Principles of Taxation

Suggested Solution # 12 - (Mock Solution)

Sol # 1:
Ali Mir
Computation of Taxable Income and Income Tax Liability
For the tax year 2021
Rupees
Income from salary:
Salary from employment 1,493,200
Income from property:
Gross property income 960,000
Less: amount received against watchman services (180,000)
780,000
Less: expenses incurred
(No deduction is allowed to an individual against property income) -

780,000
Income from business:
Business income 725,000
Less: consideration for vacating the possession (120,000)
deemed income- other source (92,000)
gain on sale of derivative products- capital gain (125,000)
388,000
Add: loss on speculation business 430,000
818,000
Income from foreign speculation business 500,000
Less: loss on local speculation business (430,000)
70,000
888,000
Capital gain on sale of securities: (Separate block)
Gain on sale of derivative products 125,000
Less: brought forward loss on sale of listed shares
(-)
(Loss on sale of listed shares cannot be b/f)
125,000
Income from other source:
Other source income 1,050,000
Add: consideration received with rent for watchman’s services 180,000
Less: actual salary paid to the watchman (168,000)
12,000
Services provided as a visiting faculty member 380,000
Less: expenditure incurred for providing the service (20,000)
360,000
Add: consideration for vacating the possession 120,000
Less: amount paid for acquiring the possession (60,000)
60,000
1/10th shall be charged to expense (60,000 ÷ 10) 6,000
Deemed income 92,000
Return on investment in sukuks *175,000
1,695,000
Total income 4,981,200
Less: FTR/Exempt Separate block income:
 Income from property- separate block (780,000)
Gain on sale of derivative products - separate block (125,000)
Return on investment in sukuks - separate block (175,000)
(1,080,000)
Add: Loss on sale of agricultural produce (income is exempt) 65,000
(1,015,000)
3,966,200
Less: tuition fees of children
(Since taxable income is more than Rs. 1,500,000 no deduction is (-)
allowed)
Taxable income 3,966,200

Marking Scheme:
Income from Salary 0.5 Mark
Income from Property 2.5 Marks
Income from Business 3.5 Marks
Capital Gains 2 Marks
Income from Other Source 4 Marks
Total Income 0.5 Mark
Total Incomes under FTR/SBI 1.5 Mark
Taxable Income 0.5 Mark

Sol # 2:
a) "Rent" means:
a) any amount received or receivable by the owner of land or a building as consideration for the use or
occupation of, the land or building; and
b) a forfeited deposit paid under a contract for the sale of land or a building.

b) Under the provisions of Income Tax Ordinance, 2001 , the deductions are allowed in case of company
under the head income from property , while no deductions are allowed in case of Individual or AOP under
FTR.
However, the option is granted to the Individual or AOP to opt the NTR. So, if the individual or AOP opts the
option of NTR then the deductions will be allowed of the expenses that were incurred for deriving such
income.

c) Full Time Teacher Allowance:

The tax payable by a full time teacher or a researcher, employed in a non-profit education or research
institution duly recognized by Higher Education Commission, a Board of Education or a University recognized
by the Higher Education Commission, including government training and research institution, shall be
reduced by an amount equal to 25% of tax payable on his income from salary.

d) Foreign Source Salary of Resident Individuals:

1. Any foreign-source salary received by a resident individual shall be exempt from tax of the individual
has paid foreign income tax in respect of the salary.
2. A resident individual shall be treated as having paid foreign income tax in respect of foreign-source
salary if tax has been withheld from the salary by the individual’s employer and paid to the revenue
authority of the foreign country in which the employment was exercised.
e)
(i) Treatment of grant, subsidy, rebate etc.
If the said grant is not chargeable to tax as income of the said person such as Grant under Clause 102A of Part-
I of Second Schedule), the said amount shall be deducted from the cost: and If the said grant etc. is chargeable
to tax then said amount should not be deducted.
(ii) Treatment of Cost of asset which becomes the property of a Person, otherwise than actual purchase
The circumstances where the capital asset becomes the property of the person, otherwise than actual purchase
or self-construction
The fair market value of such asset, on the date of its transfer or acquisition by the person, shall be treated to
be the cost of the asset.

