Writing Time: 02 Hours 50 Minutes (i) ti (wv) w) wi) (wi) wii (0) Roading Time: 15 Min Roll No. ‘Attempt all questions. Write your Roll No. in the space provided above. Answers must be neat, relevant and brief. tis not necessary to maintain the sequence, Use of non-programmable scientific calculator of any model is allowed BUSINESS TAXATION [S3] ICMA ean WINTER 2018 EXAMINATIONS Pakistan Thursday, the 8th November 2018 Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. In marking the question paper, the examiners take into account clarity of exposition, logic of arguments, effective presentation, language and use of clear diagram/ chart, where appropriate DO NOT write your Name, Reg. No, or Rall No,, or any irrelevant information inside the anewer script ‘Question No. 1 ~ "Multiple Choice Questions" printed separately, is an integral part of this question paper. Question Paper must be returned to invigilator before leaving the examination hall. DURING EXTRA READING TIME, WRITING IS STRICTLY PROHIBITED IN THE ANSWER SCRIPT EXAMINEES ARE ADVISED TO MANAGE SOLUTIONS/ ANSWERS WITHIN PROPOSED TIME Question No. 2 Proposed Time : 45 Min. | Total Marks : 24 fa) (b) {c) In the light of provisions of the Income Tax Ordinance, 2001, explain the term “tax avoidance scheme”. Under what circumstances the Commissioner may exercise his powers to recharacterise or disregard a transaction? ‘A foreign company, for the purpose of executing construction contracts, intends to establish a branch office in Pakistan, Under the provisions of the Income Tax Ordinance, 2001, advise the company, the circumstances, under which taxes withheld from the payments made to a non-resident person, would be construed as final tax under the presumptive tax regime Mr. Shahid is the Senior In-Charge at the audit of Famous Technologies Limited (FTL) for the year ended June 30, 2018. He has developed serious differences with the management as regards to the computation of the company's income tax liability. The following transactions are the subject of the dispute: () Investment in a Pakistan subsidiary at a cost of Rs.35 million was disposed of to an associated undertaking at an arm’s length price of Rs, 25 million. (i) Research & Development expenditure amount to Rs.3 million. As a result of the expenditure, FTL has been able to develop a new design for its products, which will be used for business purposes from the next accounting year. However, the useful life of the design cannot be ascertained (iil) FTL is in the process of establishing a subsidiary company in a foreign country, with the objective of setting up a plant. In order to ascertain the technical feasibility of establishing the plant, FTL sought consultancy services of a firm resident of that country and paid Rs. 1 million from Pakistan without deduction of withholding tax. Required: ‘As a Tax Manager in the firm, you are required to give your views with regards to the tax treatment of each of the above transactions. er.winter 2018 10f5 Marks 05 03 06 PTO{d) Mr. Khalid, the sole proprietor of Khaild & Company, is a resident individual and is in the process of filing his wealth statement for the tax year, 2018. The relevant information is as under: () Assets and liabilities disclosed in the wealth statement for the tax year 2017 were as follow: Rupees ‘Assets Agricultural land in Sukkur 7,500,000 Residential property in Karachi 4,500,000 Investment in shares of listed companies 1,650,000 Business capital - Khalid & Co. 6,000,000 Motor vehicle 1,600,000 Cash at bank 900,000 Cash in hand 450,000 22,800,000 Liabilities Bank Loan (2,250,000) Net assets 20,350,000 (ii) Details relating to Khalid & Company are as follows: Income from business for the tax year 2018 — after tax 3,810,000 Drawings — during the year 700,000 (iii) Balance of cash in hand and at bank, as on June 30, 2018 amounted to Rs. 240,000 and Rs. 1, 100,000 respectively. (iv) Transactions carried