RL for the tax period May 2021. Also compute the amount of
withholding tax, if any.
Note: Show all relevant exemptions, exclusions and disallowances.
39 KARMA LIMITED
Karma Limited (KL) is registered at the large taxpayers unit (LTU) of Inland Revenue Department and
is engaged in the business of import, manufacture and supply of various products. Following information
has been extracted from KL’s records for November 2021.
Rupees
Purchases:
Raw material:
Import 5,000,000
Supplies:
Additional information:
(i) Raw material purchased from local un-registered suppliers includes goods worth Rs. 950,000
which were returned by an un-registered customer. These goods were sold in August 2021.
Proper debit/credit notes were raised in respect of the returned goods.
(ii) The imports include raw materials worth Rs. 2,000,000 which were imported for the purpose of
manufacture infant use put up for retail sales, specified in Sixth Schedule.
(iii) Taxable supplies to registered persons include the following:
A forward transaction on Pakistan Mercantile Exchange Limited for the supply of goods
worth Rs. 600,000 to a large trading house in Karachi.
Supply of Confectionery, chocolates and candies worth Rs. 2,500,000 to a retail outlet in
Islamabad.
(iv) Taxable supplies to un-registered persons include goods worth Rs. 5,500,000 which were
supplied to various cottage industries in Multan. The rest of the goods were supplied to the end
consumers.
(v) On 25 September 2019, KL received Rs. 2,250,000 from Trading Corporation of Pakistan (TCP)
against grant of a tender for the supply of 50 metric tons of sugar. On 5 November 2020, TCP
removed 30 metric tons of sugar from KL’s premises for the purpose of export to Oman. The
remaining 20 metric tons of sugar were removed on 20 November 2020 and were supplied to
wholesalers in the local market.
(vi) KL delivered fertilizers, covered under Third Schedule, to Small Bank Limited under a Murabaha
financing arrangement at a price of Rs. 1,584,000. The amount was receivable in equal monthly
instalments over a period of one year. The retail price of the fertilizer in the market at the time of
delivery was Rs. 1,320,000.
(vii) KL supplied 400 kg of a special brand of tea, covered under Third Schedule, to FM Enterprises
at a wholesale price of Rs. 500 per kg. In October 2020 KL had purchased 600 kg of this particular
brand of tea from a local registered supplier, ST Limited (STL), at a price of Rs. 450 per kg. This
tea is sold in the market at a retail price of Rs. 700 per kg. STL declared this brand in their return
for November 2020.
(viii) All the above products, unless otherwise specified, are NOT covered under Third Schedule of
the Sales Tax Act, 1990.
All the above figures are exclusive of excise duty and sales tax, wherever applicable. Sales tax
is payable at the rate of 17% whereas excise duty, if any, is payable at the rate of 8%.
Required:
In the light of the provisions of the Sales Tax Act, 1990, Federal Excise Act, 2005 and Rules made
thereunder, compute the amount of sales tax payable by or refundable to KL for filing the sales tax-cum-
federal excise return for the tax period November 2020. Also compute the amount of withholding tax, if
any.
Note: Show all relevant exemptions, exclusions and disallowances.
40 PASDAR LIMITED
Pasdar Limited (PL) is engaged in the business of production, import and trading of variety of products
and is registered with the Inland Revenue Department for sales tax purposes. Following information has
been extracted from PL’s records for the month of May 2021:
Rupees
Purchases:
Raw material:
from local registered suppliers 5,560,000
from cottage industries 1,500,000
Import – finished goods 5,000,000
Supplies:
taxable supplies to registered persons 6,000,000
taxable supplies to un-registered persons 1,760,000
Additional information:
(i) Raw material purchased from local registered suppliers includes packing material worth
Rs. 850,000 purchased for textile products.
(ii) The imports include tyres of Rs. 800,000 which were used in PL’s delivery vans. Tyres are
designated as specified goods under Third Schedule of the Sales Tax Act, 1990.
(iii) Annexure C of the sales tax return for March 2021 shows that a sales tax invoice of Rs. 480,000
had not been claimed by the buyer. Upon scrutiny it was disclosed that goods were actually sold
to an un-registered person however due to inadvertence the invoice was entered in the name of
a registered person.
(iv) On 15 May 2021, PL received an invoice of Rs. 3,000,000 from Najib Brothers (NB), a specialized
workshop for industrial machinery in Islamabad. NB provided overhauling services to PL and
charged sales tax at the rate of 5% under the Islamabad Capital Territory (Tax on Services)
Ordinance, 2001.
(v) On 20 May 2021, PL acquired the ownership of a taxable activity of Glaze Enterprises (GE), as
an ongoing concern for Rs. 10,500,000. GE issued a sales tax invoice in the name of PL and
received the entire amount of sale proceeds from PL.
(vi) PL paid Sindh Sales Tax of Rs. 50,000, Punjab Sales Tax of Rs. 65,000 and Federal Excise Duty
of Rs. 45,000 in respect of franchise fees to a non-resident franchisor.
(vii) Taxable supplies to registered persons include the following:
Supply of Electric Irons worth Rs. 500,000 to a distributor in Hyderabad. Electric Irons are
designated as goods specified in Third Schedule to the Sales Tax Act, 1990. The Irons were
purchased from a commercial importer in March 2021.
Supply of goods worth Rs. 2,700,000 to the Local Government. PL had imported these goods
from China in April 2021 at Rs. 2,200,000 and had paid 3% value addition tax at the time of
import.
Rest of the goods were supplied to various dealers in Sindh and Punjab.
(viii) Taxable supplies to un-registered persons include second hand worn clothing of Rs. 200,000
which was supplied to a retail outlet in Okara.
(ix) On 25 May 2021, one of PL’s finished goods warehouse was destroyed by fire and all the goods
stored were burnt to ashes. The goods were insured and PL received Rs. 2,750,000 from the
insurance company in settlement of its claim. PL had claimed input tax of Rs. 325,000 on these
goods in the April 2020 return.
(x) PL distributed gift vouchers worth Rs. 450,000 among its customers. The vouchers were to be
redeemed at any time between July to September 2020.
(xi) As part of a settlement deal with AB Bank Limited, PL agreed to set off its hypothecated stock of
Rs. 750,000 against an overdue loan of Rs. 950,000. The open market price of the goods was
estimated at Rs. 1,100,000.
(xii) PL received a notice from the Deputy Commissioner of Inland Revenue demanding sales tax on
promotional give-aways worth Rs. 235,000 which were distributed in March 2021. The tax
department however accepted PL’s contention that the non-payment of sales tax was due to
misconstruction on part of the company.
(xiii) PL’s Wholesale-cum-Retail Outlet received Rs. 2,350,000 in cash against supply of lubricants to
a registered person. The lubricants were purchased from a manufacturer in April 2021 who had
charged sales tax and extra tax on such supplies.
(xiv) All the above figures are exclusive of sales tax, wherever applicable. Sales tax is payable at the
rate of 17%.
Required:
In the light of the provisions of the Sales Tax Act, 1990, Federal Excise Act, 2005 and Rules made
thereunder, compute the amount of sales tax payable by or refundable to PL for the tax period
May 2021. Also compute withholding tax, wherever applicable.
Note: Show all relevant exemptions, exclusions and disallowances.
Rupees
Purchases from registered suppliers 3,900,000
Purchases from un-registered suppliers 1,058,000
Advance from customers 117,000
Taxable supplies to registered persons 3,105,000
Taxable supplies to un-registered persons 1,210,000
Imports 852,000
Other income 215,000
Additional information:
(i) Purchases from registered suppliers include the following:
lubricating oil worth Rs. 380,000 purchased from an oil marketing company for in-house
consumption. Lubricating oil is designated as goods covered under Third Schedule of the
Sales Tax Act, 1990.
raw material of Rs. 390,000 and Rs. 225,000 purchased from SL on 6 November 2020 and
20 November 2020respectively. On 15 November 2020, the Commissioner suspended SL’s
registration for claiming fraudulent refunds.
goods covered under Third Schedule, worth Rs. 285,000 purchased from Nayab Associates
(NA). QFL, upon instructions from NA, directly deposited cash amounting to Rs. 285,000 into
its bank account.
(ii) Purchases from un-registered suppliers consist of the following:
packing material of Rs. 358,000 which was purchased from a supplier who was liable to be
registered with sales tax authorities.
edible fruits, covered under Sixth Schedule, of Rs. 700,000.
(iii) Taxable supplies to registered persons include the following:
goods worth Rs. 435,000 supplied to a manufacturer for onward sale to an exporter holding
concessions under DTRE scheme.
tyres worth Rs. 660,000. These tyres were purchased from a local manufacturer, which was
a cottage industry, in October 2019. The tyres are designated as specified goods under Third
Schedule to the Sales Tax Act, 1990.
(iv) Taxable supplies to un-registered persons consist of the following:
sale of 150 bicycles, covered under Fifth Schedule, to un-registered dealers in Multan for
Rs. 900,000. The bicycles were purchased in August 2020.
sale of goods worth Rs. 310,000 to end consumers.
Imports comprise of air conditioners worth Rs. 852,000. These were imported by QFL’s
wholesale-cum-retail division for sale through its own outlets. Air conditioners are designated
as specified goods under Third Schedule to the Sales Tax Act, 1990.
(v) Other income includes gain on disposal of a truck of Rs. 105,000. The truck was sold to an active
tax payer for Rs. 1,205,000. No sales tax was recorded on this transaction.
Further information:
(i) In August 2020, QFL’s car rental division imported wheel alignment machine for in-house use.
3% value addition tax of Rs. 18,000 was not paid at import stage.
(ii) In July 2020, QFL sold certain taxable goods worth Rs. 535,000 to an un-registered wholesaler at
a wholesale price of Rs. 50 per pack and collected further tax at the rate of 3% of the value of
supplies. In November 2020, the internal auditor pointed out that these goods were covered under
Third Schedule. The retail price of these goods at the time of sale was Rs. 65 per pack.
(iii) In May 2020, QFL inadvertently collected sales tax of Rs. 45,000 from a customer as against the
applicable tax of Rs. 54,015. QFL had applied to the Commissioner IR for the revision of the return
however, no reply has so far been received in this regard.
All the above figures are exclusive of sales tax, except where it is implied otherwise.
Sales tax is payable at the rate of 17%.
Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the
amount of sales tax payable by or refundable to QFL and input tax to be carried forward, if any, for the
tax period November 2020. Also compute withholding tax, wherever applicable.
Note: Show all relevant exemptions, exclusions and disallowances. Ignore default surcharge.
42 MR. PAREKH
Mr. Parekh acquired and disposed of 3,500 shares of a listed company, Big Limited (BL). The details
are as follows:
Acquisition Disposal
Dated
No. of shares Rate No. of shares Rate
31-03-2020 1,400 20 - -
15-09-2020 700 22 - -
01-04-2020 900 18 - -
01-05-2021 - - 600 17
07-05-2021 - - 800 19
21-05-2021 - - 700 18
31-05-2021 500 23 400 25
31-05-2021 - - 1,000 27
Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, calculate the amount
of capital gain / loss and tax thereon, if any, on the above transactions. Ignore incidental expenses on
cost of acquisition of securities.
43 CAPITAL GAIN
Under the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable
income or explain the tax treatment, wherever applicable, in each of the following cases:
(i) Hamid held 2,000 shares in Beta Limited (BL) which he had acquired on 1 July 2020 at
Rs. 15 each. BL subsequently merged into Gama Limited (GL) through a scheme approved by
the High Court. GL issued 1 share for 2 shares held in BL.
(ii) Bari acquired 100 shares in Pie Limited (PL) on 1 January 2021 at Rs. 40 per share and deposited
them into CDC account. On the same date i.e. 1 January 2021, PL declared 25% bonus shares
with 1 April 2021 as the date of entitlement. On 31 March 2021, the market value of these shares
was Rs. 50 each. On 15 April 2021 Bari disposed of 50 shares in PL at Rs. 40 each. The bonus
shares were credited to Bari’s account on 15 May 2021. He sold the remaining shares including
bonus shares on 18 May 2021 at Rs. 40 each.
(iii) Anjum borrowed 5,000 shares from Nazia for a short term. The value of the borrowed shares was
agreed at Rs. 100 per share. Anjum agreed to pay, for the specified period, a mark-up of
Rs. 2 per share to Nazia at the time of settlement. Anjum sold the borrowed securities at Rs. 105
each and subsequently, on the date of return of borrowed securities, re-purchased 5,000 shares
at Rs. 95 per share.
46 TRANSFER OF ASSETS
In the light of the provisions of Income Tax Ordinance, 2001, briefly explain the taxability of income the
following situation.
Mr. Ravi transferred his house to a trust with a condition that out of the total rental income of Rs. 840,000
per annum, Rs. 500,000 would be paid to his wife and the balance of Rs. 340,000 would be paid to his
minor son Ashok. Ravi also provided Rs. 350,000 to the trustees for the acquisition of his property.
Following information is available relating to the proposed scheme of transfer and the status of MPL:
(i) 50% of the purchase consideration would be paid to Mr. Adnan in terms of fully paid shares of MPL
whereas the remaining 50% would be paid in cash.
(ii) The break-up value of each share of MPL as at April 30, 2021 is Rs. 15.
(iii) MPL has a share capital of Rs. 30 million consisting of equity shares of Rs. 10 each. Mr. Adnan
owns 70% of the paid up share capital of MPL whereas the remaining 30% is equally owned by his
spouse Razia, whose income is clubbed with Mr. Adnan, and his elder brother Rais. Due to financial
constraints, Rais is considering to dispose off his ownership interest in the company.
(iv) MPL would assume all the liabilities of HT with the exception of Rs. 2 million, which is payable to
Barkat Enterprises.
(v) The net realizable value of stock in trade as at April 30, 2021 is Rs. 4 million.
(vi) Rs. 1.0 million receivable against sale of medicines to Parker & Sons last year is not recoverable
due to insolvency of the customer. All possible efforts have already been made by HT for the
recovery of debt.
(vii) Following is the tax written down value (WDV) and fair market value (FMV) of HT’s patents and
fixed assets as at April 30, 2021:
Rupees
Cost Tax WDV FMV
Fixed assets 7,000,000 3,000,000 5,200,000
Patents 5,000,000 2,500,000 2,300,000
Required:
(a) Any transaction that is related to disposal of assets becomes the subject matter of gain or loss.
Advise Mr. Adnan about the conditions, which are required to be fulfilled under the Income Tax
Ordinance, 2001 if he wishes to avoid recording any gain or loss on the disposal of his business to
MPL.
(b) Advise the necessary changes, if any, required to be made by Mr. Adnan in his proposed scheme
of transfer in order for it to be in compliance with the conditions identified in part (a) above.
(c) Calculate the following, assuming the conditions in (a) above have been fully complied with.
(i) Number and the value of shares to be received by Mr. Adnan from MPL.
(iii) Mr. Adnan’s cost in respect of the shares received by him as consideration.
Required:
Advise the management of Rahat Foundation about the circumstances under which the Commissioner
of Income Tax may withdraw the approval granted to the Foundation.
51 RESIDENTIAL STATUS
In view of the provisions of Income Tax Ordinance, 2001 and the stated rules, determine the residential
status of the following persons for the tax year ended June 30, 2021 under the given circumstances.
(i) Mr.Mubeen came to Pakistan for the first time on a special assignment from his company on
April 01, 2020 and left the country on September 30, 2020.
(ii) Mr.Rana, who had never travelled abroad in his life, got a job in Canada. He went to Canada on
December 29, 2020 to assume his responsibilities as a CFO. In June, 2021 his company sent him
to India on a training workshop. On June 30, 2021 on his way back to Canada he had to stay in
Karachi for a whole day in transit.
(iii) Mr. Baber, a Federal Government Employee was posted to the Pakistan mission in Geneva from
July 01, 2020 to June 30, 2021.
(iv) Mr. Francis, a sugar dealer in Brazil, came to Pakistan on July 31, 2020. During his visit he stayed
at Lahore for 60 days and spent the rest of the days in Karachi. He left the country on
January 31, 2021. Assume that the Commissioner has granted him permission to use calendar
year as a special tax year.
(ii) While computing the taxable income, BL has not apportioned the “Cost of goods manufactured”
between its income from sale of manufactured products and income from sale of commercial
imports. The Commissioner wants such costs to be apportioned between the two revenue
streams.
