Tax Practices

Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.1 Mr. Cheng

Computation of total income, taxable income and tax liability
For the tax year 2023
Income from salary: HL DH Total
------------------- Rupees -------------------
Basic salary 1,050,000 4,050,000 5,100,000
350,000×3 450,000×9
Medical allowance 105,000 540,000
35,000×3 60,000×9
Less: 10% Exempt (105,000) (405,000)
- 135,000 135,000
Utilities allowance 60,000 270,000 330,000
20,000×3 30,000×9
Subsidized food provided by the employer 30,000 Exempt 30,000
10,000×3
Company maintained car 37,500 187,500 225,000
150,000(3,000,000 250,000(5,000,000
×5%)×(3/12) ×5%)×(9/12)
Annual bonus 350,000 - 350,000
Gratuity under an unapproved scheme 1,225,000
Less: Exempt (75,000)
1,150,000 - 1,150,000
Return tickets to China 550,000 550,000
Amount received for signing a bond 750,000 750,000
Commission for securing a contract 400,000 400,000
Loan paid off by DH 3,800,000 3,800,000
Profit on loan at benchmark rate (10%) 95,000 95,000
3,800,000×10%×3/12
12,915,000
Income from property:
Rent 800,000
Less: Repair allowance @ 1/5 (160,000)
Less: Profit on loan (as above) (95,000)
545,000
Income from business:
Foreign source income
Share of profit in business 1,260,000÷0.7 1,800,000

FTR income:
Dividend from a listed company 97,750÷0.85 115,000
Bonus dividend -

Total income 15,375,000

Less: FTR income (115,000)
Taxable income 15,260,000
Tax liability:
Upto Rs. 12,000,000 2,955,000
Above Rs. 12,000,000 @ 35% 1,141,000
4,096,000
Less: Foreign tax credit
Actual tax paid (1,800,000 – 1,260,000) 540,000
Tax liability at average rate of tax [(4,096,000÷15,260,000)×1,800,000] 483,145 (483,145)
3,612,855

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 Tax Practices
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

Less: Tax credit on donations

Donation amount 600,000
30% of taxable income 15,260,000×30% 4,578,000
Tax credit on donation [3,612,855/15,260,000×600,000 being lower] (142,052)
No tax credit on payment of insurance premium -
Tax liability – NTR 3,470,803
Tax liability on FTR income (Dividend) 115,000×15% 17,250
Total tax liability 3,488,053
Less: Tax deduction at source on dividend (17,250)
Income tax payable 3,470,803

A.2 Admissibility
Name of person Head of income Tax regime
of related expenses
Atif - FTR No
Income from other
Bilal NTR Yes
sources
Income from other
Seema NTR Yes
sources
Kamal - Exempt No
Exempt (Include in income
Sikandar - No
just for rate purpose)
Dream Bank Income from business NTR Yes

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 Tax Practices
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.3 (a) Faith Brothers

Computation of total income, taxable income and tax payable/refundable
For the tax year 2023
Rs. in million
Income from business
Profit before tax 177.0

Add: Inadmissible expenses

Accounting depreciation 188.0
Payment to builder 50.0
Payment to a research institute in UAE 5.0
Foreign exchange loss 15.8
Loss on disposal of a capital asset (new machinery damaged during
shipment) 9.0
267.8
Less: Admissible expenses
Cash payment for the purchase of ten air ticket -
Payment of demurrages -
Payment of penalties -
Bad debts recovered not allowed in the previous year (16.0)
Shortfall in recovery of bad debts 16–(30–10) (4.0)
Reversal of capital gain (40.0)
(60.0)
Income before tax depreciation 384.8

Less: b/f business loss (52.0)

Tax depreciation (214.0)
Tax depreciation on plant (W-1) (3.9)
(217.9) (269.9)
Income before unabsorbed tax depreciation 114.9
Less: Unabsorbed tax depreciation 114.9×50% (57.5)
Total business income 57.4

Capital gain
Modaraba certificates 8.0
Shares of an unlisted company 12.0
Loss on disposal of a capital asset (new machinery damaged during
shipment) (9.0)
3.0
Shares of a listed company 20.0
Less: B/f capital loss (6.0)
14.0
Total income 82.4

Less: Separate block of income

Capital gain on Modaraba (8.0)
Capital gain on listed company share (14.0)
(22.0)
Taxable income 60.4

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 Tax Practices
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

