ADVANCED TAXATION

Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

Ans.1 Rozgar (Pvt) Limited (RPL)

Computation of Taxable Income and Income Tax Liability
For the tax year 2018

Income from Business: Rupees

Profit before taxation 22,905,000
Add: / (Less): Inadmissible expenses / (income)
Sale of milled limestone and marble-Export – Opt out of FTR -
Purchase of raw material without deduction of tax -
Bad debt written off 175,000
Penalty for non-payment of sales tax in time 75,000
Donation to educational institution 5,150,000
Securing overdraft facility -
Export of IT services – exemption not applicable (1,800,000)
Fee for technical services – from Sri Lankan Co. (540,000)
Withholding tax on technical services paid by RPL Note-1 81,000
Unrealized gain on revaluation of foreign currency debtors (2,600,000)
Dividend-in-specie – Separate consideration (875,000)
Gain on sale of securities in FL – FTR income separate consideration (30,000)
Gain on borrowed capital (300,000)
Mark-up on borrowed capital 60,000
Total business income for the year A 22,301,000

Capital Gain:
Gain on sale of securities in FL [(38–0 × 10,000) 380,000
Gain on borrowed securities (W-1) 222,750
B 602,750
Other source income:
Dividend-in-specie - FTR 875,000
Export of IT services – exemption not applicable 1,800,000
C 2,675,000

Total income for the year (A+B+C) 25,578,750

Less: FTR/Separate block income:

Dividend-in-specie – FTR (875,000)
Gain on sale of securities in FL (380,000)
Gain on borrowed securities (222,750)
(1,477,750)
Taxable income for the year under NTR 24,101,000

Computation of net tax liability:

Tax regime [as opt out of FTR] NTR
Tax on taxable income [24,101,000 @ 30%] 7,230,300
Less: Tax credit
Donation (library building) [4,820,200 × (7,230,300 ÷ 24,101,000)] (1,446,060)
Net tax payable under NTR 5,784,240
Tax on dividend-in-specie -FTR [875,000 @ 15%] 131,250
Tax on gain on sale of securities in FL – FTR [380,000 × 15%] 57,000
Tax on gain on borrowed securities [222,750 × 15%] 33,413
Gross tax payable 6,005,903

Less: Tax deduction at source:

Advance tax paid u/s 147 (2,860,000)
Advance tax u/s 154 (minimum tax) [85,000,000 × 80% × 1%] (680,000)
Tax deducted u/s 236S (Dividend-in-specie) (131,250)
(3,671,250)
2,334,653
Add: tax @ 7.5 % on RPL’s accounting profit before tax for non-distribution of at least
40% of its after tax profit through cash/bonus shares [(22,446,000×7.5%] 1,683,450
Net tax payable 4,018,103
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 ADVANCED TAXATION
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

Note-1
Tax paid by RPL u/s 152 (1) on fee for technical services @ 15% on services provided by the
Sri Lankan company shall be recoverable from the provider of the services and in case of non-receipt
it would be treated as RPL’s expenditure.

Working - W-1
Net gain / loss of the borrower No. of shares Price Amount
Sale of borrowed securities 15,000 125 1,875,000
Repurchase of securities and returned to the lender (15,000) 105 (1,575,000)
O.50% of sale proceeds as incidental expenses on (9,375)
sale
0.50% of repurchase price being incident expenses
on acquisition (7,875)
Financial cost paid to the lender [15,000×10%×120×4÷12] (60,000)
Net gain /(loss) 222,750

W-2: Adjusted accounting profit before tax:

Profit as per accounts 22,905,000
Add: withholding tax on technical fees 81,000
fee for technical services- not booked (540,000)
Adjusted accounting profit 22,446,000

Ans.2 (a) (i) Return of income: (when considered to be invalid):

If any of the following conditions is not fulfilled, the return furnished shall be
treated as an invalid return as if it had not been furnished:

1. it is accompanied by the revised accounts or revised audited accounts, as

the case may be;
2. the reasons for revision of return, in writing, duly signed by the taxpayer
are filed with the return
3. it is accompanied by approval of the Commissioner in writing for
revision of return; and
4. taxable income declared is not less than and loss declared is not more
than income or loss, as the case may be, determined by an order issued
under sections 121, 122, 122A, 129, 132, 133 or 221

However, the condition specified in 3. above shall not apply if the revised
return is filed within sixty days of filing of return.