(iii) The audited financial statements show a gain of Rs. 50 million on the disposal of an immovable
property comprising office in a commercial building. This property was purchased by the company
for Rs. 90 million and was sold for Rs. 120 million. Its tax written down value at the time of disposal
was Rs. 70 million. The gain has not been offered to tax by BL. The Commissioner wants to add
the amount of Rs. 50 million to the company’s taxable income.
(iv) The financial statements also disclose an outstanding liability on account of royalty of Rs. 250
million. This amount payable to BL Dubai Plc. is outstanding for the last four years, pending
approval from the State Bank of Pakistan. The expense was claimed by BL in the tax year 2017.
The Commissioner wants to add back the amount to the taxable income of BL.
(v) Bad debts written off during the year include an amount of Rs. 10 million which was provided to a
distributor as a loan who has now been declared insolvent. The Commissioner wants to add this
amount to the taxable income of BL.
Required:
Under the provisions of Income Tax Ordinance, 2001 explain, giving reasons, as to whether or not the
Commissioner’s contention with regard to each of the above situation is valid.
55 GROUP TAXATION
Al Maratib, a large group of companies is contemplating to avail the benefits of Group Taxation by
offering it to be taxed as one fiscal unit.
Required:
In the light of the provisions of Income Tax Ordinance, 2001 explain the provisions of Group Taxation
to the chairman of the group.
(i) State how the taxes withheld from the payments made to a non-resident person would be taxable.
(ii) The tax implication in each of the following cases while determining chargeable income of the
branch office in Pakistan.
58 SELECTION OF AUDIT
Identify the authority and briefly describe the methods by which a person may be selected for the audit
of its Income Tax affairs in the tax year 2021. Also state whether a person can again be selected for
audit in tax year 2021 if nothing was found during its audit in the tax year 2020.
Identify the persons and the conditions subject to which such persons paying taxes under Presumptive
Tax Regime may opt for Normal Tax Regime.
64 ASSOCIATES
What is meant by “Associates”? State the circumstances under which the following may be regarded as
associates:
70 PROFIT ON DEBT
What do you understand by ‘profit on a debt’? Describe the circumstances under which any profit
received by a non-resident person on a security issued by a resident person shall be exempt from tax
under the Income Tax Ordinance, 2001.
Rupees
Advance tax paid under section 147 20,500,000
Paid on import of machinery 2,250,000
Deducted by banks on profit on debt 250,000
SL filed its return of income for the tax year 2021 on the due date for filing of return with a gross tax
liability of Rs. 32,500,000.
Required:
In view of the provisions of the Income Tax Ordinance, 2001 explain whether the advance tax paid
quarterly by SL under section 147 could result in any further tax liability to the company, if yes, compute
the amount of such additional tax liability.
78 MR.HOSHYAR - PENALTY
Mr.Hoshyar, a non-salaried individual, filed his return of income for tax year 2021 on 27 November 2021
and paid a total tax of Rs. 2,173,000 on his declared income.
Required:
Under the provisions of the Income Tax Ordinance, 2001 analyse the above situation and:
(i) Compute the amount of penalty which may be payable by Mr.Hoshyar in addition to his above
tax liability.
(ii) Explain whether Mr.Hoshyar would be liable to pay any penalty, if his declared income in return
filed u/s 114 was below the taxable limit.
79 ADVANCE RULING
The concept of “Advance Ruling” was brought into tax laws to facilitate foreign investors. Under the
provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, explain the following:
The meaning of the term “Advance Ruling”, who may issue such a ruling and within what time it is
required to be issued.
82 DEFINITE INFORMATION
“The Commissioner may amend an assessment order for a tax year only audit or on the basis of definite
information acquired from an audit or otherwise”. What do you understand by the term “Definite
information” as described in the Income Tax Ordinance, 2001?
83 PAKIZA LIMITED
Pakiza Limited (PL), an unlisted public company, was engaged in the business of producing dairy
products in Punjab. On 1 January 2020, PL established a new factory in Badin where the Federal
Government has allowed one-year tax exemption to all new businesses. PL imported plant and
machinery for its new factory at a cost of Rs. 8,200,000 from Japan. PL received a Provincial grant of
Rs. 1,000,000 for installing the machinery in Badin whereas the actual expenditure on installation
amounted to Rs. 700,000. Transportation cost of Rs. 200,000 was paid for bringing the machinery to
the factory. During installation, one of the parts was damaged which had to be replaced at a cost of
Rs. 45,000. PL also paid a premium of Rs. 50,000 for insuring the machinery against fire and theft. A
cost of Rs. 5,000,000 was incurred towards construction of building and Rs. 1,200,000 for the
acquisition of furniture and fittings. The factory was completed by the end of June 2020 and commercial
production started on 1 July 2020.
Required:
(a) Under the provisions of the Income Tax Ordinance, 2001 compute tax depreciation which PL may
claim as deduction in computing its taxable income for the year ended 30 June 2021.
(b) Under the provisions of the Income Tax Ordinance, 2001 who may be appointed by the Federal
Government as a judicial and accountant member of the Appellate Tribunal?
(c) Under the provisions of the Income Tax Rules, 2002 what would be considered as the date of
acquisition in each of the following cases?
(i) Acquisition of a security on account of a nomination under section 80 of the Companies
Ordinance 1984 under bequest.
(ii) Borrowed security.
85 NON-REVENUE OBJECTIVES
‘Apart from financing government’s operational expenditures, taxation also assists in achieving non-
revenue objectives of social and economic development in a country.’ List any five non-revenue
objectives of taxation.
87 WITHHOLDING AGENTS
a. List the persons specified as “Withholding agents” for the purpose of collection of Sales Tax Law?
b. State the goods / services from which withholding agents cannot deduct tax?
89 CONSIDERATION IN KIND-SUPPLY
(a) Folad Limited (FL) has supplied 50 tons of Iron Bars to Tameer Limited (TL). The market price of
the supply is Rs. 2.5 million exclusive of sales tax. Owing to financial difficulties, TL has requested
to settle the price by transferring a piece of land having a market value of Rs. 2.3 million and to
pay Rs. 75,000 in final settlement along with the applicable sales tax by way of a cheque drawn
in favour of FL.
Required
Comment on the chargeability of sales tax in the above situation.
(b) Under the provisions of Sales Tax Rules, 2006 narrate the procedure to be followed by Tameer
Limited, in the above situation, if it decides to return 20 tons of Iron Bars to Folad Limited due to
sub-standard quality. Assume that both FL and TL are registered taxpayers.
In order to increase the profit margin of her business, she decided to get herself registered with the sales
tax authorities enabling her to reclaim the input tax on her purchases. She made an application for
voluntary registration under the Sales Tax Act, 1990 on April 25, 2021 and was registered with effect
from May 2, 2021. Following was the position of her unsold stock of coffee and dates at April 25, 2021:
Required:
In the light of the provisions of Sales Tax Act, 1990.
(a) Explain whether and under what circumstances Ms. Hina could reclaim the amount of tax paid on
the unsold stock acquired before registration.
(b) Calculate the amount of input tax, if any, which she can reclaim with her sales tax return for the
month of May 2021.
93 REPRESENTATIVE OF NON-RESIDENT
In view of the provisions of Sales Tax Act, 1990 identify the persons who may be regarded as the
representative of a non-resident person for a tax year.
97 REGISTRATION
Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, briefly explain whether the
persons under each of the following situations are required to be registered with Inland Revenue
Department. Also compute the amount of sales tax, if any, payable by or refundable to such persons.
The rate of sales tax is 17%.
(i) A manufacturer whose annual turnover during the last twelve months ended 31 March 2021 is
Rs. 4,500,000 and the amount of his annual utility bills for the same period is Rs. 800,000.
(ii) A distributor whose annual turnover during the last twelve months is Rs.3,000,000.
(iii) An importer whose annual turnover is Rs. 12,000,000.
(iv) A commercial exporter who intends to claim a refund of Rs. 200,000.
98 CREDIT NOTE
Aroma Limited (AL), a company registered under the Sales Tax Act, 1990 is engaged in the business of
production and supply of assorted blend of tea in the local market. Mr.Pali, the sales director, requested
the finance manager to issue a credit note in favour of one of AL’s customers, who had bought 50 kg of
a special blend of tea on 4 December 2020. Finance manager issued the credit note on 5 June 2021.
Required:
In view of the Sales Tax Rules, 2006 explain whether AL can adjust the amount of its output tax in
relation to the above credit note in its return for June 2021.
(ii) In case of transfer of ownership of a taxable activity to a non-registered person, the possession of
taxable goods by the registered person shall be deemed to be ___________. If the tax payable by
such registered person remains unpaid, the amount of unpaid tax shall be ______________ of the
business and shall be payable by the _____________ of the business.
(iii) Jami, a registered exporter, purchased taxable goods worth Rs. 500,000 from Asif Enterprises
(AE), an un-registered supplier who is liable to be registered under Chapter I of the Sales Tax
Rules, 2006. Jami shall deduct sales tax of Rs. ____________ from the payment due to AE under
the Sales Tax Law.
116 RECORDS
Briefly describe the requirements relating to the maintenance and keeping of records by a person
registered under the provisions of Federal Excise Act, 2005.
SECTION
Advanced Taxation
Answers
CHAPTER 01 – INDIVIDUAL
1 MR. KHAN
Interest free loan [(2.5 million) × 10% x 6/12] [Section 13(7)] 125
Compensation under redundancy scheme [Taxed at last three tax years average tax -
rate]
Rent from Mr.Riaz for the Shop – March to June (137,500 × 4) [Section 15] 550
Rent from bank for the residential portion–April to June 2021 (100,000×3) [Section 15] 300
Income from Property treated as separate block of Income(SBI) – (Assumed that 900
option to be taxed property income under NTR not availed to the taxpayer)
Capital Gain
(Gain on sale of listed shares, which were held for the period of more than 24 months
but less than four years - Rs. 500,000 taxable as SBI) – 1st Schedule
(As salary income is more than 75% of the total income so Mr. Khan shall be treated
as salaried person) – 1st Schedule
Salary Income (excluding redundancy payment and unapproved gratuity) (A) 4,645
(b) On redundancy payment at the average rate of tax (4,000 x 14%) 560
(on the assumption that Mr. Khan, by notice in writing to the Commissioner,
would elect to be taxed on the basis of average rate of tax) [Section 12(6)]
(c) On unapproved gratuity at the average rate of tax (2,000 x 14%) 280
(d) On capital gain 500 x 15% (holding between 2-4 years) – 1st Schedule 75
(e) On rent chargeable to tax 900 [Rs. 20 + 10% x (900 - 600)] – 1st Schedule 50
2 MR.YAQEEN
60
Leave fare assistance [Section 12] 240
From DPL:
Basic Salary (800 x 6) [Section 12] 4,800
Medical allowance (80 x 6) [exempt being 10% of basic salary] [Explanatory note (ii)] -
Utilities allowance (100 x 6) [Section 12] 600
Amount received as consideration for joining DPL [Section 12] 3,000
Assets received for use at home (200 x 15% /2) [Section 12] 15
Perquisite in the form of concessional loan (10%-8% x 5,000 x (3/12)) [Section 13] 25
Total income under the head salary 11,740
Capital Gain:
Gain on disposal of painting [Section 37] (W-1) 176
Less: 1/4th of gain is exempt due to sale after one year [Section 37(3)] (44)
Net gain on disposal of painting 132
Sale of shares in ABL under NTR (W-2) 50
182
Taxable income for the year 11,922
(i) An option to purchase shares under an employee scheme granted to an employee is not
chargeable to tax unless such a right or option is exercised. [Section 14]
(ii) The perquisites received by an employee in the form of free or subsidised medical treatment
provided by a hospital or clinic is exempt from tax. For the purpose of calculating the perquisites,
an ex-employee is included in the definition of employee. [Clause 53A of Part I of 2ndSchedule]
(iii) Any foreign source income, in a tax year, of a citizen of Pakistan who was not a resident in any
of the four tax years preceding the tax year in which he became a resident shall be exempt from
tax in the tax year in which he became resident and in the following tax year. Therefore, salary
arrears received by Mr.Yaqeen from his ex-employer in Norway is exempt from tax.
[Section 51]
(iv) Rental income from agricultural land received by an owner of such land is treated as agricultural
income and is exempt from tax. Therefore, the amount of Rs. 600,000 received by Mr.Yaqeen is
an exempt income [Section 41]. In the absence of information it has been assumed that
provincial income tax on agricultural income has been paid by the taxpayer.
(v) Subject to certain conditions and limitations, a loan utilized for the construction of a new house
or the acquisition of a house is entitled to be deducted from total income (deductible allowance).
However, the loan obtained by Mr.Yaqeen was for the purpose of renovation of his existing
residential house, therefore, it is not eligible for deductible allowance. [Section 60C]
3 MR.SOHAIL
The tax chargeable under Separate Block of income is Rs. 36,500 which is more than the tax chargeable
under normal tax regime which is Rs. 14,500, therefore Mr. Sohail should exercise Option II under
section 15(7) of the Income Tax Ordinance, 2001.
Note: The students should solve the question as per requirement given in the question, however, in the
absence of information and in order to understand the taxation of income from property in the hands of
an individual or AoP the question has been solved keeping in view both streams of taxability and to
decide on which tax to be charged is beneficial to the Taxpayer.
4 MR.IQBAL
25,000 D
Tax @ 22.5% on the amount exceeding Rs. 5,000,000 (7,396,164– 5,000,000) 539,137
Investment in life insurance [500,000 × 1,209,137 ÷ 7,396,164] (Note-3 u/s 62) (81,740)
(226,873)
Add: tax payable under FTR (Bank profit 150,000 x 15%) 22,500
[Tax liability will be computed at 15% under 1st Schedule to the ITO, 2001]
Tax payable under FTR of Rs. 800,000 - Income from property
20,000 + 10% (Rs.800,000 - 600,000) 40,000
by bank (Tax deduction will remain at 10% as the profit on debt is less than
Rs.500,000 during the tax year) (15,000)
Note:
(1) As the earlier car was provided to Mr. Iqbal for business use, no personal benefit was derived by
him; hence, no amount is taxable as a perquisite. [Section 12]
(2) Where the issuance of shares is subject to a restriction on the sale or transfer of the allotted
shares, no amount is chargeable to tax to the employee until the earlier of:
Since neither of these events occurred before 30 June 2021 no amount is taxable as salary of
Mr.Iqbal for the tax year 2021. [Section 14]
(3) According to Section 62(1) of the Income Tax Ordinance, 2001 a resident person who has
invested in new shares or sukuks offered to the public by a listed company and has also paid life
insurance premium on a policy to the life insurance company shall be entitled for a tax credit,
only on any one type of investment. Since the amount paid by Mr.Iqbal in respect of life insurance
premium is more than the amount invested by him in right shares, he would be entitled for a tax
credit on insurance premium paid in life insurance policy on the lower:
a) Rs. 500,000
b) 20% of Rs. 7,396,000 or
c) Rs. 2,000,000
(4) It is assumed that he joined the above pension fund before the age of 40.
Restricted to the number of days it was used in the tax year (122÷365)
[No. of months can also be used] 60,164
Since 45% of the basic salary is higher than FMR, hence the same shall be added in the salary income
of the employee.
5 MR.SAIF
Personal Status: Individual
Residential Resident
Status:
Computation of income tax liability
For the tax year 2021
Income from Salary: Rupees
Basic Salary (600,000×12) [Section 12] 7,200,000
Guaranteed bonus (relates to tax year 2022) [Section 12] -
Air ticket reimbursed [Section 12] 120,000
Perquisite representing car W-1 75,000
(Rs. 100,000 spent by RPL on maintenance is exempt in the hands of Mr.Saif)
Perquisite representing accommodationW-2 3,240,000
Old stock purchased from RPL (Rs. 14,000 – Rs. 5,000) [Section 12] 9,000
Total income under the head salary 10,644,000
Income from property:
Rent of plot of land (25,000 × 10) [Section 15] 250,000
Amount not adjustable against the rent -
(Nothing is to be included in the chargeable income as this provision of law is attracted where the owner of building
and not land receives such amount and No deductions are allowed to individual as well if option to taxed under NTR
has not availed taxpayer being an individual.) [Section 15(7)]
Capital Gain: [Section 37A]
Consideration received on sale of 1,200 shares in Mio Ltd. (1,200 × Rs. 50) 60,000
Less: Cost of acquisition 1,200 x 35 (42,000)
Incidental expenses (0.5% × 60,000) (300)
Net gain on disposal of securities 17,700
Since more than 50% of the shares in Mio Limited are held by China Government, the company is treated
as a public company for capital gain purposes and treated as separate block of income.