f)
Mr. Shahid
Computation of Taxable Income and Tax Liability Rs.
Income from Business (Unadjusted) 7,140,000
Less: Contribution to approved pension fund (1,640,000)
Taxable Income 5,500,000
Computation of tax liability:
Tax on Rs. 5,500,000 [620,000 + 30% x (5,500,000 – 4,000,000)] 1,070,000
Less: Tax credit on contribution to approved pension fund:
Tax credit shall be allowed on lower of:
(a) Actual amount of contribution i.e. Rs. 1,640,000 or
(b) 30% (instead of 20% with each year above 40 years there is
2% increase in percentage) of taxable income i.e. Rs. 1,650,000
with cap of 30% of preceding year taxable income 1,635,000 (i.e.
Rs. 5,450,000 x 30%)
Hence the lower is Rs. 1,635,000 entitled for tax credit under
this section:
Tax credit (1,635,000 x 1,070,000 / 5,500,000) (318,082)
Tax liability 751,918

Marking Scheme:
(a) Definition 3 Marks
(b) 1 Mark for Explanation of Company & 2 Marks for 3 Marks
Explanation of Individual or AOP
(c) Explanation 2 Marks
(d) Explanation 2 Marks
(e)
(i) Treatment 2 Marks
(ii) Treatment 2 Marks
(f)
Taxable Income 2 Marks
Tax Liability 1 Mark
Tax Credit 2 Marks

Sol # 3:
1) A company shall be a resident company for a tax year if:
 it is incorporated or formed by or under any law in force in Pakistan; or
 the control and management of the affairs of the company is situated wholly in Pakistan at any
time in the year
 In the given situation the foreign company is registered under the Companies Act, 2017, so it is a
resident company under the Income Tax Ordinance, 2001.
2) An association of persons shall be a resident association of persons for a tax year if the control and
management of the affairs of the association is situated wholly or partly in Pakistan at any time in the
year.
In the given situation the control and management of the affairs of the association was situated partly
in Pakistan so it is a resident AOP.
3) Under the provisions of Income Tax Ordinance, 2001 an individual is considered as resident if he
stayed 183 days (in aggregate) or more in the current tax year or he stayed 120 days (in aggregate) or
more in the current tax year and stayed 365 days (in aggregate) or more in the proceeding 4 tax years
in Pakistan.
In the given situation, Mr. Asad is present in Pakistan for 182 days (in aggregate) in the tax year 2020
and during the proceeding last 4 tax years he was present in Pakistan for 365 days (in aggregate) as
the day of in transit between two places outside Pakistan is not included so Mr. Asad is a resident
individual.
Marking Scheme:
1) 1 Mark for Provision and 1 mark for decision 2 Marks
2) 1 Mark for Provision and 1 mark for decision 2 Marks
3) 1.5 Marks for provision , 1.5 Marks for correct 4 Marks
calculation of number of days & 1 Mark for Decision.
Sol # 4:
(a)
Mr. Hamza
Computation of Tax liability
Rs.
Capital Gains
Gain on sale of Shares:
Consideration received 750,000
Less: Cost of the Shares:
Amount of Employee share scheme under “Salary”
570,000
(15,000 x 38)
Less: Amount paid (240,000)
(330,000)
Taxable Income 420,000

Tax Liability
1,000
(20,000 x 5%)

(b)

Claimed Allowed Recovered Taxable

(i) 600,000 410,000 240,000 50,000
(ii) 600,000 410,000 160,000 (30,000)

Marking Scheme:
(a)
Mention the correct head of income 1 Mark
Consideration received 1 Mark
Cost of Shares 1 Mark
Taxable income 1 Mark
Tax liability 1 Mark
(b)
 (i) Taxable Amount 2 Marks
(ii) Taxable Amount 2 Marks

Sol # 5:
(a) According to the provisions of Income Tax Ordinance, 2001 , Extension in time for filing of Return does not
extend the due date for payment of tax. Default surcharge U/S 205 will be charged.
So, in the given situation Mr. Kamran Malik shall have to pay the amount of default surcharge in addition to
the tax payable (Rs. 2,474,750) by him.
Default surcharge will be paid at the rate that may be specified under the provisions of Income Tax
Ordinance, 2001 and Rules made thereunder.