(ii) Return of income: (when penalty is not to be paid):

If a taxpayer files a revised return voluntarily along with deposit of the amount
of tax short paid or amount of tax sought to be evaded along with the default
surcharge, whenever it comes to his notice, before receipt of notice, calling for
audit (under sections 177) or providing an opportunity of being heard before
amending or further amending the assessment (sub-section(9) of 122), no
penalty shall be recovered from him:

(b) “MNE group” means any group that

(i) includes two or more entities the tax residence for which is in different
jurisdictions or includes an entity that is resident for tax purposes in one
jurisdiction and is subject to tax with respect to the business carried out through
a permanent establishment in another jurisdiction; and
(ii) has a total consolidated group revenue equivalent to seven hundred and fifty
million euros or more, or an equivalent amount in Pakistan Rupees, during the
fiscal year immediately preceding the reporting fiscal year as reflected in its
consolidated financial statements for such preceding fiscal year.
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 ADVANCED TAXATION
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

(c) Paragon Limited (PL)

Computation of taxable income
For the tax year 2018
Rupees
Income from property:
Rent of plot of land [higher of (240,000 × 12) or (200,000 × 12)] 2,880,000
Add: 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.)
Less: expenses incurred on land
Repairs 1/5th of rent (ground levelling expenses) -
(Admissible only against the rent of the building)
Property tax (150,000)
Rent collection charges (6% of 2,880,000 = Rs. 172,800 ) (12,000)
(Lower of actual expenditure or 6% of rent is admissible)
Interest accrued on mortgage [not available as not paid] -
Insurance premium [not available on land] -
(162,000)
Taxable income 2,718,000

Ans.3 (a) HL (Pvt) Limited (HL)

Computation of Taxable Income and Income Tax Liability

Income from Business: Rupees

Profit before taxation 11,000,000
Less: Other source income:
Royalty – exempt (950,000)
Profit on debt (100,000)
Rent – exempt being agricultural income (600,000)
Gain on disposal of immov. property – separate consideration (450,000)
Total business income for the year 8,900,000
Less: loss surrendered by AB Note(1) -
Net business income A 8,900,000

Income from other source:

Profit on debt B 100,000

Taxable income for the year under NTR (A+B) 9,000,000

Computation of net tax liability:

Tax on taxable income [9,000,000 @ 30%] 2,700,000
Gain on immov. property.[450,000×10%] 45,000
Gross tax payable 2,745,000
Less: Tax deduction at source:
Advance tax paid u/s 151 (adjustable tax) (10,000)
Advance tax paid u/s 153 (2,440,000)
(2,450,000)
Net tax payable 295,000

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 ADVANCED TAXATION
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

Note:1
In order for AB to surrender its assessed losses in favour of HL (its holding company),
it is necessary that HL must directly hold seventy-five percent or more of the share
capital in AB, as none of the companies in the group is a listed company. However,
since HL’s holding in AB is only limited to seventy percent, AB is not qualified to
surrender its losses in favour of HL.

(b) AB is a 98% owned subsidiary of HL

In this scenario, since HL’s holding in AB is more than 75% (AB is a 98% owned
subsidiary of HL) therefore, AB can surrender its assessed losses in favour of HL.