Income from business: [Section 18]
Admission fee received (75 × 25,000) 1,875,000
Membership fee received {(20 × 11 + 25 × 6 + 30 × 4) x Rs. 5,000} 2,450,000
4,325,000
Less: Admissible expenses:
Salaries paid: Mr.Saif (inadmissible being the owner of the club) [Section 21] -
Son (45,000 × 11) [Section 20] (495,000)
Fines (inadmissible) [Section 21] -
Cost of repair of electrical wiring [Section 20] (85,000)
Depreciation: Fitness W-3 machines (842,188)
Fire W-3 screen (61,250)
Other misc. expenses [Section 20] (120,000)
2,721,562
Rent from sub-letting first floor of the bungalow (75,000 × 6) [Section 39] 450,000
Less: Premium paid (Rs. 50,000 – Rs. 25,000) [Section 40] (25,000)
399,625
Less: Donation of plot to Pakistan Sports Board (lower of actual or 30% of taxable
income) 2nd Schedule Clause 61 (500,000)
Tax @ 27.5% on the amount exceeding Rs. 12,000,000 (i.e. on 1,265,187) 347,926
Add: Tax payable under separate block of income (15% ×17,700) (1st Schedule) 2,655
Tax payable on income from property under separate block of income
5% × (Rs. 250,000 – 200,000) 2,500
from salary (2,100,000 + 13,000 deducted on his salary by his own business) (2,113,000)
Notes
Items not included in computation:
(a) Bonus in July 2021: Salary is taxable on receipt basis hence it will be taxed in tax year 2022.
[Section 12]
(b) Maintenance of car: It is not separate perquisite and included in notional figure calculated in W-1
below. [Section 12]
(c) Insurance premium: 50% premium paid in July 2021 will not be allowed as income from other source
as it is taxable on receipt basis. [Section 12]
(d) LCD TV: Only depreciation @ 15% is allowed. Whereas, initial allowance is disallowed in computing
income under the head income from other sources except in case of lease of building together with
plant and machinery. [Section 39 & 40]
N-1
Donation to Pakistan Sports Board: In case of donation to institution mentioned in 2 nd schedule u/c 61,
straight deduction is allowed subject to lower of actual amount or 30% taxable income.
N-2
Income / loss under the head “income from property” cannot be adjusted against income under other
heads as the same is now fully covered under separate block of income as option to be taxed under NTR
assumed to be not availed by the taxpayer [Section 15(7)]
6 MR.PANSARI
Personal Status: Individual
Residential Status: Resident
Computation of Taxable Income and Income Tax Liability
For the tax year 2021
Income from Salary: Rupees
Basic salary per month (Rs. 450,000 x 12) [Section 12] 5,400,000
Conveyance allowance per month (Rs. 50,000 x 12) [N-1] 600,000
Conveyance for business and private use (Rs. 3,000,000 x 5%) [N-2] 150,000
Leave encashment (benefit due but voluntarily waived off is fully taxable) [U/S 69(c)] 75,000
Perquisites – Olive Oil container (Rs. 5,000 x 2 x 12) [N-3] 120,000
Rupees
Benefit on acquisition of shares from Trio Limited (8,000 x 2x 102) [Section 14] 1,632,000
Rupees
Gain on sales of shares of Trio Limited (Unlisted) (6,000x(8.5–5 ) x 102) [Section 37] 2,142,000
Brought forward capital loss on sale of Ghareeb (Pvt.) Limited [N-7] (25,000)
2,117,000
Notes:
(1) In the absence of information, it has been assumed that conveyance allowance has not been for the
discharge of official performance, therefore the conveyance allowance shall be included in the
taxable salary income of the employee. [Section 12 & 13]
(2) Current market value of company owned car is not relevant for the computation of conveyance for
business and private use. [Rule 5 of Income Tax Rules, 2002]
(3) Any perquisite or benefits for which the employer does not have to bear any marginal cost, as notified
by the Board are exempted from employees’ income. As the Board has not notified any SRO in this
connection, hence the given benefit is fully taxable in the hands of the employee as the same is not
within the ambit of clause (53A) of Part-I of 2nd Schedule to the Income Tax Ordinance, 2001.
(4) Any pension received by citizen of Pakistan from an ex-employer other than where the person
continues to work for the employer is exempted from person’s income under clause (8) of Part-I of
the 2nd Schedule to the Income Tax Ordinance, 2001.
(5) Director meeting fee received is covered in the definition of salary under section 12 (1)(a) read with
section 2(22) of the Income Tax Ordinance, 2001. Further the salary income is taxable on receipt
basis.
(6) As the royalty is not within the provisions of the section 89, the same will be taxable entirely in the
year received under the head income from other sources. [Section 39]
(7) It is assumed that brought forward loss on sales of Ghareeb (Pvt.) Ltd shares is adjusted within the
following six tax years. [Section 59]
7 MH ASSOCIATES
Masood
Computation of Income Tax Liability
For tax Year 2021
Income from Business: Rupees
Share of profit from AOP for rate purpose (Net profit before tax – exempt income) 3,120,000
x 60% Hence (6,000,000 – 800,000)× 60%) [Section 88 read with section 9]
Capital gains:
Rent of fork lifter – Covered under minimum tax regime [Section 236Q] 120,000
Less: Repair expenses (As the cost of folk lifter has not been given in the question (15,000)
therefore no initial allowance and depreciation allowance has been claimed [Section 40]
2,405,000
Rupees
Total income (including share of profit from AOP) 6,953,750
Income taxable at normal rates (including share from AOP) [Section 88] 6,953,750
Less: Zakat paid to approved NGO (but paid in cash) [Section 60] -
Less: Share of profit from AOP [Section 88] (3,120,000)
Taxable income – NTR 3,833,750
Tax liability
On industrial plant rental income – Rs.150,000 × 10% - Minimum tax [Section 236Q] 12,000
On income under NTR– Rs.3,833,750 x 22.34% (including income from rent of 856,460
industrial plant) – As tax on industrial plant under NTR is more than 10% minimum tax
under section 236Q hence the higher is to be paid by the taxpayer.
Total tax liability 856,460
Tax credit shall be allowed for the lower of foreign tax liability in respect of sale of shares
or Pakistan tax in respect of foreign source income, calculated by applying the “average
rate of Pakistan income tax” to the net foreign source income for the year. [Section 103]
N-1:
Since the time taken by Masood to complete the book was less than 24 months, the entire amount of
royalty will be taxable in the current year. [Section 89 read with section 39]
W-1: Computation of Capital gain on disposal of shares: [Section 37]
Consideration for shares (2500 × 32 × 90) 7,200,000
Less: Cost of the shares (2500 × 2,100) (5,250,000)
Commission paid to broker (0.2 × 2500 × 90) (45,000)
Gain on disposal of shares 1,905,000
Exempt amount – 25% of the gain u/s 37 (476,250)
Taxable gain 1,428,750
BURQ ENTERPRISES
Personal status: Association of Persons
Residential status: Resident
Tax Year: 2021
Computation of taxable income and tax liability
Consultancy
Imports
Services
(MTR)
(MTR)
Rupees in ‘000’
Net Sales of generators (574,200 / 1.17) 490,769 -
Receipt from consultancy services - 55,000
Cost of sales (W-1) (341,740) -
Gross profit 149,029 55,000
Administrative and selling expenses (allocated on the basis (W-2)
of sales ratio) (70,859) (7,941)
Finance cost-Specific to imports (W-3) (7,800) -
Other Income(allocated on the basis of sales ratio) (W-4) 450 50
Net Income 70,820 47,109
Scheme of taxation (Section 148 & 153) NTR
Tax liability (W-5) 36,324 5,500
Less: Tax deducted at source (20,650) (5,500)
Net tax payable 15,674 -
Share of profit from AOP for rate purposes only (W-6) 52,364,000
Income from property (Taxable as SBI and assumed that option for 156,300
property income to be taxed under NTR has not availed by the
Individual taxpayer)
Capital Gain
52,400,300
There is no tax liability under normal tax regime as there is no income other than AOP share and
gross rent assumed to be taxed under separate block of income at 0%.
Any salary drawn by member of AOP is appropriation of profit and chargeable to tax being share of
member in the total income of AOP. Divisible profits will be taken before tax profit of AOP.
9 BIG PHARMA
Personal Status: Company
Residential Status: Resident
Computation of income tax liability
For the tax year 2021 Rs. in 000’
Accounting profit before taxation 17,150
Add: Inadmissible expenses
Accounting depreciation recorded in: [Section 20]
Cost of sales 3,200
Administrative expenses 800
Provision for slow moving stock [Section 35] 1,300
Demurrage (Allowed as admissible expense as not within the -
definition of penalty u/s 21(g) of the ITO, 2001)
Royalty [Section 20] -
Damages paid to distributors on breach of contract (Allowed as -
admissible expense as not within the definition of penalty u/s
21(g) of the ITO, 2001)
Provision for bad debts [Section 29] 1,100
Small items of Office equipment charged off [Section 21] 1,400
Unrealized exchange loss [Section 20(1)] 1,350
Interest on foreign debt [u/s 152(3)(b) no approval from CIR 1,300
obtained]
WWF as per accounts [Section 60A] 350
Loss from Oman branch [Section 104] W-1a 3,400
Profit from Qatar branch [Section 104] (2,700)
Net loss from foreign source (carried forward for adjustment 700
against foreign source income of the following tax year)
11,500
28,650
Less: Admissible expenses:
Tax depreciation (assumed inclusive of office equipment 6,000
given in question) [Section 20]
Bad debts written off [Section 29] (W–1) 300
(6,300)
Taxable income 22,350
Less: brought forward tax loss (assumed it is only business loss (6,100)
without any unabsorbed depreciation loss) [Section 57]
Taxable income 16,250
WWF (W–2) (350)
Net taxable income 15,900
Rs. in 000’
Tax @ 29% 4,611
Higher of [MTL u/s 113 or 29% on taxable income or 17% of
accounting profit) 1,440or 4,611Or (Rs. 17,150 x 17%)=
2,915.50
WWF [Section 60A] 350
4,961
Less: Tax credit/deduction at source:
Foreign Tax Credit: Lower of: (225)
Taxes paid in Qatar & Tax payable on Pakistan Rate
(since 2,700 x 29%=783therefore paid is lower) [Section
103]
Minimum tax (C/F from prior years) [Section 113] (450)
Deducted and paid by distributors [Section 168] (2,450)
Paid on import of raw material [Section 168] (2,000)
Unadjusted foreign tax credit (allowed for same year only) -
(5,125)
Net Tax (refundable) (164)
Rs. in 000
W-1: Computation of bad debts written off: [Section 29]
Opening balance of provision for bad debt account 2,500
Add: provision during the year 1,100
3,600
Less: Closing balance of provision for bad debt A/c (3,100)
Debts written off during the year 500
Less: Loan to Oman branch written off [W1(a)] (200)
Bad debt written off allowed for tax purpose 300
W-1a Since the loan to Oman branch had not been offered to tax as business income previously, the
same could not be claimed as admissible deduction even if it was written off.
2% of accounting profit i.e. Rs. 350,000 is higher than 2% of taxable income i.e. 325,000.
(b) Aggregate outstanding balance of loans received by RL from foreign controllers as at June 30,
2021: [Section 106]
Amount
in million
Received from:
BP $ 4.2
ATX Gmbh $ 3.8
$ 8.0
@ Rs. 85 ($ 8.0 million x 85) Rs. 680.0
Rs.
Total equity at the beginning of the year: in million
Net assets as at June 30, 2021 (2,900 – 2,670) 230
Less: After tax profit for the year (150)
80
Add: Interim dividend paid during the year 100
Equity at the beginning of the year 180
Rs.in million
Calculation of foreign equity share:
Effective share of BP and ATX in the equity of RL (0.7 x 180 million) 126
Maximum allowable debt for BP and ATX is 126 × 3 million = 378
Interest relating to the above amount would be allowed as deductible profit.
Computation of allowable profit on debt
Profit on debt paid/accrued for BP(10-08-2020 to 14-05-2021)
Total interest expenses (357 million × 12% ×278/366) 32,539,672
An AOP is liable to pay tax separately from its members and where an AOP has paid tax, the amount
received by members (including salaries) out of the income of AOP is exempt from tax. Since both
Mateen and Vaqas have no other income except for the share in AOP, no tax is payable by them
separately.
Mateen (1,100,000)
Vaqas (970,000)
Calculation of Dividend:
On company profits [Higher of 1.5% of turnover, Alternate corporate tax or NTR] 176,175
Based on the above information it would be better for Mateen and Vaqas to operate as an AOP category,
if possible, being lowest tax impact (Rs.201,625).
Rs. in ‘000
Profit received from UAE Govt. against consultancy services [Section 169 read (27,000)
with clause (3) of Part-II of 2nd Schedule]
Royalty received from Singapore [Clause 131 Part I of 2nd Schedule] (50,000)
(43,500)
109,000
Initial allowance on new plant and machinery [25% x 52 million] [Section 23] (13,000)
Rs. in ‘000
Computation of net tax liability:
Tax on Rs. 73,975 million @ 29% or higher of 1.5% of 1,100,000 or 17% of
[Rs. 152,500 (less exempt & covered under FTR) – 50,000 – 27,000] 21,453
Less: Tax credit [Section 61]
on donation Rs. 13 million or 20% of taxable income whichever is lower (3,900)
[73,975 million x 20% = 14,975 million] or 30% x 13,000
Foreign tax paid on royalty received from Singapore [since the royalty income is
-
exempt from tax, no credit would be allowed] [U/C 131 Part-I of Second Schedule]
Higher of A & B 17,553 (A)
Alternative Corporate Tax: [Section 113C]
Accounting Income 152,500
Less: Exempt + Royalty (50,000 + 27,000) (77,000)
Services outside Pakistan (not included in section 113C) 75,500
17% of 75,500 12,835 (B)
Higher of (A) & (B) 17,553
Add: Tax payable on services rendered outside Pakistan [@ 4% (being 50% of 3,600
8% (U/C 3 of Part-II of 2nd Schedule) of gross receipt of Rs. 90 million]
Total tax payable 21,153
ML was required to estimate the tax payable for the relevant tax year at any time before the second
instalment was due. In case the tax payable was likely to be more than the amount otherwise
payable on the turnover basis, the taxpayer shall furnish to the CIR on or before the due date of
the second quarter an estimate of the amount of tax payable by the taxpayer and thereafter pay
50% of such amount by the due date of the second quarter of the tax year after making adjustment
for the amount (if any) already paid. The remaining 50% of the estimate shall be paid after the
second quarter in two equal instalments payable by the due date of the third and fourth quarter of
the tax year.
Where the tax paid under section 147 is less than ninety per cent of the tax chargeable for the
relevant tax year, the taxpayer is liable to pay default surcharge at the rate of 12% per annum on
the amount of shortfall for the period. Such default surcharge shall be calculated from the first day
of April in that year to the date on which assessment is made or the thirtieth day of June of the
financial year next following, whichever is the earlier.
Under the given circumstances, the total advance tax paid by ML under section 147 along with the
amount of taxes suffered at source amounted to Rs. 6.865 million which is less than 90% of the
amount of tax charged to ML for the tax year 2021. Therefore, ML is exposed to the levy of default
surcharge under section 205(1B).
2,632,500
2020 39%
6,750,000
1,012,500
2021 15%
6,750,000
Note:
1. It is assumed that RPL is a public company listed on registered stock exchange in Pakistan.
Therefore its income will be assessed under normal tax regime. [Section 153(3)(a)(ii)]
2. In case RPL is not listed, gross receipts will be treated as taxable income tax deductible @ 7% will
be minimum tax liability of RPL. [Section 153(3)]
3. In this question as the total revenue and total cost of project has remained the same in all the tax
years of the project so percentage of completion in each tax year has been used. If the total revenue
and costs will not remain the same after the end of first tax year then after the first year instead of
applying each year stage of completion percentage the stage of completion percentage till the end
of all tax years shall be computed and applied on total revenue and total costs and finally all the
already recognized revenue and costs in the preceding tax years computed on stage of completion
basis shall be deducted in order to compute revenue and cost to be recognized in Profit and Loss
account of each tax year.
Amount in Rupees
Add/(Less):Inadmissible
expenses / (income):
Less: Donation
(PM Fund) [Note-(iii)] (600,000) (600,000)
1,317,000
Taxes paid [Section 168] (1,600,000) (70,000) - - (1,670,000)
Net tax payable /
(refundable) (353,000) - - - (353,000)
No turnover tax u/s 113 and alternative corporate tax has been computed as the same are less than tax
computed under normal tax regime on the taxable income of the company.[Section 113 & 113C]
Notes:
(i) Profit on debt paid by a resident in respect of a debt utilized for the purpose of carrying on
business outside Pakistan through a permanent establishment is against foreign source income.