(b)
(i) Tax short paid/evaded plus default surcharge but NO penalty
(ii) Tax pointed out by CIR Plus default surcharge Plus 25% of penalty
(iii) Tax evaded plus default surcharge Plus 50% of penalty

(c)
(i) The Commissioner may give notice to a person to furnish a return for a period of less than 12 months, if
(a) the person has died;
(b) the person has become bankrupt or gone into liquidation;
(c) the person is about to leave Pakistan permanently;
(d) the Commissioner otherwise considers it appropriate to require such a return to be furnished.
The return will be furnished by the due date specified in the notice.
(ii) The Commissioner may, if a taxpayer fails to furnish return of income as required, based on any available
information or material and to the best of his judgment, make a provisional assessment of the taxable
income and issue a provisional assessment order specifying the taxable income and the tax due thereon.
The provisional assessment order is treated to be as the final assessment order after the expiry of forty -five
days from the date of service of order of provisional assessment;

Marking Scheme:
(a)
1.5 Mark for law reference and 1.5 Mark for the explanation 3 Marks
(b)
(i) Explanation 1 Mark
(ii) Explanation 1 Mark
(iii) Explanation 1 Mark
(c)
(i) Explanation 3 Marks
(ii) Explanation 3 Marks

Sol # 6:
(a)
Anaconda Limited (AL)
Computation of Net Sales Tax Liability
For the tax period November 2021

Taxable Sales Tax Amount of

SALES TAX CREDIT (INPUT TAX)
Value Rate Sales Tax
Purchases from registered suppliers
(4,350 – 520 – 350 – 970 – 240 – 210) 2,060,000 17% 350,200
 Semi manufactured goods 520,000 Inadmissible -
Packing material 350,000 17% 59,500
Storage batteries - no extra tax 970,000 17% 164,900
Cooking ranges 240,000 17% 40,800
Goods under DTRE 210,000 0% 0
Purchases from un-registered suppliers 2,280,000 Inadmissible -
Import of compressor scrap 1,200,000 Inadmissible -
Import of finished sports footwear 1,735,000 17% 294,950
Value addition 3% -
Overhauling services 125,000 Inadmissible -
Input Tax for the month 910,350

SALES TAX DEBIT (OUTPUT TAX)

Taxable supplies to registered persons 6,752,000 17% 1,147,840
Red chillies in retail packing 435,000 17% 73,950
Supply of sugar to Pharma Co. 28,000 - -
Supply of cooking ranges 285,000 17% 48,450
Supply of foam- un-registered person-liable to be 1,295,000 17% 220,150
registered
Supply of goods on credit- un-registered 680,000 17% 115,600
(686,800 ÷ 1.01)
Supply of goods to un-registered end consumers 1,068,200 17% 181,594
Output tax for the month 1,787,584
Further tax on foam- not for household use - [1,295,000×3%] 38,850
Further tax on credit sale - liable to be registered-[680,000×3%] 20,400
Further tax on sale to un-registered end consumers -
Further tax erroneously collected - incidence passed to consumer paid to Federal
Government 162,000
Admissible credit (lower of 910,350 or 90% of 1,787,584 = 1,608,826) (910,350)
Sales tax payable 1,098,454
Input tax to be carried forward Nil

Marking Scheme:
(a)
Purchases from registered suppliers 2 Mark
Semi manufactured goods 0.5 Mark
Packing material 0.5 Mark
Storage batteries - no extra tax 0.5 Mark
Cooking ranges 0.5 Mark
Goods under DTRE 0.5 Mark
Purchases from un-registered suppliers 0.5 Mark
Import of compressor scrap 0.5 Mark
Import of finished sports footwear 0.5 Mark
Value addition 0.5 Mark
Overhauling services 0.5 Mark
Input Tax for the month 0.25 Mark

SALES TAX DEBIT (OUTPUT TAX)

