Tax Practices

Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.1 (a) Mr. Basit

Computation of total income, taxable income and net tax payable/refundable
For tax year 2022
Rupees
Salary
Pakistan source income:
Salary [610,000×7] 4,270,000
Allowance for services of domestic servant [60,000×7] 420,000
Allowance @ 5% of salary solely expended in the performance of his duties of
employment (4,270,000×5%) 213,500
Acquired car on lease -
Shares acquired under employee share scheme
[1,170,000(13,000×90)–390,000(13,000×30)] 780,000
Leave encashment 320,000
Gratuity (2,200,000–300,000) 1,900,000
Salary arrears of tax year 2021 700,000
Foreign source income:
Salary (3,200×250×3) 2,400,000
Total income from salary 11,003,500

Capital gain
Loss on sale of ML’s shares [400,000(5,000×80)–450,000(5,000×90)] (50,000)

Income from other sources

Pakistan source income:
Gift received 200,000
Foreign source income:
Income earned from university [1,000(1,500–500)×250] 250,000
450,000

Total income 11,403,500

Less: Foreign source salary – Exempt (2,400,000)
Add: Capital loss (Separate block of income) 50,000
Taxable income 9,053,500

Tax liability
On Rs. 8,000,000 1,345,000
On remaining Rs. 1,053,500 @ 25% 263,375
1,608,375
Less: Foreign tax credit [250,000×17.77%(1,608,375/9,053,500×100) = 44,425]
OR [225×250 = 56,250] whichever is lower. (44,425)
1,563,950
Less: Tax credit for investment in mutual fund
[1,810,700(9,053,500×20%)×17.27%(1,563,950/9,053,500×100)] (312,708)
1,251,242
Less: Withholding tax (1,400,000)
Tax refundable 148,758

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 Tax Practices
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

(b) Arrears amount may be taxed at the rates of tax year 2021 that would have been
applicable if the salary had been paid to the Basit in tax year 2021.

(c) Basit is required to furnish a foreign income and assets statement giving particulars of:
(i) his total foreign assets and liabilities as on 30 June 2022;
(ii) any foreign assets transferred by him to any other person during tax year 2022 and
the consideration for the said transfer; and
(iii) complete particulars of foreign income, the expenditure derived during the tax year
2022 and the expenditure wholly and necessarily for the purposes of deriving the
said income.

A.2 (a) (i) In case any immovable property having fair market value (FBR value or DC rate
whichever is higher) greater than five million rupees is purchased in cash, then
it will have following implications:
 Such asset shall not be eligible for initial allowance or depreciation.
 Such amount shall not be treated as cost for computation of any gain on
disposal (sale value will be treated as capital gain).
 Such person shall pay a penalty of 5% of the FBR value or DC rate
whichever is higher.

(ii) Any payment by way of loan by a private company as defined under the
Companies Act, 2017 to its shareholder to the extent of accumulated profits is
treated as dividend. Therefore, the amount will be taxed as dividend in the hands
of shareholder. Accordingly, company is required to deduct withholding tax on
payment.

Where subsequently any loan or advance is repaid, shareholder will be entitled

to a refund of the tax, if any, paid by him as a result of such advance or loan
having been treated as dividend.

(iii) Any profit received by a non-resident person on a security issued by a resident

person shall be exempt from tax if:
 the persons are not associates;
 the security was widely issued outside Pakistan for the purposes of raising
a loan outside Pakistan for use in a business carried on by the resident
person in Pakistan;
 the profit was paid outside Pakistan; and
 the security is approved by the Board for the purposes of this section.

(b) Faster & Co.

Computation of amount of allowable deduction in determining taxable income
Rs. in million
Initial allowance on plant and machinery [160(W-1)×25%] (40.00)
Depreciation on plant and machinery [18(160(W-1)×75%×15%)×50%] (9.00)
Amortization of pre-commencement expenditure (5×20%) (1.00)
Finance charges [(2×3%÷2)×53] (1.59)
(51.59)

W-1: Cost of plant and machinery Rs. in million

Acquisition cost 150
Change in AED rate [2×(5550)] 10
160

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 Tax Practices
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

(c) Tax credit for certain persons

Following incomes or taxpayers shall be allowed a tax credit equal to one hundred per cent
of the tax payable:
(i) Persons engaged in coal mining projects in Sindh supplying coal exclusively to power
generation projects;
(ii) A start-up for the tax year in which the startup is certified by the Pakistan Software
Export Board and for the following two years;
(iii) Persons deriving income from exports of computer software or IT services or IT
enabled services up to the period ending on 30 June 2025 if 80% of the export
proceeds are brought into Pakistan in foreign exchange through normal banking
channels.