Therefore, profit on debt paid by SL shall not be admissible against local source income.
However, it is admissible against income earned from China branch.[Section 105]
(ii) Since excess provision for bad debts had not been previously allowed as deductible expense.
Therefore, it would not be chargeable to tax. [Section 29]
(iii) Donation paid to Prime Minister’s Relief Fund is exempt from tax and is allowed as a direct
deduction from taxable income. [Clause 61 of Part I of 2nd Schedule]
(iv) In case of Korea and China branches, since the foreign income tax paid Rs. 250,000 and
Rs. 400,000 respectively is in excess of the Pakistan income tax of Rs. 240,000 and NIL
respectively, the tax credit allowed would be restricted to Rs. 240,000 and NIL. Further, the
excess amount of Rs. 10,000 and Rs. 400,000 respectively would not be allowed to be refunded,
carried back to the previous tax year, or carried forward to the next tax year. [Section 103]
(v) It is assumed that SL has not opted to be taxed under NTR under section 154(5) for Exports
covered under FTR u/s 154(4), and further assumed that sales of Rs.7.0 million is equal to export
proceeds subject to tax deduction @ 1%
SL VL ML
Rupees in ‘000
Capital Gain:
Gain on sale of shares in private company [Section 37] - - 400
Less: 1/4th of gain is exempt due to sale after one year [Section 37] - - (100)
Less: B/f capital loss [Section 59] - - (200)
(B) - - 100
Income from Other Sources:
Profit on debt assessable separately (C) [Section 39] 150 - 300
Total income for the year (A) + (B) + (C) 3,770 ( 1,735) 326
Total taxable income before availing group relief 3,770 ( 1,735) 326
Less: Group Relief Scheme:
B/f assessed business loss not to be surrendered [Section 59B] - 500 -
Loss surrendered by VL in favour of SL [Section 59B] ( 1,235) 1,235 -
Taxable income for the year 2,535 0 326
Business loss carried forward to next tax year [Section 57] Nil (500) Nil
Unabsorbed depreciation carried forward to next year [Section 57] Nil Nil Nil
N-1
Notes:
N-1: Since normal liability under transport business is more than 3% minimum tax u/s 153 already
deducted, therefore provision of minimum tax in respect of transport service income shall not apply.
Delivery truck ML
ML
Addition 1,500
Initial allowance @ 25% 375
Depreciation @ 15% x 50% 85 460
Goods transport vehicle plying for hire is eligible depreciable asset, hence initial allowance @ 25% to
be calculated.
(Rupees in ‘000)
All other assets [1,440/2,250 ×1,800] [Section 22 & 23] 288 864 1,152
13 40 53
(Rupees in ‘000 )
Less: Taxes paid u/s 154 and sec. 147 (78.3) (400) 478.3
1) Thin capitalization:
A foreign-controlled resident company whose foreign debt to foreign equity ratio, at any time
during a tax year, is in excess of 3:1, will not be allowed to claim as deduction the amount of
interest on that part of its foreign debt which is in excess of 3:1 ratio.
Since PPL is a foreign-controlled resident company, it cannot claim interest paid by it to its
foreign controller, Capsule plc., on that part of its foreign debt of Rs. 8,500,000 which is in
excess of 3:1 ratio.
The limitation on Foreign profit of debt imposed under section 106A is not applicable in the
given question as the amount of foreign profit on debt is less than Rs. 10 million in the tax year.
[Section 106A(2)]
Rs. in ‘000
2,400 x3 7,200
Less: Deductible interest expense on allowable foreign debt (7,200 x12%) (864)
The machinery would not be eligible for initial allowance as it was already in use of PPL.
Rs. in ‘000
Assuming Maroof Limited is a listed company, its income U/S 153(2)(c) would be assessed under
normal tax regime in both tax years 2020 and 2021 under the percentage of completion method U/S 36
as follows:
Taxable income
Tax year 2020 Rupees
Estimated Profit × percentage of completion [40,000,000×55%] 22,000,000
Withholding tax credit available
Income received: February 2020 12,622,000
May 2020 15,760,000
28,382,000
Withholding tax paid (28,382,000 × 7 ÷ 93) 2,136,280
Tax year 2021
Taxable Profit 18,000,000
Estimated Profit × percentage of completion [40,000,000 × 45%]
Withholding tax credit available
Income received: September 2020 35,000,000
December 2020 30,118,000
65,118,000
Withholding tax paid (65,118,000 × 7 ÷ 93) 4,901,354
Working:
Note 1: In case, if Maroof Limited is an unlisted/ (Pvt.) company, its income would be assessed for
higher tax to be computed under NTR or minimum tax regime shall be computed on its gross receipts
would be treated as taxable income in the tax year 2020. [Section 153]
Note 2: If in the tax year 2020 & 2021 the person being a (Pvt.) / Unlisted company shall file return of
total income along with audited accounts and documents as may be prescribed subject to the condition
that minimum tax liability under NTR shall not be less than 7% of contract receipts. (Section 153).
Note 3: In this question as the total revenue and total cost of project has remained the same in all the
tax years of the project so percentage of completion in each tax year has been used. If the total revenue
and costs will not remain the same after the end of first tax year then after the first year instead of
applying each year stage of completion percentage the stage of completion percentage till the end of
all tax years shall be computed and applied on total revenue and total costs and finally all the already
recognized revenue and costs in the preceding tax years computed on stage of completion shall be
deducted in order to compute revenue and cost to be recognised in the Profit and Loss account of each
tax year.
Zeta Limited
Computation of taxable income
For the tax year 2021
Rs. in ‘000
Add: Tax depreciation for the year [Reversal made in order to compute income from
business] 490
Less: Deemed income[Reversal made in order to compute income from business] (85)
Less: B/f assessed business loss - tax year 2019 [Section 57] (130)
Less: B/f un-assessed business loss – tax year 2020 [Section 57] -
775
Less: B/f assessed business loss not to be surrendered [Section 59B] (25)
Total business loss for the year to be carried forward and adjusted against
subsequent year business income only (if any) (N-5) (20)
Less: B/f capital loss – tax year 2015 [Section 59] (65)
735
185
Speculation loss carried forward to next tax year [Section 58] 100
Note:
(1) Only the loss which has been assessed or determined under the provisions of Income Tax
Ordinance, 2001 can be carried forward and set-off under the respective provisions of the
Ordinance, therefore the un-assessed business loss carried forward from tax year 2020 cannot be
set-off against the business income of 2021. [Section 56]
(2) Capital loss brought forward from tax year 2014 cannot be set off against capital gains of tax year
2021 as no loss can be carried forward to more than six tax years immediately succeeding the tax
year for which the loss was first computed. [Section 59]
(3) The speculation loss carried forward from tax year 2019 can only be set-off against income from
speculation business chargeable to tax in tax year 2020 and onwards. Since in tax year 2021, ZL
has no speculation income, therefore the brought forward loss would be carried forward to the next
tax year. However, such a loss cannot be carried forward to more than six tax years immediately
succeeding the tax year for which the loss was first computed i.e. 2019. [Section 58]
(4) Under group relief only the losses other than the capital and brought forward losses can be
surrendered in favour of a subsidiary of a holding company. [Section 59B]
(5) Brought forward business/depreciation loss can be adjusted against income from business only. It
cannot be adjusted against any other income for the year. [Section 57(1)]
Tax dep. on building (3,800,000 × 10% x 1/2) No IA as Reconstruction [Section 39] (190,000)
Tax dep. on machinery (1,500,000 × 15% x 1/2) [no initial allowance on used
machinery] [Section 39] (112,500)
(398,500)
951,500
Less: Donation lower of: [1,622,353 × 20%] Or Rs.300,000 [Clause (61) of Part I of
2nd Schedule] ( 300,000)
Tax credit @ 20% of tax payable for enlistment on SE (470,482 x 20%) [Section 65C] ( 94,096)
376,386
Advance tax paid u/s 147 and 151 (260,000 + 18,000) (278,000)
Notes:
The donation of Rs. 60,000 paid to an educational institution established by the Provincial Government
is entitled to a tax credit. [Section 61(1)(a)]
Dividend received by KA is taxed at the rate of 15% on the gross amount of the dividend irrespective of
the legal status of the company paying the dividend. Rs. 6,171 being the amount of tax deducted at
source (15% of Rs. 41,143) is the final tax and the amount of dividend income is not chargeable to tax
under any head of income while computing KA’s taxable income. [Section 5]
N-3 No adjustment of penalty on later delivery of goods has been made as the same is in the normal
course of business and not in violation of any law, Rule or regulation. Otherwise the same shall be
disallowed as expenditure under section 21(g) of the Income Tax Ordinance, 2001.[Section 21(g)]
Rupees ‘000
Export Comm-
Local sale Export Total
House ission
Gross sales:
As per P&L [46.8%:50.2%:3%] 164,034 175,951 10,515 - 350,500
Sales (adjusted for tax purposes) 140,200 171,251 10,515 4,300 326,266
Rupees ‘000
Export Comm-
Local sale Export Total
House ission
Common expenditure
[allocated on sales ratio] (106,608) (130,236) (8,007) - (244,850)
Gross profit 33,592 41,015 2,008 4,300 80,916
G.P ratio [Rule 13(3)(b)] 41.52% 50.69% 2.48% 5.31% 100%
Administrative and selling expenses:
(W-2)
Allocation of common expenses
[G.P ratio] (25,333) (30,929) (1,513) (3,240) (61,015)
Cost of acquiring a contract [800/25] (32) - - - (32)
Rupees ‘000
Export Comm-
Local sale Export Total
House ission
NTR FTR MTR MTR
Financial charges (W-3)
Mark-up on finance obtained for export
[Section 67] - (9,000) - - (9,000)
Bank charges related to export sales
[Section 67] - (2,150) - - (2,150)
Allocation of common expenses
[G.P ratio] (1,812) (2,213) (108) (232) (4,365)
Add: Other income (W-4A) 1,691 - - - 1,691
Add: Exchange gain[Section 67] - 2,000 - - 2,000
Export rebate [Section 67] - 3,900 - - 3,900
Duty drawback [Section 67] - 1,600 - - 1,600
Taxable income 8,106 4,224 387 828 13,545
Tax rate (Higher tax amount under NTR
& MTR has been applied) 29% 1% 29% 12%
Tax for the year (N-3) 2,305.79 1,695.58* 112.23 516 4,629.6
Less: paid u/s 147 (3,450.00) - - - (3,450.00)
Paid u/s 153 -
Paid u/s 154(3c) [169,558 x 1%]*1 (1,695.58) (1,695.58)
Paid u/s 233 (432) (432)
Tax payable / (refundable) for tax year (1,144.21) 112.23 84 (947.98)
CGT on shares (W- 4A) -
Total tax refundable (947.98)
Note: Fee received from Bahrain and capital gain on sale of shares in Blue Limited is exempt from tax
and since no direct expenditure was incurred in earning such income, no expenditure would be allowed
against such income. [Section 37A read with clause 131 of Part I of 2nd Schedule]
Notes:
1. It is assumed that direct cost / related expenses (except freight given in the question) against receipt
of rendering of dying and embroidery services to export house have already accounted for in the
preceding tax year. Therefore, no further cost / expenses shall be allocated in the current year.
[Section 73]
2. Clearing and forwarding expenses i.e. services paid without any withholding deduction, therefore
inadmissible expense. [Section 21]
3. Export sales will be FTR on the basis of actual gross receipts during the tax year i.e. 1% of gross
export receipt deducted will be the final tax liability for that tax year. [Section 154]
22 ZJ LIMITED
Personal Status: Company
Residential Status: Resident
Computation of Taxable Income and Income Tax Liability
For the tax year 2021
Income from Business: Rs. in ‘000
Profit before taxation 46,500
Add / (Less): Inadmissible items / transactions
Export sale to Red Cross in Somalia-NTR income
[since opt out of PTR] [Section 154(5)] -
Adjustment of opening stock-absorption cost method [25,690–28,460] [Section 36] (2,770)
Adjustment of closing stock-absorption cost method [32,350–29,200] [Section 36] 3,150
Accounting depreciation (cost of sales) [Section 20] 2,210
Withholding tax collected on a plot of land [Section 21] 600
Exp. to increase software features–intangible [Section 24] 1,800
Cost of ramps – capital expenditure [Section 21] 650
Accounting depreciation (Adm. & selling expenses) [Section 20] 1,980
Sale proceeds of vehicles sold to employees [Section 22(8)] (2,450)
Tax gain on sale of vehicles [5,250 – 3,320] [Section 20] 1,930
Income from associate- accounted for using equity method [Section 34] (20,000)
Gain on sale of securities [Section 37A] (6,000)
Total business income / (loss) before depreciation/amortization 27,600
Less: B/f assessed business losses from 2018 & 2019 [3,550 + 2,900] [Section 57] (6,450)
21,150
Less: Tax depreciation (4,300)
Dep. on ramp @100% (cost restricted to Rs. 250,000 per ramp) (Assumed 100%
depreciation allowance shall be allowed) [Section 22 read with 3rd Schedule] (500)
Amortization of software expenses (1,800÷25) [Section 24] (72)
Unabsorbed depreciation from tax year 2019 [Section 57] (2,550)
Total business income for the year A 13,728
Rs. in ‘000
Capital Gain:
Gain on disposal of plot (10,000–3,000) [Separate block of income] [Section 37A] 7,000
Gain on sale of securities in ML [(85–50 × 100,000) +(78–50 × 100,000)] U/R 13P(d)
related to negotiated deal transactions 6,300
Separate block of income
B 13,300
Income from Other Sources:
Share of profit from AOP C 1,250
Total income for the year(A+B+C) 28,278
Less: Separate block of income
Gain on disposal of plot of land-immovable property [Section 37] (7,000)
Gain on sale of securities in ML [Section 37A] (6,300)
Taxable income for the year 14,978
Computation of net tax liability
Tax regime [as opt out of PTR] NTR
Tax on taxable income [14,978@ 29%] (i) 4,344
Minimum tax [199,000 × 1.5%] (ii) W-1 2,985
Minimum tax u/s 154: [30,000 x 1%] (iii)
(Proportionate tax under NTR is already higher than minimum tax. Therefore no
impact on tax liability) 300
Alternative corporate tax [22,300×17%] (iv) W-2 3,791
Tax charged would be higher of (i), (ii), (iii) or (iv) above 4,344
Tax on Plot [(7,000 x 75%) × 10%] holding period is greater than 1 year [Section 37] 525
Tax on sale of securities [6,300 × 7.5%], holding period > 24 months < 4 years
[Section 37A] 473
Gross tax payable 5,342
90% of gross tax payable [5,342 × 90%] [Section 147 read with section 205] 4,808
Less: Taxes paid u/s 147, 148, 153 and 154 [1,000+1,200+1,050+300] (3,550)
Amount of shortfall during 2021 1,258
Period of default from 1stJuly 2020 to 31st January 2021 (assuming paid with return
on 31 January 2021) = 215 days
Amount of default surcharge @12% [1,258,000× 12% × 215 (01/07/2020 to 31/01/
2021) ÷ 365 days] [Section 205] 89
Tax liability including default surcharge 5,431
Outstanding balance of loans received by DPL from foreign controller (MI) as at 30 September 2020:
Less: Amount credited during the year to asset revaluation reserve (150)
Foreign Debt attracting the provisions of thin capitalization: (interest exempt from tax -
2nd Schedule Clause 72(i))
Foreign debt where thin capitalization is not applicable: (as interest expense is not exempt or
charged at a lower rate of tax)
Thin capitalization ratio for DPL = [315 million ÷ (86 million x 3)] = 1.2209
Debt where thin capitalisation rule is applicable (315 million × 11% × 200÷365) 18,986,301
Debt where thin capitalisation rule is not applicable (168 million × 6% × 122÷365) 3,369,205
Debt not covered under thin capitalization rule (fully deductible) 3,369,205
Therefore, total profit on debt allowable for tax purposes is Rs. 18,920,275.
Note 1: Any alternative approach in arriving at the above deductible profit on debt of Rs. 15,551,070
shall also be considered.
Note 2: In the absence of information it has been assumed that the limitation on Foreign profit of debt
imposed under section 106A is not applicable in the given question.