Taxable supplies to registered persons 1 Mark
Red chillies in retail packing 0.5 Mark
 Supply of sugar to Pharma Co. 0.5 Mark
Supply of cooking ranges 0.5 Mark
Supply of foam- un-registered person-liable to be registered 0.5 Mark
Supply of goods on credit- un-registered 0.5 Mark
Supply of goods to un-registered end consumers 0.5 Mark
Output tax for the month 0.25 Mark
Further tax on foam- not for household use 0.5 Mark
Further tax on credit sale - liable to be registered 0.5 Mark
Further tax on sale to un-registered end consumers 0.5 Mark
Further tax erroneously collected - incidence passed to 0.5 Mark
consumer paid to Federal Government
Admissible credit 1 Mark
Sales tax payable 0.25 Mark
Input tax to be carried forward 0.25 Mark

(b)
(i) Tier-1 retailers means:
 a retailer operating as a unit of a national or international chain of stores;
 a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;
 a retailer whose cumulative electricity bill during the immediately preceding twelve consecutive months
exceeds Rupees six hundred thousand;
 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
 a retailer, whose shop measures one thousand square feet in area or more. a retailer, whose shop
measures one thousand square feet in area or more.

Sales Tax on Tier 1 Retailers

 Notwithstanding anything contained in this Act, Tier-1 retailers shall pay sales tax at the rate as
applicable to the goods sold under relevant provisions of this Act or a notification issued there under:
 Provided that the customers of a Tier-1 retailer shall be entitled to receive a cash back of up to five
percent of the tax involved, from such date in the manner and to the extent, as may be prescribed by the
Board:
 Provided further that from such date, and in such mode and manner, as prescribed by the Board, all Tier-
1 retailers shall integrate their retail outlets with Board’s computerized system for real-time reporting
of sales.
(ii) A registered person may be liable for deregistration due to any of the following reasons:
(i) He ceases to carry on his business;
(ii) His supplies become exempt from tax;
(iii) He transfers or sells his business;
(iv) Merger with another person; or
(v) Failure to file tax return for six consecutive months.
(iii) Features Distinguishing the concept of Zero rating from Exempt supply:
Distinction Points Zero Rated Supply Exempt Supply
Registration A person engaged in zero rated A person engaged exclusively in
supplies has to be registered with the exempt supplies is not liable to
the sales tax department be registered
Input Tax Credit Input tax paid related to zero Input tax paid related to exempt
rated supplies is refundable. supplies is inadmissible ,
 therefore , neither adjustable nor
refundable
Marking Scheme:
(b)
(i)
Definition 3 Marks
Taxability 3 Marks
(ii) Mention the circumstances 3 Marks
(iii) 1 Mark for each point of difference 2 Marks

Sol # 7:

(a) Strategies of Taxation Management

Tax practitioners and taxpayer normally adopts any of the following technique to lessen tax burden:

Tax Avoidance
It is generally the legal exploitation of the tax regime to one's own advantage, to attempt to reduce the amount
of tax that is payable by means that are within the law whilst making a full disclosure of the material
information to the tax authorities. Examples of tax avoidance involve using tax deductions, changing one's
business structure through incorporation or establishing an offshore company in a tax haven.

Tax Evasion
It is the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes by
illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state
of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax
reporting (such as under declaring income, profits or gains; or overstating deductions).

(b) Three approaches of tax compliance

There are three approaches to ethics for tax compliance which are as under:
1) Utilitarianism is a theory in normative ethics holding that the proper course of action is the one that
maximizes utility, usually defined as maximizing total benefit and reducing suffering or the negatives.
In simple words, it is the way one helps himself in the art of decision-making.
2) Deontology, It is described as "duty" or "obligation" or "rule"-based ethics, because rules "bind you
to your duty."
3) Virtue ethics, focus less on lying in any particular instance and instead consider what a decision to
tell a lie or not tell a lie said about one's character and moral behavior. As such, the morality of lying
would be determined on a case-by-case basis, which would be based on factors such as personal
benefit, group benefit, and intentions.
(c) Federal consolidated fund:
All revenues received and loans raised by the Federal Government, and all monies received by it in repayment
of any loan, shall form part of a consolidated fund, to be known as the Federal Consolidated Fund.

Marking Scheme:
(a)
Tax Avoidance 1.5 Marks
Tax Evasion 1.5 Marks
(b)
Utilitarianism 2 Marks
Deontology, 1 Mark

Virtue ethics 2 Marks

(c) Definition 2 Marks