BUSINESS TAXATION [G5] »ICMA Senne ay SPRING 2017 EXAMINATIONS. Pakistan Monday, the 11th September 2017 Extra Reading Time: 18 Minutes Writing 7 02 Hours 50 Minutes (i) Attempt all questions. (i) Write your Roll No. in the space provided above. (i) Answers must be neat, relevant and brief Itis not necessary to maintain the sequence. (iv) Use of non-programmable scientific calculator of any model is allowed. (v) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. (vi) 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 (vi) DO NOT write your Name, Reg, No. or Roll No., or any irrelevant information inside the answer script (vii) Question No. 1 ~“Muttiple Choice Questions" printed separately, is an integral part ofthis question paper. (ix)_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 90 RollNo, Marks Question No. 2 Proposed Time : 45 Min. | Total Marks : 24 (a) What do you understand by Association of Persons (AOPs) and Resident Association of Persons under the provisions of the Income Tax Ordinance, 2001? 05 (b) Falah Associates is an AOP, having three partners, Mr. Faisal, Mr. Malik and Mr. Khalid. They share profit or loss in the ratio of 2:2: 1. The principal activity of Falah Associates is manufacturing of leather products. Following is the statement of profit or loss of the AOP: Rupees ‘Sales 500,000 Less: Costof sales 5,950,000 Gross profit 2,550,000 Less: Marketing, Selling and Administrative Expenses: ‘Advertisement expenses 230,000 Finance charges on leased assets 2,000 Depreciation on leased assets 70,000 Depreciation on owned assets 85,000 Provision for doubtful debts 22,500 Salary to Mr. Malik 600,000 Salary to Mr. Khalid 480,000 Commission to Mr. Faisal 212,500 Other expenses 115,000. _1,817,000 Net profit 733,000. Additional Information: * Cost of sales includes depreciation charges of Rs. 220,000 and aggregate freight charges of Rs. 72,000. Rs. 19,000 of the total of freight charges was of single payment in cash. + Other expenses represent the following} Rupees: Interest expense on loan utlized for purchase of fixed assets 27,000 Loss on disposal of fixed assets 15,000 Bad debts recovered (disallowed by the Tax Department in the previous year when it was claimed as bad debts expenses) (37,000) Residential utility bills of Mr. Faisal 60,000 Miscellaneous expenses 50,000 115,000 Br Spang 2017 tof PTO+ Lease rental for the year was Rs. 22,000 and information for tax depreciation purposes was as follows: Rupees Opening Tax Disposals Sales Written Down Value (WDV) (WDV) Proceeds Purchases Plant 750,000 100,000 120,000 50,000 Vehicles 500,000 — = 1,700,000 Fumiture and fixtures 90,000 15,000 10,000 12,000 + Analysis of liabilities reveals that the following amounts are outstanding for more than 3 years: Rupees Bank loan 250,000 Liability against purchases 85,000 ‘Advance from customers 52,000 Interest on the above bank loan 40,000 Required: Compute the taxable income and tax liability of the Falah Associates for the tax year 2017. Question No. 3 Proposed Time : 40 Min. | Total Marks : 20 (a) In the light of section 2(46), discuss what is meant by profit on debt and identify the circumstances under which any profit received by a non-resident person on a security issued by resident person shall be exempt from tax. (b) Differentiate between the following terms: (i) Tax evasion and tax avoidance. Provide example of the situation when each can occur. (ii) Tax admissible expenses and tax relief. (c) Mr. Mohsin, @ resident taxpayer, is operating a business. In addition to his business, Mr. Mohsin has some investment in Fresh Farm Limited (FFL), from where he has received a dividend of Rs. 70,000 for the tax year 2017. The amount received was credited to his capital account. Since FFL drives its entire income from agriculture, which is exempt from tax. ‘Mr. Mohsin has view that the dividend of Rs. 70,000, being paid from an exempt income will also not be chargeable to tax. Required: You are required to comment on the taxation of dividend received from Fresh Farm Limited (FFL) whose entire income was generated from agriculture under the provision of section 55 of the Income Tax Ordinance, 2001 Question No. 4 Proposed Time : 45 Min. | Total Marks : 24 (a) Mr. Afnan has received salary certificate from his employer containing following information for the tax year 2017 Rupees Total taxable salary (basic salary + medical + other allowances) 2,826,000 Tax liability deducted by employer 324,700 Mr. Afnan has successfully prepared his income tax return but confused in preparing wealth statement and reconciliation of net assets, Br-Spang 2017 2of4 Marks 19 07 05 04Marks Additional Information: The detail of his assets and liabilities are as follows: ‘+ Opening net assets for the tax year 2017 are Rs. 5,770,000 comprising the following} Rupees Cash and bank balance "270,000 Loan to a friend 400,000 Personal car for use of family members — Original cost 1,550,000 Furniture and other personal assets 450,000 2,670,000 Loan received from father-in-law (1,900,000) 770,000, Residential house for personal use acquired by Mr. Afnan in the tax year 2013 but not disclosed to tax authorities 5,000,000 