BUSINESS TAXATION [G5]
ICMA Sraronste!
. ‘SPRING 2018 EXAMINATIONS
Pakistan Saturday, the 18th August 2018
Roading Timo: 18 Minute
02 Hours 50 Minutes
(i) Attempt all questions.
(ii) Write your Roll No. in the space provided above,
(i) Answers must be neat, relevant and brief. tis 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
(vil) DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script
(vill) Question No, 1 ~"Muttiple Choice Questions” printed separately, is an integral part ofthis question paper.
(x) Question Paper must be returned to invigilator before leaving the examination hall.
Roll N
DURING EXTRA READING TIME, WRITING IS STRICTLY PROHIBITED IN THE ANSWER SCRIPT
EXAMINEES ARE ADVISED TO MANAGE SOLUTIONS/ ANSWERS WITHIN PROPOSED TIME
Marks
Question No. 2 Proposed Time : 45 Min. | Total Marks : 24
(a) Mr. Aslam, being a leading Tax Consultant, have been approached by Zarak Pharmaceuticals
Limited (2PL) regarding tax related issues. ZPL has requested Mr. Aslam opinion in respect of
the following
(Change in method of accounting for income chargeable to tax under the head ‘income
from business’
(i) Conditions for a deduction of a bad debt in the current tax year.
(ii) Initial depreciation allowance on a 3-year old plant, which has been imported from Japan,
The remaining useful life of the plant is 8 years.
Required:
Advise the management on the treatment of the above, under the Income Tax
Ordinance, 2001 06
{b) Tazins (Pvt) Limited intends to launch an ‘employee share scheme’ for its employees for their
dedicated service towards the company. For the purpose of educating its employees, the
management has approached a Tax Consultant to prepare a summary for them, containing the
taxabilty ofthe following
(Option granted to an employee
(ii) Disposal of the option to acquire shares under the employee share scheme
(i) Shares issued to an employee under the option that are subject to restriction on transfer
Required:
Prepare a summary explaining the timing and valuation aspects of the above including the
definition of ‘employee share scheme’, with reference to the Income Tax Ordinance, 2001 08
(c) Diamond Enterprises (DE), a sole proprietorship, is engaged in the business of buying and
selling of ‘barley’ and ‘rice’ in bulk quantities. The relevant information, extracted from DE's
financial records for the year ended June 30, 2018, is stated as under:
+ In August 2017, DE signed a future contract with Mooney Traders for the purchase of 575
metric tonnes (MT) of barley at Rs. 26,070 per MT. The delivery was expected to be made
in October 2017. MT also agreed to repurchase the entire lot at the price prevailing on the
date of sale.
+ Administrative, selling and distribution expenses amounted to Rs. 4,125,000. These
included a penalty of Rs. 74,250, which was imposed due to late payment of sales tax on
rice.
+ In October 2017, the price of barley increased to Rs. 30,096 per MT and DE sold the
entire lot to Mooney Traders without taking delivery.
+ DE incurred expenditure of Rs. 41,250 in respect of above future contract
Br-Spring 2018 10f5 PTO+ Rice sold to food companies in Sindh amounted to Rs. 21,450,000, The sale was made
after allowing discount of Rs. 1,122,000 to some of the new customers. The gross profit
margin was 22% on gross sales of rice.
‘+ DE paid Rs. 990,000 to a research institute for the development of a formula, which is
likely to improve the quality of rice it purchases from the growers.
+ Assessed losses, brought forward from previous year, were as follows:
Rupees
Trading business loss 907,500
Speculation business loss 495,000
Capital loss 412,500
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute Diamond Enterprises (DE)'s taxable income/ (loss) and the amount of loss to be
carried forward, if any, for the tax year 2018.
Question No. 3 Proposed Time : 40 Min. | Total Marks : 20
(a) Mr. Shamsuddin is a very senior professional of tax services and served on different positions
in Tax Department. He is, now, interested in becoming part of the Appellate Tribunal. As per
the Income Tax Ordinance, 2001, the Appellate Tribunal shall consist of a chairperson and
such other judicial and accountant members as are appointed by the Federal Government
having regard to the needs of the Tribunal
Required:
(i) State the criteria for a person to be appointed as an accountant member of an Appellate
Tribunal
(ii) How the powers and functions of an Appellate Tribunal are exercised?
If the members of a bench of Appellate Tribunal differ in opinion on any point, explain the
procedure for the settiment of the difference.
{b) Under the provisions of the Income Tax Ordinance, 2001, explain the term ‘foreign losses’ and
also state the provisions relating to set off and carry forward of foreign losses,
(c) Under the provisions of the Income Tax Ordinance, 2001, what would be the cost of an asset
for the purpose of depreciation deduction in each of the following circumstances?
(i) On July 01, 2017, Mr, Aoun started using his personal computer for business purposes.
