EXAMINATION NO.

______________________

2017 EXAMINATIONS – KNOWLEDGE LEVEL

PAPER P6 : PRINCIPLES OF TAXATION

TUESDAY 6 JUNE 2017 TIME ALLOWED: 3 HOURS

9.00 AM - 12.00 NOON
INSTRUCTIONS:

1. You are allowed 15 minutes reading time before the examination begins during which you
should read the question paper and, if you wish, make annotations on the question paper.
However, you are not allowed, under any circumstances, to open the answer book and start
writing or use your calculator during this reading time.

2. Number of questions on paper – 7.

3. The paper is divided into TWO Sections, A and B. Answer BOTH questions in Section A and
ANY THREE from Section B.

4. Each question carries 20 marks.

5. Use of non-programmable calculators is allowed.

6. You are provided with the following:

(i) A set of tables containing rates of tax on taxable income (Table 1).
(ii) Rates of capital allowances (Table 2).
(iii) Penalty rates for underpaid provisional tax (Table 3).

7. Begin each answer on a fresh page.

8. DO NOT OPEN THIS PAPER UNTIL YOU ARE INSTRUCTED BY THE

INVIGILATOR.
This question paper contains 12 pages.

This question paper must not be removed from the examination hall.
 SECTION A- ANSWER BOTH QUESTIONS
1. (a) Thandeka Limited is a company incorporated in Malawi and operates from
Kanengo Industrial site. The company manufactures cartons which it sells locally.
The company’s latest income statement for the year ended 30 June, 2016 is as
follows:

Note K
Sales 77,297,750
Cost of sales 1 (46,378,650)
Gross profit 30,919,100
Selling expenses 2 (8,540,000)
Administration expenses 3 (16,800,230)
Finance costs 4 (5,901,300)
Other income 5 3,185,000
Profit before tax 2,862,570

The following additional information in connection with the income statement is

available:

(1) Cost of sales

Cost of sales includes the following:

K
Cost of raw materials 32,465,055
Plant depreciation 2,318,930
Factory salaries and wages 3,763,860
Penalty – not following Malawi Bureau of Standards rules 660,850
Bonuses – provision for current year bonuses 1,947,970
Bonuses – provision for last year but paid in current year 863,560
Other allowable expenses 4,358,425
46,378,650

(2) Selling expenses comprise the following:

K
Commissions for sales persons 1,341,600
VAT on advertisements 85,400
Fuel, tyres and repairs for delivery vans 4,270,000
Depreciation for delivery vans 427,000
Other allowable expenses 2,416,000
8,540,000

Continued/……

Page 2 of 12
 (3) Administration expenses comprise:
K
Audit fees 3,495,000
Debt collection 137,250
Bad debts written off 98,540
Provision for bad debts – 2% of debtors 1,516,470
Property valuation 1,530,000
Stamp duty – increase on share capital 2,400,000
Subscription – Production magazine 276,400
Fringe benefits tax 2,356,700
Donations – Malawi Against Physical Disabilities 600,000
Donations to the Institute of Chartered Accountants in
Malawi (ICAM) conference 500,000
Other allowable expenses 3,889,870
16,800,230

(4) Finance expenses:

K
Interest on bank overdraft 4,694,184
Interest on late payment of PAYE 567,000
Interest on loan on feasibility study on new cartons 640,116
5,901,300

(5) Other income:

K
Profit on disposal of old machine 340,000
Sale of scrap metal 623,000
Dividends received 950,000
Interest from staff loans 867,000
Exchange gain – conversion of foreign creditors to
Malawi Kwacha at year end 405,000
3,185,000

Required:

Compute the taxable income for Thandeka Limited for the year ended 30 June
2016. 7 Marks

(b) (i) Mention the characteristic of Value Added Tax (VAT) as a form of tax.
1 Mark
(ii) State any three advantages of taxes that have a characteristic like that of
VAT. 3 Marks

Continued/…..

Page 3 of 12
(iii) The following transactions were recorded in the books of a VAT registered
taxpayer for the month of September 2016:

Business related expenditure, inclusive of VAT at 16.5%

K
Legal expenses 87,375
Office furniture 285,658
373,033

Business related expenditure exclusive of VAT

K
- Postal services 3,125
3,125

In addition to the above transactions, the value of sales net of VAT were
K6,000,000 and K2,000,000 in respect of local sales and export sales
respectively.