24 BISMIL LIMITED
(5,925,000)
852,213
Add: Service charges payable to the Federal Government 500,000
Net tax payable 1,352,213
*Note:
1. As in the given case one of the pre-condition for exemption of dividend income has not been
met i.e. the group should be 100% owned.
2. Further dividend income for a corporate sector being as recipient in taxable under NTR by
virtue of exclusion of dividend income from section 8 of the Income Tax Ordinance, 2001.
(a) Alpine Pharmaceuticals Limited would be allowed maximum 10% of the turnover as deductible
expenditure. Therefore, in this case it would be allowed to deduct Rs. 1,300,000 in computing
income from business that is less than the limit of Rs. 2,200,000 specified u/s 21 (o) of the
Income Tax Ordinance, 2001. (20,000,000 × 110% x 10%)
(i) Thin capitalization:
Calculation of deductible amount of interest on debt: [Section 106]
Rs. in million
Total equity at the beginning of the year:
Net assets at the year-end (350 – 190) 160
Less: After tax profit for the year (120)
Equity at the beginning of the year 40
(ii) Withholding tax is required to be deducted from Pakistan source income. In this case
income of the China based company is not Pakistan source as the items were purchased
from their website in China (it does not matter whether payment was transferred from
Pakistan). Therefore, the entire amount of Rs. 300,000 will be allowed as a deductible
expenditure. [Section 20(1) read with sections101(3) and 152(2) & (3)(d)]
(iii) In order to claim the purchase of raw material of Rs. 700,000 as deductible, NL was
required to deduct withholding tax of Rs. 28,000 from the payment made to DL.NL’s failure
to withhold tax from the payment has resulted in disallowance of 20% of the amount of
purchase of raw materials. [Section 21(c)]
However, since the payment against purchase of raw material under single account head,
in aggregate, exceeded the basic threshold of Rs. 250,000, NL was required to pay the
amount through banking channel by way of either crossed banking instrument or online
transfer of funds or through credit card showing transfer of funds from NL’s business bank
account to DL’s business bank account. Contrary to this, NL made online transfer of
payment from their business bank account into DL’s director’s personal bank account.
[Section 21(l)]
In view of above, the entire amount of Rs. 700,000 would be disallowed. However, in such
a case the disallowance under section 21(c) may be ignored and the maximum
disallowance under section 21(l) should not exceed from the total expenditure claimed at
Rs. 700,000.
26 RM ASSOCIATES
RM Associates (RMA)
Tax year2021
Rupees
Fee for
Retainership
technical *Other fees Total
fee
services
Scheme of taxation: NTR Exempt (N-4) Exempt (N-1)
Net revenue 19,710,000 6,210,000 10,580,000 36,500,000
Sales ratio 54% 17% 29% 100%
Less: common expenses (W-1) (8,597,842) (2,706,728) (4,617,359) (15,921,929)
Total income 11,112,158 3,503,272 5,962,641 20,578,071
Since the tax under NTR is higher than the withholding tax deducted from gross receipt, normal tax
would be payable. However, the withholding tax can be claimed as tax credit. [Section 153(3)]
Rent of premises (N – 3) -
Withholding tax on retainership fee - included in other charges [Section 21] (1,379,700)
Withholding tax on on-line services - included in other charges [Section 21] (105,800)
3. Although office rent of Rs.1,250,000 paid without tax deduction but the same will still be an
admissible expenditure as RM Associates being as a payer is not a withholding agent under
section 155 of the Income Tax Ordinance, 2001.
4. Amount of Rs. 6,210,000 received under an agreement from a Doha based company, Isra
Middle East, for providing technical services in Doha. The amount was brought into Pakistan
in foreign exchange in compliance with the regulations of the State Bank. No tax was deducted
from the receipt either in Doha or in Pakistan by the bank. The said amount is exempt from tax
by virtue of clause 131(b) of Part I of 2nd Schedule to the Income Tax Ordinance, 2001.
28 OLIVE LIMITED
Computation of Net Sales Tax Liability
For the tax period May 2021
Rs. in ‘000
Gross Taxable
Sales Tax
SALES TAX CREDIT (INPUT TAX) Value Value
Domestic Purchases (packing material) @17% [Section 3] 6,000 6,000 1,020
Advertisement services in province of Punjab @ 16%[Serial 650 650
number 02 of Second Schedule of Punjab Provincial Sales Tax
on Services Act, 2012] 104
Imports of finished goods including 3% VAT on commercial
imports @20% [Section 3, 7A read with 12thSchedule] 8,000 8,000 1,600
Imports - domestic consumption [Section 3(10)(b)] 15,000 15,000 2,550
Fixed Assets (Machinery) [Section 3] 1,200 1,200 204
Fixed Assets (Vehicle) – Inadmissible [Section 8(1)(i)] 1,500 - -
Clearing agent services [N-2 &N-5] 20
Inadmissible input- exempt supplies & zero rated supplies
(W-1) (1,108)
Input Tax for the month 4,390
(+) Previous month credit brought forward 325
Accumulated credit 4,715
Input tax on fixed asset (204)
SALES TAX DEBIT (OUTPUT TAX)
Domestic Supplies of manufactured goods [Section 3(1)(a)} 20,000 20,000 3,400
Exempt goods [Section 13] 4,000 - -
Supplies of imported goods [Section 3(1)(a)] 10,000 10,000 1,700
Exports [Section 4] 4,000 4,000 0
Output tax for the month 5,100
Debit for the month 5,100
Sales tax withheld by the return filer as withholding agent (W-2) 124
Admissible credit [(4,511(4,715-204) or 90% of 5,100)
whichever is lower] N-3 4,511
Add: Input on fixed asset 204
Sales Tax payable (5,100-4,511-204)+ 124 (WHT) 509
Refund claim (input consumed in export) - (W-1) 554
Notes:
N-1: The restriction of 90% is not applicable in case of commercial imports provided value of imports
subject to 3% value addition tax exceeds 50% of value of all taxable purchases. Since such value is <
50% in the question therefore 90% rule is also applicable on commercial imports. [SRO 1190(I)/2019
dated October 02, 2019]
N-2: Sales tax @ 16% on custom agents [serial # 3, 2nd schedule of Punjab Sales Tax on services].
100% withholding tax [Rule 5 Punjab ST on services (withholding) Rules 2015.
N-3: Input on fixed asset is excluded while comparing 90% and is adjustable in totality.[Section 8B]
N-4: No further tax has been charged on export sales as they are not required to be register under
Sales Tax Act, 1990 &read with SRO 585(I)/2017, Dated: 01/07/2017.
N-5: Sales Tax on clearing agent services has not been included in residual input tax on the assumption
thus it has not been used for exempt or export sales.
Rs. in ‘000
Tax withheld from clearing agent (100% WHT payable to PRA)[Rule 5 of Punjab 20
Sales Tax on Services (Withholding) Rules, 2015]
Tax withheld from advertisement services in Punjab Province 650 x 16% [Rule 7 of 104
Punjab Sales Tax on Services (Withholding) Rules, 2015]
124
A person who is a recipient of advertisement services is required to withhold and deposit the amount
of sales tax mentioned on the invoice and where sales tax amount is not indicated, the recipient of
advertisement services shall deduct and deposit the sales tax at the applicable rate.
No withholding tax has been made by the company being as registered person on supplies from
registered persons on the presumption that all the suppliers as registered persons were in the Active
Taxpayer List of the Sales Tax Law. [11th Schedule]
Rs. in ‘000
Taxable Value Sales Tax
Input tax credit to be carried forward -
Refund claim (input consumed in export) (W-2) 1,791
Less:
Penalty [Section 10] (50)
Additional tax [Section 10] (25)
Net amount refundable 1,716
Note:
N-1: If a registered person is liable to pay any tax, default surcharge or penalty payable under any law
administered by the Board, the refund of input tax shall be made after adjustment of unpaid outstanding
amount of tax or, as the case may be, default surcharge and penalty.[Section 10(2)]
N-2: No further tax has been charged on export sales as they are not required to be register under
Sales Tax Act, 1990 read with SRO 585(I)/2017, Dated: 01/07/2017.
Workings:
W-1:
Input tax on imports 2,000
Less: on private use (100,000 x 20%) (20)
1,980
W-2: Apportionment of input tax [Rule 25 of Sales Tax Rules 2006]
Gross Taxable
Sales tax
value Value
Domestic purchases from registered persons [Section 3] 70,700 70,700 12,019
Electricity bills [Section 3] - - 60
Gas bills [Section 3] 21
Mobile Phone bills [Section 3] 26
Residual input tax Total 12,126
Total sales of manufactured goods 88,000
Exempt supplies 11,000
Exports 13,000
Inadmissible tax on exempt supplies (11,000 ÷ 88,000 x 12,126) 1,516
Input tax on exports – to be claimed as a refund (13,000 ÷ 88,000
x 12,126) 1,791
Total inadmissible/ un-adjustable input tax 3,307
W-3:
Commercial imports 12,500
Less: Mark-up on appliances sold on instalment basis (2÷102 x
2,040) [Section 2(46)(a)(iii)] (40)
Value of commercial imports 12,460
W-4:
A person is required to make payment through banking channel within 180 days. In case of delay beyond
180 days, related input tax is disallowed. 180 days lapsed in August and hence related input tax reversal
would have been made by KEL in September return. Hence there will be no treatment for Rs. 34,000
(200,000x17%). [Section 73]
No withholding tax has been made by the company being as registered person on supplies from
registered persons on the presumption that all the suppliers as registered persons were in the Active
Taxpayer List of the Sales Tax Law. [11th Schedule]
Rs. in ‘000
Taxable Sales
Value Tax
W-1
Domestic purchases:
Steel sheets, copper wire, aluminum and allied R.M 2,500 425
Lubricants, spare parts and stores 4,500 765
stationary for the maintenance of inventory record 500 85
Sales tax on services under respective provincial laws:
- Bill Board advertisement service (N-1) [Section 3(2) read with serial 700 112
43 of Schedule attached in ICT law]
On banking services under ICT
L/C opening charges [Section 3(2) read with Schedule attached 500 -
in ICT law]
Safe custody fee [Section 3(2) read with Schedule attached in 100 -
ICT law]
Total 1,387
Less: Purchase return (153)
Total input on purchase of manufactured goods 1,234
Export supplies 3,800
Other zero rated supplies (1,900 + 650) 2,550
6,350
Input tax on zero rated and export to be claimed as a refund
(6,350 /13,350 x1,234) 586.959
N-1: Withholding tax provisions on advertisement services on billboard under ICT shall be same as
applicable under Sales Tax Act, 1990 by virtue of Rule 3(3) of ICT (on services), 2012 read with
Eleventh Schedule Table (serial 5) of Sales Tax Act, 1990 therefore 100% of sales tax amount i.e. Rs.
112,000 has been deducted by the Company being as recipient of advertisement services.
N-2 No withholding tax has been made by the company being as registered person on supplies from
registered persons on the presumption that all the suppliers as registered persons were in the Active
Taxpayer List of the Sales Tax Law. [11th Schedule]
Gama
Purchase [Section 3] 15,000 2,550
Inadmissible – W-2 (2,550)
Input tax for month 2,151.11
Since Beta is a by-product of Alpha, this is residual input tax and need to be apportioned.[Rule 25 of
Sales Tax Rules, 2006]
Rs. in ‘000
SALES TAX DEBIT (OUTPUT TAX)
Domestic Supplies of Alpha to registered persons (add 2,000 15,000 17,000 2,890
difference of open market price) [Section 3]
Domestic Supplies of Alpha to un-registered persons [Section 3] 3,000 3,000 510
Domestic Supplies of Gama (Exempt goods) [Section 13] 18,000 - -
Export to Turkey (Gama) [Section 4] 7,000 - -
Domestic Supplies of Beta [Section 3]
[3rd sch. Item - retail price] 5,000 6,250 1,062.50
Supply of Beta to Export Processing Zone [Section 4 read with 625 625
serial number 5 of 5th Schedule] 0
Free replacement of defective units of Alpha 1,000 0
(sales tax already paid initially with original price) 0
Supply of Beta to employees [Section 3] 1,250 1,250
[third sch. item at retail price] 212.50
Output tax for the month 4,675.00
Output tax 4,675
Less: input (input already less than 90% of output) [Section 8B] (2,151.11)
Payable 2,523.89
Input tax on fixed asset [Section 8B]
(3,000)
(whole amount input adjustment allowed)
Balance input to be carry forward 476.11
Refund on zero rated (48.89+714) 762.89
Sales tax payable @ 3% on sale to non-register is not allowed
to be adjusted as bottom line figure and must be paid to FBR. 90
3,000 x 3% [Section 3(1A)]
Sales tax payable 90
W-1 [Rule 25 of Sales Tax Rules, 2006]
Alpha Value of
supply
Taxable – local registered 15,000
Taxable – associate (4,000 – 2,000) 2,000
Taxable – unregistered 3,000
(A) 20,000
Beta
250,000 x 25 Taxable 6,250
50,000 x 25 Taxable 1,250
25,000 x 25 Zero rated 625
(B) 8,125
Total (A + B) 28,125
Input apportionment relating to zero rated (625/28,125)x2,200 48.89
Sales Tax
Admissible credit (2,763,562 or 90% of 4,590,000 whichever is lower) [Section 8B] ( 2,763,562)
Sales Tax payable 1,826,438
From unregistered suppliers (assumed they are required to be registered) -
(10,000,000 x 5%) [11th Schedule] 500,000
Add: Input tax on goods destroyed by fire [Section 2(12)& 8] 170,000
Add: Excess tax collected- incidence passed on to consumers [Note-3] 19,200
3% further sales tax to be paid on supply to un-registered persons (Rs. 9,000,000 x
3%) [Section 3(1A)] 270,000
Net sales tax payable with return 2,785,638
Return of excess tax collected- incidence not passed on to consumers [Note 3] 44,800
Refund claim (input consumed in export) (W-1) 1,279,428
Refund claim (input on zero rated supply to AB limited) (W-1) 51,177
Refund claim (input on zero rated supply for aircraft) (W-1) 204,708
Rupees
Refundable input tax on Zero rated supplies (4,913,000 x 500/48,000) (C) 51,177
Zero rated supplies for aircraft maintenance (weight > 8,000 Kg.) 2,000,000
Refundable input tax on Zero rated supplies (4,913,000 x 2,000/48,000) (D) 204,708
No withholding tax has been made by the company being as registered person on supplies from
registered persons on the presumption that all the suppliers as registered persons were in the Active
Taxpayer List of the Sales Tax Law.
Less: Admissible credit (90% of 95,200 or input tax excluding Fixed Assets
whichever is lower) [Section 8B] (52,680)
Rupees
N-1 No withholding sales tax has been deducted on banking and insurance services received as
the withholding sales tax provisions are not applicable by virtue of Rule 3 of Punjab Sales Tax on
Services (Withholding) Rules, 2015.
N-2 No withholding sales tax provisions shall apply on the registered person as Manzoor
Furnishers is not a withholding agent under the 11th Schedule to the Sales Tax Act, 1990.[11th
Schedule]
Notes:
N-1: Since consumer goods are consumed by end consumers, hence 3% additional sales tax shall not
be charged on sales to such non-registered persons.
N-2: Sales tax withholding is not Applicable on good specified in third schedule to the Sales Tax Act, 1990
and on supplies made by an active taxpayer as defined in the Sales Tax Act, 1990 to another registered
person with the exception of advertisement services.
No withholding tax has been made by the company being as registered person on supplies from
registered persons on the presumption that all the suppliers as registered persons were in the Active
Taxpayer List of the Sales Tax Law.
Notes
N-1: In case of purchase form non-registered person, sales tax is required to be withheld @5% of gross
value of supplies. Further as non-registered person cannot issue sales tax invoice, therefore no discount
will be allowed in case of purchase from non-registered person. [11TH Schedule]
Total Purchase 1,000,000
Less: Discount (380,000)
Purchase exclusive Discount 620,000
Discounted sale (380,000 / 0.95) 400,000
1,020,000 x 5/117 = 43,590
W-1: Apportionment of input tax [Rules 25 of the Sales Tax Taxable
Rate Sales Tax
Rules, 2006] Value
Domestic Purchases 5,000,000 17% 850,000
Imports -domestic consumption 800,000 17% 136,000
Advertisement of television services 500,000 16% 80,000
Residual input tax TOTAL 1,066,000
Total sales 8,600,000
Sales
Taxable Tax Amount of
Value Sales Tax
Rate
N.1 Withholding tax would be charged @ 5% of the gross value of supply made by un-registered
persons. In the absence of information, it has been assumed that the supplier of taxable goods
was liable to be registered but not actually registered and not in ATL of Sales Tax Law. However,
if they are not required to be registered then OL shall not be required to withhold 5% sales tax
amount. [Eleventh Schedule to the Sales Tax Act, 1990]
N.2 In the absence of sales tax invoice / advance payment receipt input tax cannot be claimed.