5,770,000, ‘+ Increase and decrease in assets and liabilities during the tax year 2017 are as follows: > He exchanged one of his furniture items costing Rs. 150,000 with another furniture item at Rs. 220,000, The balance is still payable at the end of the year. > Bank balance as at June 30, 2017 was Rs. 734,000 while cash in hand at the end of the year was Rs. 137,300. > Mr. Afnan repaid Rs. 200,000 to his father-in-law and received Rs. 100,000 from his friend as loan repayment. ‘+ His estimated personal expenses were Rs. 1,800,000. Required Assume yourself as a Tax Consultant and Mr. Afnan, while filing of his tax retum along with wealth statement, has sought your advice. You are required to prepare an extract of statement of assets and liabilities and reconciliation of net assets as per section 116 of the Income Tax Ordinance, 2001, by following the format given below, for fling of his return 09 Reconciliation of Net Assets Rupees Net assets — Current year Net assets — Previous year (Increase)/ decrease in assets Inflows: Income declared as per retum for the year - Subject to normal tax Outfiows: Personal expenses Other expenses Un-reconciled amount (‘zero’ where amount is reconciled) (b) Mr. Salman has taken a life insurance policy from State Life Insurance. His Tax Consultant advised him to avail tax credit on life insurance premium. In this regard, Mr. Salman has certain ‘queries with respect to tax credit. Briefly explain the following queries in the light of section 62 of the Income Tax Ordinance, 2001 (i) What are the requirements to avail tax credit on life insurance premium and who can avail such credit? 04 (ii) How tax credit is computed for payment of life insurance premium? 03 Br Spang 2017 3of4 PTO(©) In the light of the Income Tax Ordinance, 2001, discuss the following: (i) Enumerate the persons who are not required to file income tax return solely by reason of Marks ‘owning immovable property located within municipal limits or cantonment areas. 04 (ii) Identify the circumstances where the Commissioner Inland Revenue (CIR) may require a person to furnish a return of income for a period that is less than twelve months. 04 Question No. 5 Proposed Time : 20 Min, | Total Marks : 12 Kamran Limited (KL), registered under the Sales Tax Act, 1990, is engaged in the import, export and distribution of consumer goods for last several years. KL has recently expanded its business by setting up a manufacturing unit for various consumer goods. The manufacturing unit will start production from the month of July 2017. Following transactions were carried out by KL during the month of June 2017 + Imported 8,000 boxes of a product ‘Hair Serum’ at Rs. 500 per box, each box contain § small injections and sold as complete box in market. 5,000 imported boxes were sold by KL in local market at Rs. 600 per box whereas 500 of imported boxes were re-exported to Vietnam and Sri Lanka at Rs. 2,500 per box + Purchased 6,000 packs of another product ‘Toothpaste’ from local suppliers at a cost of Rs. 136 per pack. Toothpaste is included in the items listed on the Third Schedule to the Sales Tax ‘Act, 1990. The retail price of Toothpaste is Rs. 150 per pack. KL sold the entire stock to a retailer ata price of Rs. 140 per pack during the month Other Informati + Paid sales tax of Rs. 1,200,000 for acquiring new plant and equipments for its manufacturing unit and Rs, 60,000 for annual dinner and entertainment for its employees. + Imported price of Rs. 800 of Hair Serum box is inclusive of customs duty of Rs. 25 per box and the rate of sales tax paid on commercial import of Hair Serum is 20% Required: {a) Compute the net sales tax liability by KL for the month of June 2017 with proper working and reasoning where any given information has not been utilized in computation, 09 (b) Compute the amount of refund against export of commercial import of Hair Serum. 03 Question No. 6 Proposed Time : 20 Min. | Total Marks : 10 {a) Under the provision of the Sales Tax Act, 1990 and rules made thereunder, discuss the following ()) Who may be treated as a ‘non-active taxpayer"? 02 (ii) What are the consequences which a registered person may face on removal of his name from the active taxpayer list maintained by the Federal Board of Revenue (FBR) 04 (b) Specify the persons making taxable supplies in Pakistan, are required to be registered under the section 14 of the Sales Tax Act, 1990. 04 THE END EXTRACT OF TAX RATES FOR NON-SALARIED INDIVIDUALS AND AOPS te Tarbie com Rao 1._| What bene cents R500 000 bade rt eceod Rs ASODUGD | Re TSO TOM he rt oxcovdng he 100. | Where he tba ceeds Re. 2500000 goes net eed Rs 400000 | Re 344500 76% ofthe rant xeeding Re 25000 [Where tbl inane exces Rs, 400000 ba oe na eed Rs 6.000000] Rs 719500-r50% othe avon xed Re 400060 [erst bine cede Re 6000000 191,500 + 25% ofthe aout oxending R600 00 Depreciation Rates Tita Allowance on Eligible Assets Percentage of the Tax Written Down Value Percentage of Cost > Bulg ype) 10% “S Bang abuidng 15% + Furitue anditngs 15% _ Being pant and machinery 25% «Plant end machinery (no otherwise speed) 15% + Motor vehices (al ypes) 15% Computer hardware 30% Br Spang 2017 4of4