He also had to upgrade the operating system to comply with his business needs
(ii) Mr, Mirza acquired production machinery by utilizing a loan repayable in Euros. The loan
is expressed in Pak Rupees and is repayable in 2 years’ time, Mr. Mirza also received
25% subsidy on such machinery from the Federal Government.
(lil) Mr, Rehan acquired a new machine partly in exchange for an old machine, He paid
freight to bring the old machine to the seller's location and also purchased cooling
equipment, which was installed with the new machine for its smooth functioning
Question No. 4 Proposed Time : 45 Min. | Total Marks : 24
‘AB Associates is an association of person (AOP) (a registered firm) having 2 partners, Mr. Alam and
Mr. Badr, sharing profit or loss in the ratio of 3: 2 respectively,
BT'Spring 2018 20f5
Marks.
10
04
02
02
04
02
03
03Marks.
‘Statement of profit or loss of the firm for the tax year 2018 is as under:
AB Associates
‘Statement of Profit or Loss
for the tax year 2018.
Rupees
‘Sales — (Without tax deduction) 500,000
Less: Cost of sales:
Purchases 2,887,500
Depreciation 495,000
Other manufacturing expenses 412,500 _(3,575,000)
Gross profit 1,925,000
Less: Salary to partner, Mr, Alam 220,000
Commission to partner, Mr. Badr 27,500
Rent of business premises to partner, Mr. Alam 660,000
Depreciation on owned assets 55,000
Depreciation on assets - Subject to finance lease 41,250
Financial charges on leased assets 6.875
Advertisement expenses 23,375
Provision for doubtful debts 27,500
Expense on scientific research 44,250
Other expenses 82,500 _(1,185,250)
Net profit 39,750
Additional Informatio
+ Salary paid to Mr. Zaheer, who works as a Production Manager of AB Associates, consists of:
Rupees
Basic salary 765,000
Bonus 270,500
Medical allowance 74,250
Overtime 13,750
Utility allowance 49,500
All of the above information related to Mr. Zaheer's salary is on monthly basis, except bonus,
which is given annually. In addition to above, accommodation was also provided to the
Mr. Zaheer. While, during the tax year 2018, Mr. Zaheer invested Rs. 450,000 in shares and
Rs, 325,000 in life insurance policy.
Lease rentals for the year were Rs. 49,500
Information for the tax depreciation purposes is:
Rupees
‘Opening Tax Written WDVof Sales
Down Value (WDV) Disposal Proceed Purchases
Plant and machinery 687,500 220,000 247,500 110,000
Vehicles 4,100,000 - - 1,475,000
Fumiture and fixtures 220,000 27,500 20,625 19,250
Purchased plant and machinery is eligible for initial allowance at the rate of 25%. Normal
depreciation is allowed at the rate of 15% on WDV of assets.
= Other expenses represent the following:
Rupees
Loss on disposal of fixed assets 35,760
Miscellaneous expenses 110,000
Interest expense on loan utilized for purchase of fixed assets 13,750
Residential telephone bills of partner, Mr. Alam. 13,750
Bad debts recovered (90,750)
BT'Spring 2018 30f5 PTOMarks.
Bad debts recovered, were disallowed by the Tax Department in the previous year when it was
claimed as bad debt expense.
+ Analysis of the liabilities reveals that the following amounts are outstanding for more than
3 years.
Rupees
Liability against purchases "220,000
Bank loan 50,000
Interest on bank loan 110,000
Advance from customers 165,000
‘+ Mr. Alam claimed property related expenses of Rs. 154,000 including actual repairs expense of
Rs. 44,000.
Required:
Calculate the taxable income of AB Associates, share of profit of each partner and tax payable by
Mr. Alam and Mr. Zaheer for the tax year 2018. 24
Question No. 5 Proposed Time : 20 Min. | Total Marks : 12
Mr. Saif is registered under the Sales Tax Act, 1990 as a manufacturer as well as a commercial
importer. He has provided the following information for the month of June 2018:
Rupees
‘Supplies Purchases
Export sales of manufactured goods 55,500,000 Local purchases of raw material
—From registered persons 296,000,000
Local sales of exempt manufactured goods 37,000,000 Import of machine 70,000,000
Taxable supplies of manufactured goods 222,000,000 Local purchases of raw material
—From unregistered persons 92,500,000
‘Taxable supplies of commercial imports 111,000,000 _Commercial imports 74,000,000
Allthe above amounts are exclusive of sales tax. Commercial imports have been stated at the value
determined by the custom authorities and are subject to customs duty at the rate of 12%. There was
no stock of commercial imports at the beginning or end of the month.
Additional Information:
+The taxable goods, supplied to unregistered customers, Aslam Enterprises (AE), include goods
worth Rs, 10,000,000. Mr. Saif did not charge any sales tax from AE as it has submitted an
Undertaking that itis a cottage industry and exempt from sales tax under the Sixth Schedule of
the Sales Tax Act, 1990
+ Purchases from local registered persons include the following:
>» Raw materials worth Rs. 11,700,000, against which a discrepancy has been indicated by
the CREST.