Tax liability
Upto 6 million 1.3
Above 6 million 54.4×35% 19.0
20.3
Tax on capital gain – on madaraba 8×15% 1.2
– on listed company shares 14×12.5% 1.8
23.3

W-1: Cost of plant and depreciation thereon

Rs. in million
Purchase cost (400,000×45) 18.0
Foreign exchange gain – June 2022 400,000×5(45–40) (2.0)
16.0
Initial allowance @ 25% (4.0)
12.0
Depreciation – tax year 2022 12×15% (1.8)
10.2
Foreign exchange loss – June 2023 400,000×39.5(79.5–40) 15.8
26.0
Depreciation – tax year 2023 26×15% (3.9)
22.1

(b) Amount of unutilized losses alongwith maximum period to which these losses can be
carried forward:
Given Utilized c/f Maximum
------- Rs. in million ------- period (TY)
Loss from business - Tax year 2021 52 52 - -
Speculation - Tax year 2022 14 - 14 2028
Unabsorbed tax depreciation 168 57.5 110.5 No time limit
Capital loss on sale of listed securities:
- Tax 2019 8 - - Already lapsed
- Tax 2020 6 6 - -

A.4 (a) The forward contract entered into by Mujtaba Hussian for the purchase of raw materials
used in his business is in the nature of a hedging contract. He entered into this contract
to safeguard against losses due to price fluctuation. Such contracts have specifically been
excluded from the definition of speculative business. Consequently, payment to settle
the forward contract is an expenditure incurred in the normal course of business and is
a deductible expenditure.

(b) As a widow, she has been exempt from filing an income tax return despite owning a
1300 cc car. However, starting a new business during the tax year 2023 obligates her to
file an income tax return if her income from business exceeds Rs. 300,000.

Although the reported figures in the question depict income of Rs. 200,000, which is
below the threshold limit of Rs. 300,000, the expenditure amount is comprised of both
personal as well as business expenses. However, for computing taxable income, only
business expenses shall be allowed. Therefore, by considering business expenses only,
her income may exceed Rs. 300,000 and consequently, she will be required to file the
income tax return.

Moreover, if her taxable income from business exceeds Rs. 600,000, she is required to
pay tax based on rates given in the First Schedule of the Income Tax Ordinance.
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 Tax Practices
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.5 (a) (i) Assurance & Co. may apply for settling the dispute through the ADR mechanism
in the following cases:
 Where the liability of tax is Rs. 100 million or above or the admissibility of a
refund;
 The extent of waiver of default surcharge or penalty; or
 Any other specific relief required to resolve the dispute.
However, no application shall be accepted if a criminal proceeding has already
been initiated against such a case.

(ii) The Board may, after examination of the application of an Assurance & Co.,
appoint a committee, comprising of:

(A) Chief Commissioner Inland Revenue having jurisdiction over the case;
(B) person to be nominated by Assurance & Co. from a panel notified by the
Board comprising of:
– chartered accountants, cost and management accountants, and
advocates having a minimum of ten years’ experience in the field of
taxation.
Provided that the Assurance of Co. shall not nominate a chartered
accountant or an advocate if the said chartered accountant or the
advocate is or has been an auditor or an authorized representative of
the taxpayer;
– officers of the Inland Revenue Service who have retired in BS 21 or
above; or
– reputable businessmen as nominated by Chambers of Commerce and
Industry.

(C) a person to be nominated through consensus by the members appointed

under (A) and (B) above, from the panel as notified by the Board in
clause (B) above;
Provided that where the member under this clause cannot be appointed
through consensus, the Board may nominate a member proposed by the
taxpayer to be nominated as per clause (B).

(b) Any person who has furnished a return, discovers any omission or wrong statement
therein, may file a revised return subject to the following conditions:
(i) It is accompanied by the revised accounts or revised audited accounts, as the case
may be.
Provided that the Commissioner may waive this condition if satisfied that filing of
revised accounts or audited accounts is not necessary.
(ii) The reasons for revision of the return, in writing, duly signed by the taxpayer are
filed with the return.
(iii) Taxable income declared is not less than or loss declared is not more than income
or loss.

A revised return may be filed within sixty days from the date of return filing without the
Commissioner's approval.

However, after sixty days, a revised return may be filed with the approval of the
Commissioner in writing for revision of the return.

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 Tax Practices
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

Approval from Commissioner shall be deemed to have been granted by the

Commissioner if:
(i) the Commissioner has not made an order of approval in writing for revision of
return, before the expiration of 60 days from the date when the revision of return
was sought, or
(ii) taxable income declared is more than or the loss declared is less than the income
or loss, as the case may be determined u/s 120.