Total business income for the year (as per (a) above) 8,900,000
Less: loss surrendered by AB
Assessed loss for tax year 2018 9,800,000
Less: losses not allowed to be surrendered:
Capital loss- on sale of shares of an un-listed company (500,000)
Loss on sale of a delivery truck -
Loss on sale of a rare manuscript -
Brought forward losses from tax year 2017 -
9,300,000
The amount of loss acquired would be restricted to the extent
of holding in AB [9,300,000 × 98/100] 9,114,000 (8,900,000)
Loss in excess of business income would be carried forward for
adjustment in tax year 2019. [9,114,000 – 8,900,000] 214,000
Net business income A -

Income from other source:

Profit on debt B 100,000

Taxable income for the year under NTR (A+B) 100,000

Computation of net tax liability:

Tax on taxable income [100,000 @ 30%] 30,000
Gain on immovable property [450,000 × 10%] 45,000
Gross tax payable 75,000
Less: Tax deduction at source:
Advance tax paid u/s 151 (adjustable tax) (10,000)
Advance tax paid u/s 153 (2,440,000)
(2,450,000)
Net tax refundable (2,375,000)

Cash transferable by HL to AB:

The amount of cash to be transferred to AB is equal to the amount of tax
payable by HL on the profits to be set off against the acquired loss at the
applicable rate of 30%. (8,900,000 × 30%) 2,670,000

Ans.4 (a) Powers to deliver certain goods without payment of tax:

Subject to such conditions, limitations or restrictions as it thinks fit to impose, the
Board with the approval of the Federal Minister in-charge may authorise the import
of goods or class of goods, without payment of the whole or any part of the tax
payable thereon to the following persons, namely: –

(i) registered importers importing such goods temporarily with a view to

subsequent exportation;
(ii) registered manufacturer-cum-exporters who import raw materials and
intermediary products for further manufacture of goods meant for export.
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 ADVANCED TAXATION
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

(b) Following persons may be regarded as the withholding agents:

(i) federal and provincial government departments;
(ii) autonomous bodies;
(iii) public sector organizations;
(iv) companies as defined in the Income Tax Ordinance, 2001 (XLIX of 2001),
which is registered for sales tax, federal excise duty or income tax;
(v) recipients of service of advertisement, who are registered for sales tax.
(vi) persons registered as exporters.

(c) Audit selection parameters:

Risk parameters to be used for balloting, wherever necessary, shall be determined by
the Board;

Audit selection parameters may be based upon the following:-

(i) Financial ratios for the year viz. a viz. the history of the case;
(ii) Financial ratios viz. a viz. industrial, sectoral or national ratios;
(iii) Industrial comparisons or bench marks;
(iv) Quantum of losses or refunds beyond certain thresholds;
(v) Compliance history.

(d) (i) A taxable service shall be considered to have been provided in the tax period
during which:
 it was provided to the recipient;
 an invoice for the value of the taxable service was issued or was due to
be issued or sent or due to be sent to the recipient; or
 consideration for the same was received.
Whichever is earlier.

(ii) Suspension of registration:

Where, after sixty days, the suspension has not been withdrawn, the
Board/Authority may:
 institute proceedings against the person in respect of the alleged
non-compliance under this Act;
 reinstate the person's registration; or
 if neither of the action in above clauses is done, cancel the persons
registration.

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 ADVANCED TAXATION
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

Ans.5 Rahmate Ramzan Limited (RRL)

Computation of Net Sales Tax Liability
For the tax period May 2018

Taxable Sales Tax Amount of

SALES TAX CREDIT (INPUT TAX)
Value Rate Sales Tax
Purchases from registered suppliers 2,000,000 17% 340,000
Goods destroyed during manufacturing 200,000 17% 34,000
Electric bulbs and Tel. sets 2,800,000 17% 476,000
Purchases from un-registered suppliers 2,345,000 Inadmissible -
Import of agricultural tractors- Eight sch. 1,017,500 5% 50,875
Value addition 3% 30,525
Import of agricultural equipment- Eight sch. 832,500 Inadmissible -
Input Tax for the month 931,400

SALES TAX DEBIT (OUTPUT TAX)