out by Mr. Khalid during the year were as follows: Paid an advance of Rs. 1,500,000 against purchase of a bungalow for Rs. 10,000,000. Sold shares of a listed company for Rs. 350,000. The shares were purchased on May 01,2017 for Rs, 200,000. Capital gain’ tax collected by National Clearing Company of Pakistan Limited (NCCPL) amounted to Rs. 22,500. Gifted shares of a listed company to his brother. The shares were purchased by Mr. Khalid in 2012 at a cost of Rs. 100,000, whereas, the market value of the shares at the time of gift was Rs. 150,000. Paid Rs, 350,000 towards principal amount of the bank loan. Personal expenses amounted to Rs. 2,937,500. Net receipts against agricultural income amounted to Rs. 3,750,000. Required: Prepare Mr. Khalid’s wealth statement and wealth reconciliation statement for the tax year 2018, Question No. 3 Proposed Time : 40 Min. | Total Marks : 20 (a) Explain the conditions under which no gain or loss shall be taken to arise on the disposal of an asset, under the provisions of the Income Tax Ordinance, 2001 {b) When an asset is disposed of in a non-arm’s length transaction, how would you determine the consideration received by a seller and paid by a buyer? er.winter 2018 20f5 Marks 10 06 02(c) Mr. Aslam is in the process of opening a new branch at Clifton, Karachi and he is planning to give few gifts at the opening ceremony. However, he is uncertain whether these expenditures will be allowed as deductions in his annual income tax return. In the light of provisions of the Income Tax Rules, 2002, explain the expenditures, which can be described as entertainment expenditures and limitations as to the admissibility of such expenditures. {d) In the light of the Income Tax Ordinance, 2001, discuss the allowability of the following against business income chargeable to tax: () Penalty paid for late submission of withholding tax statement under the Income Tax Ordinance, 2001 Depreciation on leased assets amounting to Rs. 100,000, Payment of utility bills in cash amounting to Rs. 10,000, Question No. 4 Proposed Time : 45 Min, | Total Marks : 24 Mr. Wagar, aged 45 years, is working as a Chief Financial Officer (CFO) in a listed company, Taraggi Limited (TL). The company is engaged in the manufacture of iron rods for the local market. He derived following emoluments during the tax year ended June 30, 2018: Rupees Basic salary (per month) "250,000 Cost of living allowance (per month) _ 50,000 Other Compensations: In addition to the above emoluments, Mr. Wagar was also provided with the following ‘+ Special bonus equal to one month's basic salary paid on June 05, 2018. ‘+ Anew company maintained car for his personal use. The car was purchased on March 01, 2018 at a cost of Rs. 1,800,000. However, the cost of the car would have been Rs. 3,000,000 had the company obtained it on finance lease. ‘+A fully furnished accommodation in a posh area of Karachi. The fair market value of the rent was estimated to be Rs. 80,000 per month. ‘+ On July 15, 2017, he received 15,000 shares in MZ (Private) Limited, a company incorporated under the Companies Act, 2017. On June 30, 2018, he sold 10,000 shares in MZ for Rs. 250,000. The fair market value of these shares, on the date of issue, was estimated at Rs. 22 per share. ‘+ On June 15, 2018, he received insurance claim of Rs. 500,000 against theft of a painting which was stolen on May 31, 2018. The painting was purchased by him on January 01, 2011 for Rs, 300,000. He has paid insurance premium of Rs. 25,000 and also paid lawyer's fee of Rs. 50,000 who represented him in the settlement proceedings. Income from Other Sources: Mr, Wagar received additional income from the following sources, for the tax year 2018: ‘+ Brokerage fee of Rs. 100,000 in connection with the transfer of an apartment. The brokerage fee was received in cash. Mr. Wagar incurred an expense of Rs. 20,000 in connection with the above deal ‘+ Zakat of Rs. 25,000 has