>» Raw materials of Rs. 20,000,000 purchased from Ninja Enterprises (NE) on June 12, 2018.
The payment was made on the same day by pay order. On June 20, 2018, NE informed
Mr. Saif that with effect from June 01, 2018, their registration has been suspended by the
Commissioner Inland Revenue (CIR).
> Wires and cables of Rs. 10,500,000 and electrical and sanitary fittings of Rs. 12,090,000
‘were purchased. These items were used in the renovation of a factory building
‘+ The input tax amounting to Rs. 5,055,000 was paid in May 2018 but inadvertently it could not be
claimed in the tax return for the month of May 2018.
+ The imported machine was put into operations during June 2018.
Required:
Compute the sales tax liability of Mr. Saif, along with input tax to be carried forward (if any), in his
sales tax retum for the month of June 2018, 2
Note: Ignore the effect of minimum value addition in case of commercial imports
BT-Spring 2018 40f5Question No. 6
fa)
Proposed Time : 20 Min. | Total Marks : 10
State with the reasons whether the following persons are required to be registered under the
sales tax laws:
(i) Mr. Yousuf is working for the White Sugar Industries Limited. During the year, he
forwarded orders worth Rs. 14,000,000 to the company. The company directly made the
deliveries according to the orders and paid his commission at 5,75% amounting to
Rs, 805,000.
Mr. Ahsan is running a watch showroom. He has made sale of watches of type ‘A’ worth
Rs. 6,800,000. During the year, Mr. Ahsan also purchased materials for watches from
the market and get it manufactured from the Time Watch Makers. The sale proceeds
from the said produced goods were Rs. 3,200,000.
Mr. Hashim opened a shop for sale of men clothing. His sales during the year were
Rs. 3,500,000. He made his purchases from M/s Royal Garments Distributors.
Mr. Ashbal is running a hotel. In the first year, his sole income was from the hiring of
room and his gross receipts aggregate to Rs. 4,035,000 during the year.
Mr, Shehzad supplies lab coats as a General Order Supplier, which he delivers to the
customers at the ultimate doorstep. During the year 2018, he supplied lab coats worth
Rs. 175,000 to Zindagi Hospital for the doctors and nurses. The hospital has deducted
income tax amounting to Rs.7,123 under Section 153 of the Income Tax
Ordinance, 2001
i
tiv)
wv)
{b) While carrying out the sales tax audit of Ms. Zohra, an Officer of the Inland Revenue identified
a deficiency in the amount of sales tax deposited by her. She acknowledged this deficiency but
failed to deposit the balance amount. A show cause notice was issued to her for the payment
of the balance amount.
Required:
i) Determine Ms. Zohra's liability in the above situation
i) If she intends to revise her return of income, state the conditions which need to be
fulfilled. Also explain whether it would have been to her advantage, if she had paid the
amount before issuance of the show cause notice.
THE END
EXTRACT OF TAX RATES FOR NON-SALARIED INDIVIDUALS & ASSOCIATION OF PERSONS (AOP)
Marks.
05
02
03
& Taxable income
Rate of Tax
“L_| Whee the trable come exceeds Rs 500 000 bu dows rok exceed Ra 760000
7,000 1H e enount exceeding Re S00 000
‘Whee the tarbleneame exceeds Ps 50,000 but doesnot exceed Rs 1500000
Rs. 3.000 + 15% ofthe aroun exceeding Rs 780 000
Where the taxable income exceeds Rs 1[50,000 but doesnot exceed Rs. 2500 000
144500 20% ofthe amount excading Rs 1 50,000
‘Where the tmiable name exceed Rs 2 50.000 bu does nat exceed R000 000
e344 500+ 25% the amount excoding Rs 2 500.000
EXTRACT OF TAK RATES FOR SALARIED TAXPAYERS
& Taxable income
Rate of Tax
"L_| Whee the trie come exceeds Rs 3000000 bu does na exceed Re 3 B00 000
Te S50500 + 2 el the roan oxcondng Re 300.000
| 600.000
2 | Were the gos rau fret exceeds Ri
but oes nc erosed Rs 100,000
2: [Whe te tbe ran east Fs 450d rots Fs 00 190 [Rs 47200 + eau cs 3500
3: [Wet tae rene en 000 bt rete 70100 R 70 +7 the ana exeg 00
4 [Witenes 5720000 2201 oat dng 700.0
EXTRACT OF TAKRATES FOR INCOME FROM PROPERTY
= oss Anourot ent Tatton
«| Whee be Gow anoat ret wanes FeDDION Ba tar wt wl] Spams pou awonmundig imo
20,000 + 10% of the goss amount exceeding
600000
BT'Spring 2018 5 ofS