CAF 02: Suggested Solution Assessment-1 Solution

Answer-1
ASSOCIATES:

I. Mouse Company & Mr. A

II. Cat Company & Mr. A
III. Mouse Company & Cat Company
IV. Parrot Company & Federal Govt.
V. Parrot Company & Mr. A
VI. Mouse Company & Parrot Company
VII. Cat Company & Parrot Company
VIII. Mr. C & Pigeon Company
IX. Monkey Company & Rest Company
X. Pigeon Company & Monkey Company
XI. Rest Company & Pigeon Company

PUBLIC COMPANIES:
MONKEY COMPANY, PIGEON COMPANY & PARROT COMPANY
Answer-2
Mr. Yasir
Non-resident Individual
Income & Tax thereon
Tax year 2013
Rupees
Income from capital gain – Pakistan
Gain on Manuscript [Sec.37 (1)] 3,000,000
Taxable income 3,000,000
Tax liability (250,000+20%of 600,000) 370,000
Less: Tax credit u/s 61 (A / B x C) (370,000/3,000,000 x 90,000) (11,100)
C is lower of:
- 90,000
- 30% of 3,000,000 = 900,000
Tax payable to government 358,900

Items not included

1. Tax credit u/s 62 is allowed to a resident individual only. As Mr. Yasir is non-resident therefore I
have ignored the amount paid for shares and insurance premium paid to life insurance Company in
the calculation.
2. Under ITO 2001, tax credit u/s 63 will only be given to an eligible person (Individual having NIC).
As Mr. Yasir is a UK national therefore he is not entitled to tax credit u/s 63.
3. As the loan is obtained from friend, so no deductible allowance will be allowed.
4. Foreign source incomes are not considered in calculation as the person is non-resident.

Adnan Rauf (FCA) Page 1

CAF 02: Suggested Solution Assessment-1 Solution

Answer-3
Principles for levy of tax
Following are the principles for levy of tax.
The Benefit Principle
This principle says that taxes should be based on the benefits received. It means that those who receive
the greatest benefits from Government projects should pay the most taxes. The benefit principle is
commonly used for highways, libraries, etc.
The Ability-to-Pay principle
The tax should be based on ability to pay. It means that a person who is earning more income should pay
more tax. Progressive tax rates are an example of it.
The Equal Distribution Principle
It says that incomes and transactions should be taxed at a fixed rate. Therefore, people who are earning
more income shall pay more tax but not at higher rate.

Answer-4
Tax avoidance and evasion
Most people pay their taxes but not all are willing. So lastly, let’s look at whether other forms of
behaviour can be ethically acceptable:
❑ Tax avoidance is the legal use of the tax law to one's own advantage, to reduce the amount of
tax payable. For example, it is upto tax payer that whether the business is started as a
partnership or company. In case of partnership tax rates is lower than that of company.
Another example is starting business in a tax free zone.
❑ Tax evasion is an illegal practice where individuals, AOPs and companies unlawfully avoids
payment of tax. In tax evasion taxpayer intentionally conceals the true state of affairs to tax
authorities. It is punishable under the law. For example, concealment of income, misclassifying
income under another head, claiming excess deductions, and claiming wrong tax credits.
A utilitarian, concerned with aggregate welfare, might be willing for tax avoidance. If tax is avoided,
wealth is kept in the private sector (means it will not go to Government). The utilitarian says that
charging tax will put more burden on middle class who cannot afford hiring tax lawyers. The dissatisfaction
of middle class will be more as compared to the satisfaction achieved by rich class.
A virtue ethicist would dislike tax avoidance. It is not ethical to exploit rules knowing that one is
exploiting it for oneself.
A deontologist will not favor tax avoidance, but might not condemn it either. Deontologists can easily
argue for a duty to obey the law.

Adnan Rauf (FCA) Page 2