The above tax credit shall be available subject to fulfillment of the following conditions:
(i) Annual return of income has been filed;
(ii) Withholding tax statements for the relevant tax year have been filed, where the
person is a withholding agent; and
(iii) Sales tax returns for the tax periods corresponding to the relevant tax year have been
filed, if the person is required to file sales tax return under any of the Federal or
Provincial sales tax laws.

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 Tax Practices
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.3 Aakash
Computation of total income, taxable income and net tax payable/refundable
For tax year 2022 Rs. in million
Income from business
Loss before tax (87.0)
Add: Inadmissible expenses / admissible income
Commission expense disallowed due to sale to inactive tax payer [2.50.1(50×0.2%)] 2.4
Accounting depreciation 40.0
Bad debts recovered from Shameem [16.86(19.213.2)] 10.8
Outstanding payments for more than 3 years 14.0
Financial charges waived by the bank 2.8
70.0
Less: Admissible expenses and inadmissible / FTR income
Penalty -
Freight charges paid in cash -
Tax depreciation (48.0)
Insurance claim received (6.0)
Loss on disposal of vehicle (W-1) (1.2)
Reversal of Bad debts recovered recorded as other income (16.8+10.6) (27.4)
Bad debts recovered from Faheem [10.614(28.814.8)] (3.4)
Rental income – Chargeable under income from other sources (21.6)
(107.6)
Income from non-speculation business (124.6)

Income from speculation business

Net gain from derivative contract 23.0
Income from business (A) (101.6)

Capital gain
Sale of property (20÷4) 5.0
Sale of private company shares (3.6×3/4) 2.7
(B) 7.7

Income from other sources

Rental income from leasing of property comprised of building and 2nd hand locally
purchased plant (1.8×12) 21.6
Less: Deductions
Repair and maintenance (actual) (3.2)
Depreciation of building (85×90%×90%×10%) (6.9)
Depreciation of plant (34×15%×50%) (2.6)
(C) 8.9

Total income (A+B+C) (85.0)

Less: Capital gain on sale of property (separate block of income) (5.0)
Taxable income (90.0)

Since Aakash’s taxable income for tax year 2022 is negative, his share of profit from associate
is ignored.

Tax Liability Rs. in million

Tax on capital gain on sale of property (separate block of income) (5×3.5%) 0.175

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 Tax Practices
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

W-1: Loss / Gain on disposal of vehicle Rs. in million

Insurance claim 6.0
Cost 10
Depreciation TY 2020 (10× 15%) (1.5)
TY 2021 (10×85%×15%) (1.3)
TY 2022 -
7.2
Loss on disposal of vehicle (1.2)

Note: Answers in which loss has been computed by treating the vehicle as passenger transport
not plying for hire, has also been considered correct.

A.4 (a) ‘Sectoral benchmark ratios’ means standard business sector ratios notified by the
Board on the basis of comparative cases and includes financial ratios, production
ratios, gross profit ratio, net profit ratio, recovery ratio, wastage ratio and such other
ratios in respect of such sectors as may be prescribed.

Where a taxpayer:
 has not furnished record or documents including books of accounts;
 has furnished incomplete record or books of accounts; or
 is unable to provide sufficient explanation regarding the defects in records,
documents or books of accounts,

it shall be construed that taxable income has not been correctly declared and the
Commissioner shall determine taxable income on the basis of sectoral benchmark
ratios prescribed by the Board.

(b) (i) Particulars Due/last date

 Filing of normal tax year return for the year ended
31 Dec 2022
30 June 2022
 Filing of transitional tax year return 30 Sep 2023
 Filing of first special tax year return 30 Sep 2024

(ii)  Amendment of assessment related to normal tax

30 June 2028
year for the year ended 30 June 2022
 Amendment of assessment related to first special
30 June 2029
tax year

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 Tax Practices
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

(c) Company Status of company

A Limited  Not a small company because its paid up capital plus undistributed
reserves exceeds Rs. 50 million.
 It can be a public company if foreign company is owned by a foreign
government.
 Otherwise, A Ltd. will be a private company.
B Limited  If remaining 60% holding is with foreign government or foreign
company owned by foreign government then public company.
 Otherwise, small company being its paid-up capital plus undistributed
reserves are below 50 million and annual turnover is below Rs. 250
million if:
– employee not exceeding 250 at any time during the year.
– is not formed by splitting up or the reconciliation of a company
already in existence (1 July 2005).
– is not a small and medium enterprise.
If any of the above condition shall not be met then it shall be classified
as private company.
C Limited  Not a small company because its annual turnover exceeded Rs. 250
million.
 Not a public company because 100% shareholding is with local group.
 Therefore, it shall be classified as private company.