[Section 7]
N.3 Supplies to persons useable as industrial inputs shall be charged to tax at the rate of 17% (SRO
491).
N.4 3% further tax is not charged in case of supply of goods to the end user/consumer.
Further possession of taxable goods held immediately before a person cease to be registered is
considered as supply. However in this case, OL has just closed down its one business division
and company itself is not going to be deregistered, hence unsold stock will not be considered as
supply. [Section 2(33)(c)
N.5 Sales tax is levied on the amount received from the recipient of goods and not from anyone other
than the recipient. It is excluded from the definition of supply such as insurance claim. Apparently
it seems that discount allowed is not in conformity with normal business practice. Hence full
amount will be taxable.
N.7 Input for sales tax on services in Lahore may be adjusted against output tax. However, no
withholding sales tax has been deducted on banking and insurance services received as the
withholding sales tax provisions are not applicable by virtue of Rule 3 of Punjab Sales Tax on
Services (Withholding) Rules, 2015.
N.8 Issuance of cheque book service charges exempt at 98.13 exempt portion.
Notes:
N-1: Third Schedule applies to import and locally manufactured goods. Hence items being imported fall
in category of third schedule, the principles of commercial imports would apply. Value addition tax @
3% shall also be paid unless imported for own use
Squashes are third schedule item. Sales tax (withholding) is not applicable on 3rd Schedule items.
Sales tax is required to be paid on retail price in case of imports of 3 rd schedule item. As no retail price
has been given in the question, the assessed value has been assumed to be retail price.
N-2: The calculations have been made on the assumption of registered person.
N-3: No withholding tax has been made by the company being as registered person on supplies from
registered persons on the presumption that all the suppliers as registered persons were in the Active
Taxpayer List of the Sales Tax Law. [11th Schedule]
No withholding tax has been made by the company being as registered person on supplies from
registered persons on the presumption that all the suppliers as registered persons were in the Active
Taxpayer List of the Sales Tax Law. [11thSchedule]
39 KARMA LIMITED
Karma Limited (KL)
Computation of Net Sales Tax Liability
For the tax period November 2020
Taxable Sales Tax Amount of
SALES TAX CREDIT (INPUT TAX) Value Rate Sales Tax
Raw material from local registered suppliers [Section 3] 12,000,000 17% 2,040,000
Raw material from local un-registered suppliers 2,050,000 inadmissible -
[3,000,000-950,000] [Section 7(2)(i)]
Import of raw material [5,000,000 – 2,000,000] [Section 3] 3,000,000 17% 510,000
Import of raw material for infant use put up for retail sales 2,000,000 Inadmissible -
[Section 13 & serial number 84 Table I of 6th Schedule]
Special Tea purchased from STL [600 kg × Rs. 700] 420,000 17% 71,400
[Section 3]
(-)Inadmissible/un-adjustable input W-1 (454,357)
Input Tax for the month (Accumulated credit) 2,167,043
SALES TAX DEBIT (OUTPUT TAX)
Taxable supplies to registered persons [Section 3] 6,400,000 17% 1,088,000
Taxable supplies to Cottage Ind. (Only purchase from 5,500,000 17% 935,000
Cottage Ind. exempt) [Section 3]
Taxable supplies to un-registered -end consumers 1,000,000 17% 170,000
[Section 3]
Forward transaction on PMEX [SRO 445/12 June 2004] 600,000 N/A
[Section 13] -
Supply of confectionery, chocolates and candies [N-1] 2,500,000 17% 425,000
[Section 3]
Supplied to TCP for export purposes [Zero per cent 1,350,000 0% -
sales tax charged on the presumption that the said
supply is covered as supplies to exporters under
DTRE in serial No. 7 of the 5th Schedule to the Sales
Tax Act, 1990.]
Supplied to TCP for local market [Section 3] 900,000 17% 153,000
Supply of Fertilizers-Murabaha [SRO 445/12 June 2004]
[Section 3] 1,584,000 17% 269,280
Supply of Tea to FM Ent. – [400 kg × Rs. 700] [Section 3] 280,000 17% 47,600
Output tax for the month 3,087,880
Sales tax withheld from un-registered suppliers (2,050,000 × 5/117) – [WHT applicable
despite 3rd schedule item since unregistered] [11th Schedule] 86,607
3,012,987
Rupees
40 PASDAR LIMITEDW
Pasdar Limited (PL)
Computation of Net Sales Tax Liability
For the tax period May 2021
Import of air conditioners [Section 3 read with serial 852,000 17% 144,840
number 38 of 3rd Schedule]
(QFL is not registered as a service provider therefore, required to pay value addition
for in-house use) [Serial 2(iii) of Procedure and conditions attached with the
12thSchedule]
Sales tax withheld from un-registered supplier of packing material (358,000 × 5/117)
[11th Schedule] 15,299
Further tax on bicycles to un-registered dealers – exempt (5th Sch.) [Section 3(1A)] -
Reversal of further tax on 3rd schedule items to un-registered wholesaler in July 2019
The same will be paid to the Federal Govt, as excess tax collected. [Section 3B] -
42 MR. PAREKH
Computation of capital gain on sale of securities:[Section 37A]
Purchases/Acquisitions Disposal
No. of
Date Price Cost** 01-5-21 07-5-21 21-5-21 31-5-21 31-5-21 31-5-21
Shares
- 876 (876)
Loss eligible for set off [Section 37A] 2,863 (421) (2,442)
* Average rate taken for sale purchase on the same day as per Rule 13N(5)
43 CAPITAL GAIN
(i) The extinguishment of 2,000 shares in BL will be treated as tax neutral event(as there is no
change in ownership of the shareholder (Hamid) is involved) and 1,000 shares in GL will have
the same cost base i.e. Rs. 30,000 (Rs. 30 per share). Therefore, no CGT will be collected on
such transfer. If subsequently Hamid sells shares of GL, capital gain will be computed taking into
account the date of acquisition i.e. July 01, 2020. [Rule 13P(s)]
CGT
(ii) Purchases / Acquisitions Disposal
No. of 15 April 18 May
Date Price Cost* Total
shares 2021 2021
1-Jan-21 100 40 4,000 50 50
Bonus shares issued @ 25%
1-Jan-21 (Date of entitlement 1-04-2021)
(Date of credit 15-5-2021) 75 75
1-Apr-21 100 *40 4,000
15-May-21 25 *50 1,250
50 75 125
Selling price per share 40 40
Sales proceed 2,000 3,000 5,000
Less: Cost 2,000 3,250 5,250
Loss Nil (250) (250)
*As per income tax rule 13P(q) – market value on book closure will be treated as cost of bonus
shares
Bonus Shares: [Rule 13P(q)]
Pie Limited shall not collect 5% of value of bonus shares determined on the basis of day end
price on first day of closure of booksdue to omission of tax deduction section.
Assumption: Cost of acquisition and sale proceeds are deemed to include 0.5% as incidental
expenses.
(iii) Taxable Income of Anjum [Rule 13P(h)] No. of shares Price Amount
Net gain/ loss of the borrower
Sale of borrowed shares 5,000 105 525,000
Repurchase of shares and returned to the lender (5,000) 95 (475,000)
0.50% of sale proceeds as incidental expenses
on sale (2,625)
0.50% repurchase price being incidental
expenses on acquisition (2,375)
Financial Cost paid to the lender 2 (10,000)
Net gain (Capital gain) - 35,000
Taxable income of Nazia [Rule 13P(h)]
(a) Financial income of Nazia (Taxable) 10,000
(b) No CGT to be collected as for Nazia, on return 'of the borrowed shares by Anjum,
the cost and date of acquisition shall remain the same as was before lending the
shares to Anjum. [Rule 13P(h)] 0
46 TRANSFER OF ASSETS
As holding period > 1 year < 2 years, 3/4th (75%) amount of gain on disposal is 67,500
taxable [U/S 37(3)]
Rupees
Less: amount recovered from disallowed portion (If amount received (120,000)
will be from allowed portion of bad debt then the same will be offered
for tax in the tax year 2021)
Short fall to be allowed as bad debt deduction in Tax year 2021 30,000
Where a resident individual disposes of all the assets of his business to a resident company, no
gain or loss shall be taken to arise on the disposal if the following conditions are satisfied, namely:–
(i) The consideration received by the transferor for the disposal is a share or shares in the
company (other than redeemable shares);
(ii) The transferor must beneficially own all the issued shares in the company immediately after
the disposal;
(iii) The company must undertake to discharge any liability in respect of the assets disposed of
to the company;
(iv) Any liability in respect of the assets disposed of to the company must not exceed the
transferor’s cost of the assets at the time of the disposal;
(v) The fair market value of the share or shares received by the transferor for the disposal must
be substantially the same as the fair market value of the assets disposed of to the company
less any liability that the company has undertaken to discharge in respect of the assets; and
(vi) The company must not be exempt from tax for the tax year in which the disposal takes place.
According to the proposed scheme, Mr. Adnan is fulfilling almost all the conditions mentioned
above, except the following:
Mr. Adnan is required to receive the entire purchase consideration in the form of shares only
instead of 50% in the form of shares and 50% cash.
As Mr. Adnan, immediately after the disposal of his herbal business to MPL, is required to
beneficially own the entire paid up share capital of MPL, therefore, he must acquire the
ownership interest of his brother Rais who is also willing to dispose off his holding in MPL.
However, Mr. Adnan is not required to acquire the ownership interest of his spouse Razia as
he already beneficially owns her ownership interest.
As MPL is required to undertake all the liabilities in respect of the assets disposed of by
Herbal Traders, Mr. Adnan should ensure that MPL assumes all the liabilities of Herbal
Traders including the liability of Barkat Enterprises.
Accordingly, Mr. Adnan will have to make the aforesaid changes to his proposed scheme of
transfer in order to get exemption from capital gain tax.
The fair market value of the consideration, in the form of shares, received by Mr. Adnan in
relation to transfer of his herbal business must substantially be the same as the fair market
value of the net assets (i.e. assets less liabilities) transferred by him to MPL.
Rupees
Generally, for private limited companies, the break-up value of the shares is considered as
the FMV, this would mean that the shares to be issued to the individual must be equal to the
FMV of the net assets acquired by MPL.
Rupees
Rupees
8,000,000
The Commissioner may, at any time, withdraw the approval, if he is satisfied that:
(a) The constitution, memorandum and articles of association, trust deed, rules and regulations or
bye-laws, as the case may be, specifying the aims and objects of the organization do not provide
for prohibiting the making of any changes in the constitution, memorandum and articles of
association, trust deed, rules, regulations and bye-laws without prior approval of the Regional
Commissioner;
(i) been or is being used for personal gain of any particular person or a group of persons;
(ii) been propagating the view of a particular political party or a religious sect;
(iii) been or is being managed in a manner calculated to personally benefit its members or their
families; or
(iv) not been, or will not be, able to achieve its declared aims and objects in view of its set up,
administration or otherwise as evaluated and certified by an independent certification
agency;
(v) failed to give valid reasons for setting apart, or not utilizing, or accumulating surpluses,
excluding restricted funds, in excess of twenty five per cent of the income for the year;
(vi) Failed to file the return of income supported with the following documents
(a) the statement of audited balance sheet and statement of accounts duly audited by
qualified accountant for the year immediately preceding the year in which the
application is made;
(b) statement showing names and addresses of the persons from whom donations,
contributions, subscriptions etc exceeding Rs.5,000 have been received during the tax
year;
(c) statement showing the names and addresses of donees and beneficiaries etc to whom
payments, services etc exceeding Rs.5,000 have been made during the tax year; and
(d) statement showing the money set apart or kept un-utilized with reasons thereof;
(e) Failed to provide a detailed performance evaluation report after every three years.
Provided that where such detailed performance evaluation report is not submitted on or
before the 30th of September following every three Tax Years, Commissioner of Income
Tax shall issue a show cause notice for withdrawal of approval to the concerned
organization as stated above;
(viii) Failed to file statements of deduction of income tax under section 165 of the Income Tax
Ordinance, 2001 read with rule 44.the names, CNIC/NTN, last income declared, tax year
and addresses of the promoters, directors, trustees, president, secretary, treasurer,
manager and other office bearers, as the case may be, of the organization and indicating
clearly their family relationships, if any, with each other.
51 RESIDENTIAL STATUS
Resident Individual [Section 82 read with Rule 14 of the Income Tax Rules, 2002]
(i) Residential status of the following persons for the tax year ended June 30, 2021 under the given
circumstances.
For the tax year ended June 30, 2021, the relevant period is July 01, 2020 to June 30, 2021.
Therefore, the stay of Mr. Mubeen for the purpose of tax year 2021 is:
Month Days
July 2020 31
August 2020 31
September 2020 30
Total 92
Since none of the conditions specified in section 82 met and his stay in Pakistan is only 92 days in tax
year 2021, he is a non-resident for tax purposes.
(ii) Since Mr. Rana never travelled abroad in his life before proceeding to Canada for assuming his
job responsibilities, the number of days he spent in Pakistan for the tax year 2021 is:
Month Days
July 2020 31
August 2020 31
September 2020 30
October 2020 31
November 2020 30
December 2020 29
Total 182
The day he spent in Pakistan on June 30, 2021, while in transit, would not be counted as day of
his presence in Pakistan.The definition of resident individual to include an individual who is
present in Pakistan for 120 days or more in the tax year, and in the four preceding tax years was
present in Pakistan for 365 days in aggregate.
Therefore, Mr. Rana is a resident person as his total stay in tax year 2021 is 120 days or more
in the tax year and in the four preceding tax years he was present in Pakistan for 365 days or
more in aggregate.
(iii) A Federal Government Employee posted abroad in terms of his employment is considered as a
resident person irrespective of his physical presence in Pakistan.
Therefore, Mr. Baber is a resident individual for tax year 2021.
(iv) In case of Mr. Francis, it is immaterial where he stayed in Pakistan. The calculation will be made
from the day of his arrival in Pakistan to the day of his departure from Pakistan. Therefore, the
total number of days he spent in Pakistan during the calendar year 2020 i.e. the year starting
from January 01, 2020 to December 31, 2020 (Special tax year 2021) is:
Month Days
July 2020 1
August 2020 31
September 2020 30
October 2020 31
November 2020 30
December 2020 31
Total 154
In view of the permission granted by Commissioner Income Tax to Mr. Francis to use special tax
year, the number of days he spent in Pakistan beyond December 31, 2020 would fall under tax
year 2022. Therefore, 31 days which he spent in January 2021 would not be included in tax year
2021.
As a result, Mr. Francis is a non-resident person as his total stay in tax year 2021 is less than
183 days. Although his stay in current tax year is 120 days or more however in the four preceding
tax years he was not present in Pakistan for 365 days or more in aggregate.
52 BEETLE LIMITED (BL)
(i) The Commissioner’s contention is incorrect as the tax collected on import of plant and machinery
by an industrial undertaking for its own use is not a minimum tax and hence it is adjustable.
[Section 148(7)(a)]
(ii) Although commercial imports now covered under minimum tax regime however apportionment is
only required for those expenditures, deductions and allowances which are common in nature.
The expenditures included in cost of goods manufactured should not be apportioned unless these
include any item which can be considered as a common expenditure.
The Commissioner’s contention with regard to cost of goods manufactured is, therefore, incorrect
unless he can prove otherwise, as discussed above. [Section 67]
(iii) Any property with respect to which the person is entitled to depreciation is not covered under the
definition of “Capital asset”, therefore, any gain on sale of such property would not be considered
as a capital gain. However, such gain would be treated as income from business and would be
charged to tax accordingly. The amount of gain is calculated as follows:
Rs. in million
Sale proceed of immovable property 120
Less: Tax WDV
Cost of immovable property ( consideration received) 120
Tax depreciation charged (Rs. 90m – Rs. 70m) (20)
Tax WDV 100
Tax gain on disposal 20
Therefore, the gain of Rs. 20 million would be offered to tax as income from business instead of
Rs. 50 million as shown in the financial statements.[Section 37(5) & 22(13)(d)]
(iv) Where a person has been allowed a deduction for any expenditure incurred in deriving income
from business and the person has not paid the liability or a part of 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 should be chargeable to tax under the head business income in the first tax
year following the expiry of three years’ period.