Required:

(1) State any four obligations of a VAT registered taxpayer. 4 Marks

(2) Calculate the amount of VAT paid or payable on each of the
following expenditure and income items:
(i) legal expenses
(ii) office furniture
(iii) postal services
(iv) sales
5 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 4 of 12
2. (a) The tax written down value of business assets of Kanga Limited, a manufacturer,
as at 31 December, 2015 was as follows:
Agreed rate for
Item Tax written down value annual allowance
K’000
Factory buildings 85,200 5%
Plant and machinery 68,000 10%
Motor vehicles 54,600 20%
Furniture and fittings 16,300 10%
Computers 7,500 40%

During the year to 31 December 2016 the following transactions took place:
(1) The company disposed of some plant and machinery for K9,900,000
resulting into a capital loss of K800,000. New replacement plant and
machinery was bought during the year at K12,700,000.
(2) One motor vehicle was sold during the year for K4,820,000 resulting in
a capital loss of K720,000. A second hand five ton lorry was purchased
using the sales proceeds, amounting to K4,820,000.
(3) The company realized a capital gain of K490,000 after selling office
furniture for K1,680,000.
(4) A new computer was purchased at a cost of K980,000.

Required:

(i) Calculate the tax written down value for the assets that have been disposed
of during the year. 3 Marks

(ii) Compute capital allowances i.e. initial or investment allowances as the

case may be, and annual allowances, on the business assets for Kanga
Limited, for the financial year ended 31 December 2016. 7 Marks

(b) State five types of expenditure which a farmer, who derives income from
livestock production and other farming operations, is allowed to deduct from
his/her income in line with Section 58(2) of the Taxation Act. 5 Marks

Continued/……

Page 5 of 12
(c) (i) Why does the Taxation Act provide taxpayers with an opportunity to
appeal? 1 Mark
(ii) A taxpayer received a notice of assessment from the Commissioner
General on 7 October 2016 which was dispatched on the same day. Since
he had cash flow problems, on 11 November 2016, he wrote the High
Court appealing to it that it should assist him to reduce the amount and
allow him to pay when his cash flow situation improves.

Required:

Comment on the procedure for appeal to be followed by the taxpayer.

4 Marks
(TOTAL : 20 MARKS)

Continued/……

Page 6 of 12
 SECTION B
ANSWER ANY THREE QUESTIONS FROM THIS SECTION

3. (a) Tadala Limited imported goods worth US$67,500 from China on an open account.
The country of origin for these goods was deemed to be China, hence the
company declared the same when clearing them.
Required
(i) Why is the correct completion of the certificate of origin (form 18)
significant for customs duty taxes? 3 Marks

(ii) Compute the duties and taxes that the company paid in order to clear the
goods. (Assume that the goods attracted 25% customs duty, 30% excise
duty and 16.5% value added tax and the exchange rate used at the time of
clearing was K755 to 1$). 7 Marks

(b) State the circumstances when the following income is not assessed to tax in
Malawi.

(i) Leave passages 2 Marks

(ii) Income of an expatriate 1 Mark
(iii) Foreign exchange gain 2 Marks
(iv) Capital gains on shares traded on the stock exchange 1 Mark

(c) Section 45 of the Taxation Act disallows some expenditure from being deducted
from the assessable income of a taxpayer.

Required:

State any four examples of such expenditure. 4 Marks

(TOTAL : 20 MARKS)

Continued/……

Page 7 of 12
4. (a) (i) Emoluments from employment received by or accrued to or in favour of a
wife may not qualify as earned income if paid under certain circumstances.

Required:

State the four circumstances. 4 Marks

(ii) How is an employer’s pension contribution, which is allowed as a

deduction from assessable income according to Section 37 of the Taxation
Act, determined? 3 Marks

(b) (i) Mention two examples of income which is liable to a final tax. 2 Marks

(ii) Mr Limpopo, a Zimbabwean, left Malawi two years ago having worked
for ten years for an insurance company which is registered and operates in
Malawi. He left some investments in Malawi in form of shares in a stock
exchange listed company and money in a savings account. Since he left
for Zimbabwe, he has not returned to Malawi.

During the twelve months ended 30 June, 2016, the following amounts
were remitted to him in Zimbabwe:
- K200,000 dividends from a company in which he owns shares in
Malawi
- K345,200 bank interest from a savings account
- K600,000 withdrawal from his savings account
Required:
(1) State the type of tax which is payable on each of the above
amounts. Give reasons for your answers. 4 Marks

(2) Calculate the tax due on the above amounts. 2 Marks

(c) State the circumstances that will necessitate the Commissioner General to issue an
assessment or additional assessment to a taxpayer, in line with section 91.
2 Marks

(d) (i) Mention the term used to describe the levying of income tax by more than
one country on the same income of a taxpayer. 1 Mark

(ii) Explain one way in which the levying of income tax by more than one
country arises. 2 Marks
(TOTAL : 20 MARKS)

Page 8 of 12
5. (a) Explain the following canons of tax, according to Adam Smith:
(i) certainity
(ii) economy
4 Marks

(b) Vinthukutu Limited produces and sells limestone locally and in the neighbouring
countries of Tanzania, Zambia and Mozambique.