been deducted by the bank, ‘+ Annual rent of Rs. 960,000 from letting out a building to KF Enterprises. Following expenses were also incurred by Mr. Wagar in relation to the building: Rupees, Repairs (per annum) 200,000 Fire insurance premium (per annum) 30,000 Interest of Rs. 15,000 was paid on a loan obtained for building renovation by creating first charge on the building in favour of a scheduled bank. er.winter 2018 30f5 Marks 06 06 PTOAdditional Information: Other related information is as under: ‘© TL deducted withholding tax of Rs. 600,000 from Mr. Wagar's salary during tax year 2018. On July 01, 2017, Mr. Wagar acquired a life insurance policy and paid a premium of Rs. 500,000. He also contributed Rs. 1,600,000 to an approved pension fund. ‘© On January 01, 2018, Mr. Wagar purchased shares of Abrar Limited, a listed company, as an original allottee for Rs. 200,000. © During the tax year 2017, his assessed taxable income was Rs. 3,000,000, Required: Under the Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable income and income tax payable by or refundable to Mr. Wagar for the tax year ended June 30, 2018. Question No. 5 Proposed Time : 20 Min. | Total Marks : 12 Mr. Adeel is registered under the Sales Tax Act, 1990 as a manufacturer. He has provided the following data for the month of October 2017: Rupees Purchase: Import: Value of documents retired during the period (excluding custom duty) 2,000,000 Local: Local purchases from registered suppliers 5,000,000 Advance paid to suppliers during October 2017 not yet adjusted 2,000,000 Purchases disclosed in August 2017 stil appearing in creditors 1,500,000 Sale: Sales to registered persons 7,800,000 Sales to unregistered persons 1,000,000 Local supply under international tender 1,500,000 Sales to register person of items exempt under 6th Schedule ‘500,000 Advance received from customers during the period not yet adjusted 1,000,000 Sales to employees of own manufactured goods 500,000 Sales to associated company located in Export Processing Zone 4,000,000 During the period, Mr. Adeel imported a machinery of Rs. § million and paid sales tax on it at normal rate. Sales tax paid on electricity bill is Rs. 52,500. Rate of customs duty for the purpose of import purchases is 12%. Required: Compute the sales tax liability of Mr. Adeel, along with input tax to be carried forward (if any), in his sales tax retum for the month of October 2017. Question No. 6 Proposed Time : 20 Min. | Total Marks : 10 (a) Under the provisions of the Sales Tax Act, 1990, enumerate any four features distinguishing the Concept of ‘zero rating’ from ‘exempt supply’. er.winter 2018 4o0f5 Marks 24 12 05Marks {b) AKJ Limited supplied goods valuing Rs. 2,000,000 to one of its distributor, Mr. Sarwar, who is also registered for sales tax purposes. Sales tax invoice was issued for the sald amount plus sales tax of Rs. 340,000. The transaction was recorded in the monthly sales tax retum for the month of May 2018. In June 2018, the Internal Auditor of the company observed that the accountant had applied incorrect higher selling prices. As a result, the company will have to refund the excess amount to Mr. Sanwar. Required: Describe the procedure to be adopted by the company and the distributor to adjust the excess amount of the sales tax 0s THE END EXTRA OF TAKRATES FOR SALARIED TAXPAYERS = Tore eome Tato Tex T- | Woe ee ene een FS OTR es acne POTD | a SED sa ao dg Fo TOAD 2 | Wee ete reame ees 31010 Bl bes et xced Fs 4. | AZO +2 le mou ecw 39000 3: | Whee bene ene eens 0010 bl os tds 700.00 | 07 OD #27 ve aout xeedhg Rs 400.0 Wt er oan T0000 7 1420 Poh ater FS 705,00 EXTRACT OF TAXRATES FOR NOONE FROM PROPERTY = Goss Amount of Ret Tate Tex Whee he Fos avoat Ora east FODOTOD Tat es wt wed 1. | Wee Be hath goss nowt cent 200.000 ioe te pon aan reuausen in ibbuncnrom BOM > Wh a Fe gos wont etng 2 [meets .. ale naoceines coe | SDI SC a ee ete Fs now BT-Winter 2018 Soft