Taxable supplies to registered persons 3,875,000 17% 658,750
Lubricating oil 1,500,000 17% 255,000
Supply of 200 fans in EPZ – finished product 700,000 17% 119,000
Supply of electronic components in EPZ – raw material 300,000 0% 0
Supply of packing machine to un-registered person 2,500,000 17% 425,000
Supply of stores on a Islamabad flight 125,000 17% 21,250
Taxable supplies to un-registered persons 3,475,000 17% 590,750
Supplies to Sarwat Kirmani - liable to be registered 875,000 17% 148,750
Output tax for the month 2,218,500
Sales tax withheld from un-registered supplier of 3rd Schedule items (1,280,000×1/117) 10,940
[Rule 5 of the Sales Tax WH Rules, 2007 is applicable only if supply is made by the registered person.]
Sales tax withheld from un-registered supplier of 6th Schedule items -
Extra tax on lubricating oil @ 2% [1,500,000×2%] 30,000
Further tax on packing machine-liable to be registered - [2,500,000×2%] 50,000
Further tax on sale to Sarwat Kirmani - liable to be registered - [875,000×2%] 17,500
Further tax on sale to cottage industry - not liable to be registered -
Admissible credit (lower of 931,400 or 90% of 2,218,500 = 1,996,650 (931,400)
Sales tax payable 1,395,540
Input tax to be carried forward Nil

Ans.6 (a) Default surcharge:

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 KIBOR plus three per cent per annum of the duty due, refund of duty or
drawback.

The duration of time which may be considered as a period of default:-

(i) the period of default shall be reckoned from the date following the due date on
which the duty was payable to the preceding day on which the duty is actually
paid; and
(ii) in case of inadmissible adjustment or refund of duty or drawback, the period of
default shall be reckoned from the date of such adjustment or as the case may
be, date of refund of duty or date of receipt of drawback.

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 ADVANCED TAXATION
Suggested Answers
Certified Finance and Accounting Professional Examination – Summer 2018

(b) (i) Recovery of unpaid duty:

Since Shahrukh’s failure to levy the duty was due to misconstruction a show-
cause notice was required to be serviced on him provided such notice was
issued within five years from the relevant date i.e. the date on which the
payment of duty was due (which in this case is 15th August 2014). Therefore,
the Officer Inland Revenue was justified in serving the show cause notice to
Shahrukh.

(ii) The Officer Inland Revenue is required to make the order within one hundred
and twenty days (120 days) of issuance of show cause notice i.e. on or before 1
May 2018 or within such extended period as the Commissioner may, for
reasons to be recorded in writing, fix, provided that such extended period shall
in no case exceed sixty days (60 days). i.e. not exceeding 30 June 2018.

Provided that any period during which the proceedings are adjourned on
account of a stay order or Alternative Dispute Resolution proceedings or the
time taken through adjournment by the petitioner not exceeding thirty days (30
days) shall be excluded from the computation of the periods specified above.

Ans.7 (a) Pillars of tax administration:

In order to safeguard the interest of taxpayers and avoid abuse of powers by the tax
administration, following four pillars of Tax administration are defined:

(i) Fairness
Tax authorities should strive to be impartial, fair, neutral and consistent in
administering the law without regard to race, social or economic
circumstances.

(ii) Transparency
All Proceedings must be transparent and must be seen as transparent.

(iii) Equity
Best tax administration depends on the manner of revenue generation i.e.
whether all stakeholders are taxed fairly or tax is collected from the
poor/salaried class after failing to collect taxes from entrepreneurs/ businesses.
Thus, equity demands collection of tax in a rational manner.

(iv) Accountability
There must be a strong system of accountability for wrong doers which should
curb corruption, nepotism and maladministration.

(b) Tax evasion:

It refers to all attempts to minimise a taxpayer’s liability through illegal means. It is a
punishable offence in the eyes of law.

Tax avoidance:
It refers to all attempts to minimise a taxpayer’s liability through legal means and
without violating the tax laws.

(The End)

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