The Commissioner’s observation is, therefore, correct that such Royalty having not been paid for
over three years should have been offered to tax in the current tax year. [Section 34(5)]
(v) Bad debt is allowed if the amount of debt was previously included in the person’s income from
business or in respect of money lent by a financial institution in deriving income from business.
Since BL is not a financial institution, loan written off could not be allowed as Bad debt and,
therefore, the Commissioner’s contention is correct. [Section 29]
(ii) Any foreign-source income brought into or received in Pakistan by the person.
55 GROUP TAXATION
58 SELECTION OF AUDIT
Government grant: [Clause 102A of Part I of 2nd Schedule to the ITO, 2001]
Rs. 20 million is not income for tax purpose but is a capital receipt on grounds that
(a) Amount was voluntarily paid by Federal Government.
(b) Company did not ask for grant.
(c) Amount received did not arise out of any legal /contractual obligation.
(d) Amount is not traceable to any source of income.
Cost of asset [Section 76(10)]
Further in determining the cost of asset, any subsidy or grant received shall be reduced/ deducted from
cost to the extent of said grant is not chargeable to tax. Hence cost of plant and machinery will be
50 – 20 = 30 million.
Every person paying an amount to a non-resident person is required to deduct tax from the gross amount
paid unless the non-resident person is not chargeable to tax in respect of the amount.
A non-resident’s business income is chargeable to tax if such income is a Pakistan source income.
Since JH Hospital in Boston, USA (JHH) is a non-resident company and the medical treatment provided
by it to the CEO was also outside Pakistan, USD 30,000 cannot be attributable to any business activity
of JHH in Pakistan and therefore, USD 30,000 paid by ML cannot be regarded as a Pakistan source
income of JHH.
As USD 30,000 is not chargeable to tax in Pakistan, ML was not required to deduct tax as remitted in
accordance with the regulations of State Bank of Pakistan. ML was also not required to inform the
Commissioner in writing prior to making the payment, as the medical expenses were paid in accordance
with the State Bank’s regulations.
In view of above, USD 30,000 is a deductible expense for the tax year 2021.
Dividend received from exempt income: [Clause 105B of Part I of 2nd Schedule]
Keeping in view provision of clause 105B part I of 2 nd Schedule the benefit of the RFL’s exempt income,
being wholly agricultural in nature, will be extended to Mr. Pansari who has received dividend from such
exempt income and therefore, Rs. 45,000 received by him as dividend will be exempt from tax.
Although where any income is exempt from tax under the Ordinance, the exemption, in the absence of
a specific provision to the contrary, shall be limited to the original recipient of that income and shall not
extend to any person receiving any payment wholly or in part out of that income.
Where the business of a non-resident person comprises the rendering of independent services
(including professional services and the services of entertainers and sports persons), the remuneration
received by such person shall be regarded as Pakistan-source business income if the remuneration is
paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person.
Since GL is a Pakistan resident company, Rs. 10 million receivable by the Indian artist would be
regarded as his / her Pakistan source income.
Payment for Foreign Produced Commercial [U/S 152A]
GL is also required to deduct withholding tax at 20% from such payment, as every person paying an
amount to a non-resident person is required to deduct tax from the gross amount paid at 20%.
In view of the above, GL after deducting withholding tax from the payment of Rs. 10 million can claim it
as deductible expenditure.
3. Every person receiving commissions / discount against sale of petroleum products [U/S 156A read
with clause 56F of Part-IV of 2nd Schedule]
Conditions:
The above persons may opt for the Normal Tax Regime (NTR) along with accounts and documents
provided the tax liability under NTR does not fall below a specified percentage of the tax already
deducted or collected, in each of the above respective case [Clauses 56C – 56G, part III, 2nd schedule]..
64 ASSOCIATES
Two persons shall be associates where the relationship between the two is such that one may
reasonably be expected to act in accordance with the intentions of the other, or both persons may
reasonably be expected to act in accordance with the intentions of a third person.
Where the member, either alone or together with an associate or associates under another
application of this section, controls 50% or more of the rights to income or capital of the association;
Where the shareholder, either alone or together with an associate or associates, controls either
directly or through one or more interposed persons
It refers to all attempts to minimise a taxpayer’s liability through illegal means. It is a punishable offence
in the eyes of law.
It arises when a taxpayer intentionally conceals the true nature of his/her tax affairs, for instance failing
to declare income on his/her tax return. For example when cash sales are concealed to reduce income
and assets.
It refers to any transaction where one of the main purposes of a person in entering into the transaction
is the avoidance or reduction of any person’s liability to tax.
It pertains to a situation when a taxpayer legitimately takes advantage of the deductions, concessions
and benefits provided by the tax laws in order to reduce or defer his/her tax liability. For example
operating as a small company to incur lower tax rate or availing tax credit on newly established industrial
undertaking.
Means a financial product which derives its value from the underlying security or other assets,
may be traded on a stock exchange of Pakistan and includes deliverable futures contracts, cash
settled futures contracts, contracts of rights and options and future commodity contracts traded at
PMEX.
Where capital loss realized on sale of specific security by an investor in preceded or followed in
one month’s period by purchase of the same security by the same investor whereby the
transaction falls within one month between same two parties or their related parties where one
was seller and other was buyer and they change places becoming buyer and seller respectively,
thus, maintaining portfolio.
Where the investor having realized loss (as in the case of a wash sale) on a particular security
does not repurchase the same security but chooses another similar security in the same sector
thus not only minimizing or eliminating altogether liability on account of tax on capital gain, but
also maintaining the portfolio broadly at the same risk return profile.
Any fee for technical services where the services giving rise to the fee are rendered through
a permanent establishment in Pakistan of the non-resident person; or
Any royalty or fee for technical services that is exempt from tax under this Ordinance.
The ‘prescribed person’ with reference to deduction of tax from rent of immovable property
means:
A company;
Individuals or association of persons paying gross rent of rupees one and a half million and
above in a year; or
Any other person notified by the Board for the purpose of this section.
To achieve consistency in the administration of the Income Tax Ordinance and to provide
guidance to taxpayers and officers of the Board, the Board may issue circulars setting out the
Board's interpretation of the Ordinance.
A circular issued by the Board shall be binding on all Income Tax Authorities and other persons
employed in the execution of the Ordinance, under the control of the said Board other than
Commissioners of Income Tax (Appeals).
70 PROFIT ON DEBT
(ii) The security was widely issued by the resident person outside Pakistan for the purposes of raising
a loan outside Pakistan for use in a business carried on by the person in Pakistan;
(iii) The profit was paid outside Pakistan; and
(iv) The security is approved by the Board for the purposes of exemption.
Tax admissible expenses: are the expenses borne by a person that legitimately reduces the gross
income to arrive at its taxable income from any source of income e.g. tax depreciation.
Tax reliefs: are the allowances and deductions which also serve to reduce the tax liability. Such
deductions are often not directly associated with the earning of revenue, but have been given by the
revenue authority to encourage certain activities. They may be deducted from income to arrive at the
tax base on which tax is computed, or deducted directly from the actual tax liability by way of tax credit
e.g. tax credit or allowable deduction for pension contribution..
(ii) Pre-commencement expenditure: [U/S 25 read with Part III of the Third Schedule]
Pre-commencement expenditure means any expenditure incurred before the commencement of
a business wholly and exclusively to derive income chargeable to tax, including the cost of
feasibility studies, construction of prototypes, and trial production activities, but shall not include
any expenditure which is incurred in acquiring land, or which is depreciated or amortised under
section 22 or 24.
A person shall be allowed a deduction for any pre-commencement expenditure in accordance with
the following:
Pre-commencement expenditure shall be amortized on a straight-line basis at the rate of 20%.
The total deductions allowed in the current tax year and all previous tax years in respect of an
amount of pre-commencement expenditure shall not exceed the amount of the expenditure.
No deduction shall be allowed in the manner as mentioned above, where a deduction has been
allowed under another section of the Income Tax Ordinance, 2001 for the entire amount of the
pre-commencement expenditure in the tax year in which it is incurred.
Depreciable asset means any tangible movable property, immovable property (other than unimproved
land), or structural improvement to immovable property, owned by a person that
(a) has a normal useful life exceeding one year;
(b) is likely to lose value as a result of normal wear and tear, or obsolescence; and
(c) is used wholly or partly by the person in deriving income from business chargeable to tax,
but shall not include any tangible movable property, immovable property, or structural improvement to
immovable property in relation to which a deduction has been allowed under another section of this
Ordinance for the entire cost of the property or improvement in the tax year in which the property is
acquired or improvement made by the person.
Provided that where depreciable asset is jointly owned by tax payer and Islamic Financial Institution
Licensed by SBP or SECP, as the case may be, pursuant to an arrangement of Musharika financing or
Diminishing Musharika financing, the depreciable asset shall be treated to be wholly owned by the tax
payer.
The consideration received by the association for the disposal is a share or shares in the company
(other than redeemable shares);
1. the association must own all the issued shares in the company immediately after the disposal;
2. each member of the association must have an interest in the shares in the same proportion to
the member‘s interest in the business assets immediately before the disposal;
3. the company must undertake to discharge any liability in respect of the assets disposed of to
the company;
4. any liability in respect of the assets disposed of to the company must not exceed the
association‘s cost of the asset at the time of the disposal;
5. the fair market value of the share or shares received by the association for the disposal must be
substantially the same as the fair market value of the assets disposed of to the company, as
reduced by any liability that the company has undertaken to discharge in respect of the assets;
and
6. the company must not be exempt from tax for the tax year in which the disposal takes place.
Therefore, the amount of penalty payable by Mr. Hoshyar would be Rs. 126,034.
(ii) Penalty where declared income in the return was below taxable limit:
A person who fails to furnish a return of income where his declared income is below the taxable
limit as required under section 114 within the due date, such person shall pay a penalty of
Rs.40,000.
79 ADVANCE RULING
Advance Ruling: [U/S 206A & U/R 231A]
Advance ruling means determination by the Commissioner in relation to the transaction which has been
undertaken or is proposed to be undertaken by a non-resident person the question of law specified in
the application.
Who may issue and the time frame for issuance:
The advance ruling is required to be issued by the Board within 90 days of the receipt of a valid
application in writing by a non-resident person.
No collection of taxes is made from the information provided from which the Board can pay the
reward.
Imputable income in relation to an amount subject to final tax means the income which would have
resulted in the same tax, had this amount not been subject to final tax.
PMEX is the abbreviation for Pakistan Mercantile Exchange Limited a futures commodity exchange
company incorporated under the Companies Ordinance 1984 and is licensed and regulated by the
Securities and Exchange Commission of Pakistan.
82 DEFINITE INFORMATION
Definite information includes information on: [U/S 122(8)]
(iii) Any other receipts that may be chargeable to tax under the Ordinance; and
(iv) The acquisition, possession or disposal of any money, asset, valuable article by the tax payer; or
83 PAKIZA LIMITED
(a) Computation of tax depreciation for tax year 2021: [Section 22 and 23 read with 3 rd
Schedule to the Income Tax Ordinance, 2001]
Plant Building Furniture
(b) Person who may be appointed by the Federal Government as a judicial and accountant
member of the Appellate Tribunal.
Judicial member: [Section 130(3)]
(i) A person may be appointed as a judicial member of the Appellate Tribunal if the person
has been a Judge of a High Court;;
is or has been a District Judge; or
is an advocate of a High Court with a standing of not less than ten years; or
possesses such other qualification as may be prescribed (e.g. accountant
members)
Accountant member: [Section 130(4)]
(i) he is an officer of Inland Revenue Service equivalent to the rank of Regional
Commissioner;
(ii) a Commissioner Inland Revenue or Commissioner Inland Revenue (Appeals) having at
least three year experience as Commissioner or Collector
(iii) a person who has, for a period of not less than ten years, practiced professionally as a
chartered accountant within the meaning of the Chartered Accountants Ordinance, 1961;
or
(iv) a person who has, for a period of not less than ten years, practiced professionally as a
cost and management accountant within the meaning of Cost and Management
Accountants Act, 1966.
85 NON-REVENUE OBJECTIVES
Non-revenue objectives
(i) To strengthen anaemic enterprises by granting them tax exemptions or other conditions or
incentives for growth;
(ii) To protect local industries against foreign competition by increasing local import taxes;
(iii) As a bargaining tool in trade negotiations with other countries;
(iv) To counter the effects of inflation or depression;
(v) To reduce inequalities in the distribution of wealth;
(vi) To promote science and invention, finance educational activities or maintain and improve the
efficiency of local forces;
(vii) To implement laws which eliminate discrimination among various elements in the
markets/businesses.
Being a registered person, Mr.Furqan was required to file a nil /null return for each tax period
irrespective of the fact that he did not carry out any taxable activity after the registration.
Failure of Mr.Furqan to file a return by the due date may result in imposition of penalty.
Mr.Furqan may be liable for deregistration due to any of the following reasons:
Every registered person who ceases to carry on his business or whose supplies become exempt
from tax, or who ceases to remain registered shall apply to the Commissioner Inland Revenue
having jurisdiction for cancellation of his registration in Form STR-3, and the Commissioner, on
such application or on its own initiative, may issue order of de-registration or cancellation of the
registration of such person from such date as may be specified, but not later than ninety days from
the date of such application or the date all the dues outstanding against such person are deposited
by him, whichever is later and such person shall cause to be de-registered through computerized
system accordingly.
The Commissioner, upon completion of any audit proceedings or inquiry which may have been
initiated consequent upon the application of the registered person for de-registration, shall
complete the proceedings or inquiry within ninety days from the date of application and direct the
applicant to discharge any outstanding liability which may have been raised therein by filing a final
return:
Provided that the person applying for de-registration shall not be de-registered unless he provides
record for the purpose of audit or inquiry.
87 WITHHOLDING AGENTS
Following persons are specified as withholding agents for the purpose of deduction and deposit
of sales tax:
(iv) Companies as defined in the Income Tax Ordinance, 2001, which is registered for Sales
Tax, Federal Excise Duty or income tax;
(v) Recipients of services of advertisement, who are registered for sales tax.
(vi) Registered person purchasing cane molasses from persons other than Active taxpayers.
Withholding agent includes the accounting office which is responsible for making payment against
the purchases made by a government department.
b) Goods / services under which Withholding agents cannot deduct / withheld tax: [11th
Schedule of the Sales Tax Act, 1990]
i. Electrical energy;
ii. Natural Gas;
iii. Petroleum Products as supplied by petroleum production and exploration companies, oil
refineries, oil marketing companies and dealers of motor spirit and high speed diesel;
iv. Vegetable ghee and cooking oil;
v. Telecommunication services;
vi. Goods specified in the Third Schedule to the Sales Tax Act, 1990;
vii. Supplies made by importers who paid value addition tax on such goods at the time of import;
viii. Supplies made by an Active Taxpayer as defined in the Sales Tax Act, 1990 to another
registered persons with exception of advertisement services; and
ix. Supply of sand, stone, gravel/crush and clay to low cost housing schemes sponsored or
approved by Naya Pakistan Housing and Development Authority.
The following persons are authorized to represent a taxpayer before the adjudicating authority and
Appellate Tribunal, namely:
(a) A person in the employment of the taxpayer working on a full-time basis and holding at least a
bachelors’ degree in any discipline from a university recognized by the Higher Education
Commission provided that such person shall represent only the taxpayer in whose employment
he is working on full-time basis;
(b) An advocate entered in any rolls, and practicing as such, under the Legal Practitioners and Bar
Councils Act, 1973;
(d) A person who has retired or resigned after putting in satisfactory service in the Sales Tax
Department or Customs Department or Federal Excise Department for a period of not less than
ten years in a post or posts not inferior to that of an Assistant Collector;
Provided that no such person shall be entitled to represent a taxpayer for a period of one year
from the date of his retirement or resignation, or in a case in which he had made, or approved, as
the case may be, any order under the relevant Acts; and
(e) An accountant.
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.
Therefore, value of supply shall be Rs. 2,500,000 and not the consideration received i.e. Rs 2,375,000.
However, if the sales tax invoice reflects trade discount of Rs 125,000 and discount allowed is in
conformity with the normal business practices, then the value of taxable supply will be taken at
Rs.2,375,000.