The following information is available for the financial year ended 30 June, 2016:
(1) Taxable profits for the year (before adjusting for taxable foreign exchange
losses and gains) K34,566,000
(2) Provisional tax paid during the year K4,675,000

(3) Tax withheld by its debtors when paying, in form of withholding tax
amounted to K2,190,000

(4) An analysis of its foreign exchange account for the year revealed the
following balances:

 realized foreign exchange gains K16,872,430

 realized foreign exchange losses K10,500,420
 unrealized foreign exchange gains of K3,778,100

(Note: The taxable profits have not taken into account exchange differences from
the accounting and from the tax position).

Required:

(i) State the foreign exchange gains and losses that will be allowable for tax
purposes for Vinthukutu Limited. 3 Marks

(ii) Compute the tax to be paid by Vinthukutu Limited after year end.8 Marks

(c) (i) State the due date for the submission of the monthly excise duty return by
a registered licensee. 1 Mark
(ii) Give any four examples of disposal details of excisable goods that an
excise return must show. 4 Marks
(TOTAL : 20 MARKS)

Page 9 of 12
6. (a) Lusangazi Sports Complex and Club is a fast growing taxable club registered in
Malawi. For the financial year ended 30 June, 2016, it presented the following
income and expenditure account:

K’000
Income
Gambling machine 8,100
Membership fees 10,340
Live band performances 1,560
Sale of food 5,102
Video shows 940
Sale of drinks 9,430
Total income 35,472

Expenditure
Repairs and maintenance 2, 300
Salaries and wages 5,320
Cost of goods sold 6,355
Sundry expenses 1,230
Grounds maintenance 960
Total expenditure 16,165
Surplus 19,307

Required:

(i) Compute the taxable income of Lusangazi Sports Complex and Club for
the year ended 30 June, 2016. 4 Marks

(ii) Assuming the taxable income for Lusangazi Sports Complex and Club is
K2,550,000, calculate the tax payable. 2 Marks

Continued/……

Page 10 of 12
 (b) Lusangazi Club offered the following fringe benefits to its Manager for the period
ended 30 June 2016.

- a car with unrestricted usage and was bought at K9 million.

- school fees for one child and in April 2016 the club paid K50,000 directly
to the school.

- monthly DSTV subscription at K48,000 per month.

Required:

Compute the fringe benefits tax payable by Lusangazi Club for the quarter ended
30 June 2016. 9 Marks

(c) (i) Define the term “relief supplies”. 1 Mark

(ii) Give any four examples of relief supplies. 4 Marks
(TOTAL : 20 MARKS)

7. (a) Mr Pemba Phiri was employed by an entrepreneurer as a Business Development

Manager on a three year contract. The terms of the contract were as follows:

Contract period : 3 years (starting on 01/07/13, ending on

30/06/16).

Salary : K820,000 per month (salary was the same

throughout the contract period).

House allowance : 1% of salary,

Contract gratuity : 25% of total salary received during the

contract period.

Mr Phiri was paid the contract gratuity on expiry of his contract on 30 June, 2016.

Other transactions during the year for Mr. Phiri were as follows:

(1) Received rental income of K510,000 net of tax from his tenant who occupies
his house in Kasungu

Continued/……
Page 11 of 12
 (2) Paid city rates of K15,000 to Kasungu Town Assembly
(3) Made a donation of K1,000 to the Malawi Red Cross Society during the
flag week campaign

Required:

Compute Mr Pemba Phiri’s tax liability for the year ended 30 June, 2016.
8 Marks

(b) Define mining expenditure in line with paragraph 11 of the second schedule of the
Taxation Act. 6 Marks

(c) Chimoka Limited recovered PAYE from its employees in the month of January
2016 amounting to K317,526 and remitted it to the Malawi Revenue Authority
(MRA) on 30 May 2016.

Required:

(i) State the latest date that Chimoka Limited should have paid the PAYE to
MRA, in line with the tax rules. 1 Mark

(ii) State the penalties that an employer who fails to pay PAYE by the due
date is liable to. 2 Marks

(iii) Compute the penalties that Chimoka Limited paid to MRA for paying
PAYE late. 3 Marks
(TOTAL : 20 MARKS)

END

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