(c) Every individual resident taxpayer who has foreign income of not less than USD 10,000
or foreign assets with a value of not less than USD 100,000 shall furnish a foreign income
and assets statement. The statement must be in the prescribed form and verified in the
prescribed manner, and should include the following particulars:
 The person’s total foreign assets and liabilities as of the last day of the tax year;
 Any foreign assets transferred by the person to any other person during the tax
year and the consideration for the said transfer; and
 Complete particulars of foreign income, the expenditure derived during the tax
year, and the expenditure wholly and necessarily for the purposes of deriving the
said income.

A.6 (a) Time of supply Reasons

(i) November 2022 Time of supply in relation to the supply of goods
under a hire purchase is the time at which the
agreement is entered into.
(ii) March 2023 Time of supply is the period in which goods are
delivered.
(iii) July 2022 Time of supply is the time when goods are
available to the recipient of the supply
irrespective of their use.
(iv) September 2022 Time of supply is the time when goods are
available to the recipient for the supply
irrespective of actual delivery.

(b) Short paid amounts recoverable without notice:

Where a registered person pays the amount of tax less than the tax due as indicated in
his return, the short paid amount of tax along with default surcharge shall be recovered
from a such person without giving him a show cause notice and without prejudice to
any other action prescribed under the Sales Tax Act or the rules made thereunder, as
follows:
 By stopping the removal of any goods from his business premises, and
 Through the attachment of his business bank accounts,

Provided that no penalty under the Sales Tax Act shall be imposed unless a show cause
notice is given to the such person.

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 Tax Practices
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.7 (a) Confidence Engineering

Computation of tax payable
For tax period February 2023
Taxable Sales tax
Amount @ 17%
Input Tax: ----- Rs. in million -----
Wires and cables 6 1.02
Taxable goods from remaining registered persons 332 56.44
(338–6)
Purchases from cottage industry 14 -
Purchases from remaining unregistered person 46 -
(60–14)
Raw material given to the factory engineer (2) (0.34)
Raw material destroyed by fire (25) (4.25)
Purchase return within 180 days (26) (4.42)
Electricity bill 1.2 0.20
48.65
Input tax brought forward from last year 27.00
Total input tax 75.65

Output Tax:
Supplies under warranty period 5 -
Goods withdrawn by owner for personal use 4 0.68
Raw material given to factory engineers 2 -
Sales to Pray Traders 32 5.44
Remaining sales to registered person 177 30.09
(220–5–4–2–32)
Sales to a cottage industry 16 2.72
Remaining sales to unregistered person 24 4.08
(40–16)
Invoice dated 15 July 2022 8 1.36
Sales return (lapse of 180 days) (19) -
44.37
Admissible credit (90% of output tax i.e. 39.93 (44.37×90%) or
input tax i.e. 75.65, whichever is lower (39.93)
Sales tax payable 4.44
Further tax payable for sales to unregistered person (24×3%) 0.72
Sales tax to be carried forward (75.65 – 39.93) 35.72

(b) (i) Input tax on purchases from unregistered person including cottage industry shall
not be allowed.
(ii) The ‘sale price’ of the product sold includes the cost of parts, if any, to be supplied
during the warranty period, therefore it is not considered as a ‘separate supply’ and
hence no sales tax is chargeable at the time of disposal of ‘parts’ to meet the
warranty claim.
(iii) Putting to private use of raw material is not a supply and therefore it is not
chargeable to tax.
(iv) The adjustment on account of sale return credit can only be claimed if credit note
is issued within 180 days of the relevant supply. Therefore, no tax credit will be
available to CE.

Page 7 of 8
 Tax Practices
Suggested Answer
Certificate in Accounting and Finance – Spring 2023

A.8 Tax Avoidance:

 Make donations to an approved charity organization to claim a tax credit.
 A partnership firm may be converted into a small company to avail benefit in tax rate of
such company.

Tax Evasion Measures to prevent tax evasion

Mr. B earned an income of Rs. 10 million. Cash inflow/outflow shall be made through a
However, he only declared Rs. 6 million declared bank account.
which is verifiable from the banks. He has
hidden the remaining amount in a separate
bank account.
Mr. C earned a turnover of Rs. 10 million. Only those expenses shall be admissible which
However, he kept it as cash in his locker and are paid through banking channel / Cash
hid it from tax authorities. He paid all related expenses shall not be admissible.
expenses from this cash.

(The End)

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