Return of supply: [U/R 20 of Sales Tax Rules, 2006]
Tameer Limited (TL) would follow the following procedure:
(i) TL shall issue a Debit Note (in duplicate) in respect of Iron Bars supplied to it by Folad Limited (FL),
indicating the quantity being returned, its value determined on the basis of the value of Iron Bars
as shown in the tax invoice issued by FL and the amount of related sales tax paid thereon, as well
as the following, namely:
Name and National Tax Number of the recipient (i.e. TL);
Name and National Tax Number of the supplier (i.e. FL);
Number and date of the original sales tax invoice;
The reason of issuance of the Debit Note; and
Signature and seal of the authorized person issuing the note.
(ii) The original copy of the debit note shall be sent to FL and the duplicate copy shall be retained by
TL for record.
The tax paid on goods purchased by Ms.Hina who subsequently got voluntary registration under
the Act or the rules made thereunder, shall be treated as input tax, subject to the following
conditions:
(i) The dates were purchased from a registered person against a valid sales tax invoice.
(ii) The invoice was issued during a period of thirty days before making the application for
registration; and
(iii) Such dates constitute her verifiable unsold stock on the date of application for voluntary
registration.
(i) The tax paid on the coffee at import stage must be during a period of ninety days before
making an application for registration.
(ii) She holds the bill of entry relating to such coffee; and
(iii) The unsold or un-consumed stocks are verifiable on the date of application for voluntary
registration.
(b) In view of the above, the following amount of input tax can be claimed by Ms. Hina with her sales
tax return for the month of May 2021.
Rs.
In case of locally purchased packed dates: 41,325
(458 packets of dates purchased on March 28, 2021)
In case of imported coffee: 39,900
(42 kg of coffee imported on February 25,2021)
81,225
(ii) Require by a notice in writing any person who holds or may subsequently hold any money for or
on account of the person from whom tax may be recoverable to pay to such officer the amount
specified in the notice;
(iii) Stop removal of any goods from the business premises of such person till such time the amount
of tax is paid or recovered in full;
(iv) Require by a notice in writing any person to stop clearance of imported goods or manufactured
goods or attach bank accounts;
(v) Seal the business premises till such time the amount of tax is paid or recovered in full;
(vi) Attach and sell or sell without attachment any movable or immovable property of the registered
person from whom tax is due; and
(vii) Recover such amount by attachment and sale of any moveable or immovable property of the
guarantor, person, company, bank or financial institution where a guarantor or any other person,
company, bank or financial institution fails to make payment under such guarantee, bond or
instrument.
Provided that the Commissioner Inland Revenue or any officer of Inland Revenue shall not issue
notice under this section or the rules made thereunder for recovery of any tax due from a taxpayer
if the said taxpayer has filed an appeal under section 45B in respect of the order under which the
tax sought to be recovered has become payable and the appeal has not been decided by the
Commissioner (Appeals), subject to the condition that twenty-five per cent of the amount of tax
due has been paid by the taxpayer.
93 REPRESENTATIVE OF NON-RESIDENT
(i) Individual under legal disability: The guardian or manager who receives or is entitled to receive
income on behalf, or for the benefit of the individual.
(ii) Association of persons: If Association of person is a firm then partner, in other cases a director
or a manager or secretary or agent or accountant or any similar officer of the association.
(iii) Federal Government: Any individual responsible for accounting for the receipt and payment of
moneys or funds on behalf of the Federal Government.
Under following circumstances, every representative shall be personally liable for the payment of any
tax due by him in the capacity of representative, where he
(i) Alienates, charges or disposes of any moneys received or accrued in respect of which the tax is
payable; or
(ii) Disposes of or parts with any moneys or funds belonging to the registered person that is in the
possession of the representative or which comes to the representative after the tax is payable, if
such tax could legally have been paid from or out of such moneys or funds.
Any notice required to be served on any non-resident person, for the purposes of Sales Tax Act, shall
be treated as properly served on the non-resident person if:
(ii) Sent by registered post or courier service to the person’s registered office or address for service
of notices under the Act, in Pakistan, or where the person does not have such office or address,
the notice is sent by registered post to any office or place of business of the person in Pakistan;
(iii) Served on the person in the manner prescribed for service of a summons under the code of Civil
Procedure, 1908; or
(iv) Sent electronically through email or to the e-folder maintained for the purpose of e-filing of Sales
Tax cum Federal Excise Returns by the registered person.
97 REGISTRATION
Requirement of registration: [U/S 14]
(i) Manufacturers other than those classified as cottage industry are required to be registered under
the Sales Tax Rules 2006. ‘Cottage industry’ whereby a manufacturer located in a residential area
without having industrial gas and electricity connection, not having workers more than 10 and
annual turnover from all supplies not exceeding Rs. three million will fall under its domain.
Therefore, in this case since the manufacturer is not a cottage industry, it is required to be
registered and pay any sales tax.
(ii) Since a distributor is required to be registered with Inland Revenue Department irrespective of his
turnover, therefore, in this case the distributor would register with the Inland Revenue Department
and pay sales tax of Rs. 510,000 on his turnover of Rs. 3,000,000.
(iii) Since an importer is required to be registered with Inland Revenue Department irrespective of his
turnover, therefore, in this case the importer would be required to register himself with the Inland
Revenue Department. Sales tax at import stage would be paid on the basis of import value (other
than 3rd Schedule items). However, the amount of output tax would be Rs. 2,040,000 (Rs.
12Million x 17%). In case of commercial importer, Value Addition Tax @ 3% would also be paid.
(iv) A commercial exporter is not required to be registered with Inland Revenue Department. However,
an exporter who intends to obtain sales tax refund against his zero-rated supplies must get
registration before making an application for such refund. Therefore, in this case since the exporter
intends to claim a refund of Rs. 200,000 he must get himself registered with Inland Revenue
Department.
98 CREDIT NOTE
‘Crest’ means the computerized program for analysing and cross-matching of sale tax returns,
also referred to as computerized Risk-based Evaluation of Sale Tax.
‘Supply chain’ means the series of transactions between buyers and sellers from the stage of first
purchase or import to the stage of final supply.
All taxable supplies in the tax period as revealed by the records and tax invoices; and
All input tax, output tax and the net amount of sales tax payable or refundable, as the case
may be,are in accordance with the provisions of the Sales Tax Act and are duly substantiated
by the records required to be maintained for the purpose.
(i) Joint and several liability of registered persons in supply chain [U/S 8A]
Where a registered person receiving a taxable supply from another registered person is in the
knowledge or has reasonable grounds to suspect that some or all of the tax payable in respect of
that supply or any previous or subsequent supply of the goods supplied would go unpaid of which
the burden to prove shall lie on the department, such person as well as the person making the
taxable supply shall be jointly and severally liable for payment of such unpaid amount of tax;
Provided that the Board may by notification in the official gazette, exempt any transaction or
transactions from the provision of this section.
(ii) Change in the rate of tax [U/S 5]
If there is a change in the rate of tax—
Taxable supply made by a registered person shall be charged to tax at such rate as is in
force at the time of supply;
Imported goods shall be charged to tax at such rate as is in force;
In case the goods are entered for home consumption, on the date on which a goods
declaration is presented under section 79 of the Customs Act, 1969; and
In case the goods are cleared from warehouse, on the date on which a goods declaration
for clearance of such goods is presented under section 104 of the Customs Act, 1969;
Provided that where a goods declaration is presented in advance of the arrival of the
conveyance by which the goods are imported, the tax shall be charged as is in force on the
date on which the manifest of the conveyance is delivered:
Provided further that if the tax is not paid within seven days of the presenting of the goods
declaration under section 104 of the Customs Act the tax shall be charged at the rate as is
in force on the date on which tax is actually paid.
(vii) Any allowance forming part of the emoluments of .any servant of the Government or local authority
which the Federal Government or Provincial Government may, by notification in the official
Gazette, declare to be exempt from attachment, and any subsistence grant or allowance made to
any such servant while under suspension;
(viii) Any expectancy of succession by survivor-ship or other merely contingent or possible right or
interest; and
(ix) A right to future maintenance.
Following are the types of disputes in relation to which a registered person may apply to the Board for
the appointment of a committee for the resolution of a dispute which is under litigation in any Court of
Law or an Appellate authority.
(i) The liability of tax against the aggrieved person, or admissibility of refunds, as the case may be;
The Board may, after examination of the application of a registered person, appoint a committee within
sixty days of receipt of such application in the Board.
The committee appointed by the Board for the resolution of dispute would consist of the following:
(i) Chief Commissioner Inland Revenue having jurisdiction over the case; and
(ii) two persons from a panel notified by the Board comprising of chartered accountants, cost
and management accountants, advocates, having minimum of ten years’ experience in the
field of taxation and reputable businessmen.
Retailers falling in any of the following categories shall be required to be registered as a retailer under
the Sales Tax Act 1990:-
(a) A retailer operating as a unit of a national or international chain of stores;
(b) a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;
(c) A retailer whose cumulative electricity bill during the immediately preceding twelve consecutive
months exceeds rupees twelve hundred thousand; and
(d) A wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale
basis to the retailers as well as on retail basis to the general body of the consumers; and
(e) a retailer, whose shop measures one thousand square feet in area or more.
(f) any other person or class of persons as prescribed by the Board.
Provided that the above provisions shall remain applicable to retailers who do not obtain registration:
Provided further that the retailers operating as a unit of a franchise or any other arrangement of a national
or multinational chain of stores, shall obtain a separate registration as distinct from their principal.
A registered person who does not fall in any of the following categories is regarded as an active tax
payer:
Who fails to file the return by the due date for two consecutive tax periods;
Who fails to file an Income Tax return u/s 114 or wealth statement under section 115, of the Income
Tax Ordinance, 2001, by the due date; and
Who fails to file quarterly or an annual withholding tax statement under section 165 of the Income
Tax Ordinance, 2001.
Avail concession under the Sales Tax Act or Rules made there under.
Persons including government departments, autonomous bodies and public sector organisations,
shall make any purchases from an active tax payer.
A taxable service is a service listed in the Second Schedule to the Provincial Act, which is provided:
Explanation:
The above deals with services provided by registered persons, regardless of whether those services
are provided to resident persons or non-resident persons.
There are 69 different services which are mentioned in the 2 ndschedule which are charged with
different rates of tax. Main services include hotels, advertising, telecommunication, insurance,
banking etc.
(i) Where a person is providing taxable services in a Province other than the Punjab/ Balochistan/
Khyber Pakhtunkhwabut the recipient of such services is resident of the Punjab/ Balochistan/
Khyber Pakhtunkhwa or is otherwise availing such services in the Punjab/ Balochistan/
Khyber Pakhtunkhwa and has charged tax accordingly, the person providing such services
shall pay the amount of tax so charged to the Government.
(ii) Where the recipient of a taxable service is a person registered under the Act, he shall deduct
the whole amount of tax in respect of the service received and pay the same with the
Government.
(iii) Where a person is providing taxable services in more than one Province or territory in Pakistan
including the Punjab/ Balochistan/ Khyber Pakhtunkhwa,such person shall be liable to pay tax
to the Government to the extent the tax is charged from a person resident in the Punjab/
Balochistan/ Khyber Pakhtunkhwaor from a person who is otherwise availing such services
in the Punjab/ Balochistan/ Khyber Pakhtunkhwa.
(iv) Where rendering of a taxable service originates from the Punjab/ Balochistan/ Khyber
Pakhtunkhwa but terminates outside Pakistan,such person shall be required to pay tax on
such service to the Government.
(v) Where a taxable service originates from outside Pakistan but is received or terminates in the
Punjab/ Balochistan/ Khyber Pakhtunkhwa, the recipient of such service shall be liable to pay
the tax to the Government.
(vi) The person who are required to pay the tax to the Government in terms of sub-sections (i),
(ii), (iii), (iv) and (v) shall be liable to registration for the purpose of this Act.
(vii) All questions or disputes relating to the application of the principle of origin given in this section
shall be resolved in terms of the already recorded understanding between the Federal
Government and the Provincial Governments on the implementation of reformed General
Sales Tax: provided that pendency of any such question or dispute shall not absolve the
concerned person from his obligation to deposit the tax.
(viii) The provisions relating to origin and reverse charge shall apply notwithstanding any other
provision of this Act or the rules and the Government may specify special procedure to
regulate the provisions of this section.
c) i) Activities which are regarded to be excluded from the ambit of ‘Economic activity’:
[Section 6(2) Punjab Sales Tax on Services Act, 2012]
Person means:
an individual;
a company;
an association of persons;
Federal Government;
a provincial Government;
a local authority or local government; or
(i) Sixty days, one hundred and twenty days, Additional Commissioner Inland Revenue, Board,
nine months. [Section 10(3)]
(ii) a taxable supply, the first charge on the assets, transferee of business. [Section 49)1]
(iii) Nil [11th Schedule of Sales Tax Act, 1990]
In the light of the provisions of Federal Excise Act, 2005, fill in the following blanks with the appropriate
answers.
(i) Every person who for any reason whatever has collected any duty in excess of the duty actually
payable and the incidence of which has been passed on to the consumer, shall pay the amount
so collected to the Federal Government.[Section 11]
(ii) “Non-tariff area” means Azad Jammu and Kashmir, Northern Areas and such other territories or
areas to which the Federal Excise Act does not apply.[Section 2(17)]
(iii) “Establishment” includes an undertaking, firm or company, whether incorporated or not, an
association of persons and an individual.[Section 2(10)]
(iv) “Distributor” means a person appointed by a manufacturer in or for a specified area to purchase
goods from him for sale to a wholesale dealer in that area.[Section 2(8)]
116 RECORDS
Where any services are liable to duty under Federal Excise Act at a rate dependent on the charges
therefore, the duty shall be paid on total amount of charges for the services including the ancillary
facilities or utilities, if any, irrespective whether such services have been rendered or provided on
payment of charge or free of charge or on any concessional basis.
(iv) In case of goods produced or manufactured in non-tariff areas and brought to tariff areas for sale
or consumption therein, of the person bringing or causing to bring such goods to tariff areas.
In relation to furnishing a return under the FEA, 2005, means the 15th day of the month following
the end of the month, 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.
Evaded duty; or
If a person does not pay the duty due or any part thereof within the prescribed time or receives a
refund of duty or drawback or makes an adjustment which is not admissible to him, he shall, in addition
to the duty due, pay default surcharge at the rate of 12% per annum of the duty due, refund of duty or
drawback.
‘conveyance’ means any means of transport used for carrying goods or passengers such as
vessel, aircraft, vehicle or animal etc.
Notwithstanding the provisions of this Act or the rules made thereunder, where a registered person
pays the amount of duty less than the duty due as indicated in his return, the short paid amount
of duty along with default surcharge shall be recovered from such person by stopping removal of
any goods from his business premises and through attachment of his business bank accounts
without prejudice to any other action under the Federal Excise Act or the rules made thereunder:
Provided that no penalty under this Act or rules made thereunder shall be imposed unless a show
cause notice is given to such person.
(iv) Particulars to be stated on the invoice issued at the time of providing services: [U/S 18]
A registered person shall be required to issue serially numbered invoice for each transaction at
the time of providing or rendering services containing the following particulars:
Any person who employs hired labour in the production or manufacture of goods; or
Any person who engages in the production or manufacture of goods on his own account if
such goods are intended for sale: and
Any person who, whether or not he carries out any process of manufacture himself or
through his employees or any other person, gets any process of manufacture carried out on
his behalf by any person who is not in his employment.
Provided that any person so dealing in goods shall be deemed to have manufactured
for all purposes of this Federal Excise Duty Act, such goods in which he deals in any
capacity whatever;
Sales tax mode means the manner of collection and payment under the Sales Tax Act, 1990, and
rules made thereunder, of the duties of excise chargeable under the Federal Excise Act specified
to be collected and paid as if such duties were tax chargeable under section 3 of the Sales Tax
Act and all the provisions of the Sales Tax Act and rules, notifications, orders and instructions
made or issued thereunder shall, mutatis mutandis, apply to the excise duty so chargeable.
Cancelation of the registration: [Rule Section 150K 11of Sales Tax Rules, 2006Act, 1990]
In case a person ceases to provide or render excisable services, he shall apply to the Collector for
cancellation of his registration in the Form STR-3and the Collector may, after such enquiry or audit as
he may deem fit to have, cancel the registration of that person from such date as may be specified, but
not later than three months from the date of such application or the date on which all the dues under the
Act or these rules and arrears, if any, outstanding against such person are deposited by him, whichever
is later.
Type of goods and services on which excise duty is liable to be charged in sales tax mode:
Excise duty on goods specified in second schedule of the FEA, 2005 or such services as may be
specified by the Board by way of Gazette notification shall be liable to be paid in sales tax mode.