A.5 (a) Value of

Reason
supply (Rs.)
(i) 1,000,000 Discount can be claimed if it is as per market norms and has
(800,000 ÷ 80%) been shown on tax invoice. Since the amount of discount has
not been shown on tax invoice, it shall be chargeable to tax at
gross amount.
(ii) 900,000 Use of own manufactured items for in-house consumption will
(1,500,000×60%) be subject to sales tax. However, goods locally procured is not
deemed to be supply.
(iii) Nil Time of supply is the time at which goods are delivered or
make available to the recipient. Since goods were not delivered
in February, this was not chargeable to tax in the month of
February.
(iv) 6,000,000 For taxable supplies specified in third schedule, sales tax is
(1000×6,000) charged on the retail price of goods.
(v) Nil Free replacement of defective parts is considered as original
supply and not a separate supply so this was not chargeable to
tax in February return.
(vi) 400,000 Cash discount shall not be deducted while computing value of
supply, so gross amount shall be chargeable to tax.

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 Tax Practices
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

(b) Kazmi Traders

Computation of tax payable / refundable
For the tax period February 2022
Taxable Sales Tax
Amount @ 17%
--- Rs. in million ---
Input Tax
Taxable goods from registered persons 256 43.52
(320×80%)
Taxable goods from unregistered persons 32 -
Exempt goods from registered persons 56 -
Electrical and sanitary fitting 17 -
Electricity bills 1.36
44.88
Less: Refundable input tax (for zero rated) (W-1) (15.82)
29.06
Output Tax:
Taxable goods to registered persons 180 30.60
(200×90%)
Exports 98 -
30.60
Admissible credit (90% of output tax i.e. 27.54(30.6×90%) or input tax i.e.
Rs. 29.06, whichever is lower 27.54
Sales tax payable 3.06
Less: input tax on fixed assets (taxable supplies) (W-1) (9.25)
Sale tax to be carried forward (fixed asset portion only) 6.19
Sale tax to be carried forward (29.06–27.54) 1.52
Total sale tax to be carried forward 7.71
Sales tax refundable on zero rated supplies [15.82(W-1)+5.03(W-1)] 20.85

W-1: Apportionment of input tax

Input tax on plant and
Value of supply Residual input tax
machinery
180 9.25 29.06
98 5.03 15.82
278 14.28 44.88
(84×17%)

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 Tax Practices
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

A.6 (a) Tier-1 retailers:

Tier-1 retailers are required to be registered under Sale Tax Act, 1990. They shall pay
tax at the rate as applicable to the goods sold under relevant provisions of the Sales
Tax Act or a notification issue thereunder.

Tier-1 retailers shall integrate their retail outlets with Board’s computerized system for
real-time reporting of sales.

In case a Tier-1 retailer does not integrate his retail outlet in the manner as prescribed
during a tax period or part thereof, the adjustable input tax for whole of that tax period
shall be reduced by 60%.

Other than Tier-1 retailers:

Retailers other than those falling in Tier-1 are not required to be registered under Sales
Tax Act, 1990. Tax shall be charged from them, through their monthly electricity bills,
at the rate of five percent where the monthly bill amount does not exceed rupees twenty
thousand and at the rate of seven and half per cent where the monthly bill amount
exceeds the rupees twenty thousand and the electricity supplier shall deposit the
amount so collected directly without adjusting against his input tax. The above tax is
other than normal tax of 17%, further tax of 3% and extra tax.

(b) Return of supply

SL shall issue a debit note (in duplicate) in respect goods returned, indicating the
quantity being returned, its value determined on the basis of the value of supply as
shown in the tax invoice issued by the supplier and the amount of related sales tax paid
thereon, as well as the following, namely:
 name and registration number of SL;
 name and registration number of TPL;
 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.

A.7 (a)  To strengthen anemic enterprises by granting them tax exemptions or other
conditions or incentives for growth;
 To protect local industries against foreign competition by increasing local import
taxes;
 As a bargaining tool in trade negotiations with other countries;
 To counter the effects of inflation or depression;

(b) (i) Fiscal adequacy

The sources of revenue taken as a whole should be sufficient to meet the
expenditures of the government, regardless of business, export taxes, trade
balances and problems of economic adjustments. Revenues should be capable of
expanding or contracting annually in response to variations in public
expenditures.

(ii) Equality or theoretical justice

Taxes levied must be based upon the ability of the citizen to pay.

(iii) Administrative feasibility

In a successful tax system, tax should be clear and plain to taxpayers, capable of
enforcement by the adequate and well-trained public officials, convenient as to
the time and manner of payment and not unduly burdensome to discourage
business activity.
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 Tax Practices
Suggested Answers
Certificate in Accounting and Finance – Spring 2022

(The End)

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