TAX PLANNING AND PRACTICES (Paper 1)

Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.1 Haq Halal Limited (HHL)

Computation of Total income, Taxable Income and Income Tax Liability
For the tax year 2024
Income from Business: Rs. in million
Profit before taxation 28.40
Add: / (Less): Inadmissible expenses / (income)
Sale of IT products to charitable schools - special discount
[18(12.6m ÷70%) × 30%] 5.40
Export of IT-enabled services to KA in Turkey -
It is not covered under FTR income as the withholding tax statement has not been filed
Accounting depreciation 11.00
Prize on account of sales promotion (1.20)
Gain on sale of shares in ML and CL (1.00)
Proceeds from the sale of shares in KL (2.80)
Tax depreciation (30.40)
9.40
Capital Gain:
Gain on sale of shares in ML and CL (W-1) 1.67
Gain on sale of shares in KL – [85,000 × 10(35−25)] 0.85
2.52
Income from Other Sources:
Share of profit from AOP 6.00
FTR income
Prize on account of sales promotion [1.20+0.30] 1.50
Total income for the year 19.42
Less: Gain on sale of shares in ML and CL (being SBI) (1.67)
Prize on account of sales promotion (being FTR) (1.50)
Taxable income for the year 16.25

Computation of tax liability:

Tax on taxable income [16.25m @ 29%] 4.71
Less : Tax credit on donation
Donations to charitable schools (special discount of 30% against the supply of
IT products ; Rs. 12.6 /0.7 × 0.3 = 5.4 OR
20 % of the taxable income i.e. Rs. 16.25 × 0.2 = 3.25 whichever is lesser
Tax credit allowed = 4.71 / 16.25 × 3.25 = 0.94 (0.94)
(i) 3.77
Minimum tax [305.40m(W-2) × 1.25% ] (ii) 3.82
Alternative corporate tax [30.08m(W-3)×17%] (iii) 5.11
Tax charged would be higher of (i), (ii) or (iii) above 5.11
Tax on sale of shares in ML and CL [1.67 × 12.5%] being shares were acquired
before 30 June 2022. 0.21
Tax on prize of sales promotion 0.30
Tax liability 5.62

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 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

W-1: Computation of gain on sale of shares in ML and CL

De-merger: Rs. in million
Capital gain:
Sale of 30,000 shares in ML @ Rs. 35 each 1.05
Less: Cost of 30,000 shares in ML @ Rs. 39 each [(150,000×52)÷200,000] (1.17)
Incidental expenses @ 0.5% of consideration (0.01)
Loss on sale of ML’s shares (0.13)

Sale of 70,000 shares in CL @ Rs. 65 each 4.55

Less: Cost of 70,000 shares in CL @ Rs. 39 each [(150,000×52)÷200,000] (2.73)
Incidental expenses @ 0.5% of consideration (0.02)
Gain on sale of CL’s shares 1.80

Net gain 1.67

W-2: Computation of turnover for minimum tax u/s 113 Rs. in million
Turnover as per HHL’s records 260.00
Add: Discount allowed to the school [18(12.6m ÷70%) ×30%] 5.40
HHL’s share in AOP’s gross sales [125m × 32%] 40.00
Export of IT-enabled services – [no adjustment since NTR] -
Adjusted turnover 305.40

W-3: Computation of accounting profit for ACT Rs. in million

Accounting profit-unadjusted 28.40
Less: Proceeds from the sale of shares in KL (2.80)
Less: Gain on sale of shares in ML and CL (1.00)
Less: Prize on account of sales promotion (1.20)
Add: Accounting gain on sale of shares in KL [2.8−2.125(85,000×25)] 0.68
Add: Share of profit from AOP 6.00
Accounting profit for the year 30.08

A.2 ▪ Since none of the group of companies are listed, APL to hold directly 75% or more of
the share capital of the subsidiary company for group relief.
▪ APL holds 90% shareholdings in BPL and as it is a manufacturing company, the
provisions related to group relief are applicable to both APL and BPL.
▪ Although APL holds 80% shareholdings in CPL, CPL’s classification as a trading
company excludes it from qualifying for group relief. Therefore, CPL is unable to
utilize the losses of BPL to set off with its income.
▪ APL can only avail the BPL’s losses arising from business other than brought forward
losses (i.e. Rs. 280 million). Moreover, capital losses cannot be surrendered to APL.
▪ BPL has also earned income from other sources of Rs. 80 million, therefore the net
amount of loss after adjustment of this income would be Rs. 70 million (150−80).
▪ The amount of loss available for APL to claim would be computed as Rs. 63 million
(70×90%) against its business income of Rs. 240 million. Profit on debt of
Rs. 60 million could not be set off with BPL’s loss because BPL’s losses can only be
surrendered against business income of APL.

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 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.3 (a) Interest Actual Deduction Closing

income expense allowed for the reserve
Opening Reserve for
from for the year E=(B+C) F= (B–D) OR
reserve the year
Year consumer year OR D, Zero,
(C) (D=A×3%)
loan (B) (whichever is (whichever is
(A) lower) higher)
------------------------------- Rs. in million -------------------------------
2021 42 1.05 0.00 1.26 1.05 0.00
2022 144 4.70 0.00 4.32 4.32 0.38
2023 220 6.10 0.38 6.60 6.48 0.00
(b) Where a tax payable by a private limited company, which has gone into liquidation,
cannot be recovered from the company, the Commissioner of Income Tax is
empowered to issue a notice to every person who was at any time in the related tax
year, a shareholder owning not less than 10% of the paid-up capital of the company.
Considering this provision of law, the notice issued by the Commissioner is valid.
In the scenario, if Murad owns 10% or more of the paid-up share capital in JPL, he is
jointly and severally liable to pay Rs. 15 million to the Commissioner. He is, however,
entitled to recover the tax paid from the JPL or any other shareholder owning not less
than 10% of the paid-up share capital in proportion to their shareholding.
The provisions of the Income Tax Ordinance shall apply to the above amount due as
if it were tax due under an assessment order.

A.4 Comments on the computation are as follows:

(i) Warehouse destroyed by fire:
Upon the destruction of the warehouse by fire, GCPL is to be considered to have
relinquished the ownership of the warehouse and, consequently, disposed of the
warehouse.
Irrespective of warehouse’s fair market value of Rs. 11.5 million, compensation of
Rs. 8.4 million received by GCPL from Loyal Insurance Limited is the consideration
for the warehouse.
As proceeds of Rs. 8.4 million is included in profit before tax, it shall be deducted
from it and instead the tax gain on disposal of the warehouse of Rs. 0.3 million (8.4
– 8.1) is to be added to the amount of profit before tax.
Since the warehouse was a depreciable asset, the gain arising on its disposal is the
business income of GCPL and will be taxed under NTR.
(ii) Investment in controlled foreign company:
Deduction of dividend income from profit before tax is correct. But along with this,
following provisions shall also be applicable in given scenario.
As GCPL acquired more than 40% i.e. 42% shares of UAE based (non-resident)
company i.e. SL so SL shall be classified as controlled foreign company of GCPL,
subject to fulfilment of following other conditions:
▪ Tax paid by non-resident company to tax authority outside Pakistan shall be
less than 60% of the tax payable on the said income under the ordinance. In
given scenario no income tax was paid in UAE in respect of its property income
so this condition is met by SL.
▪ Non-resident company does not derive any active business income. During the
year SL has just income from property therefore this condition is also met.
▪ The shares of non-resident company are not traded on any stock exchange.
Being SL is the unlisted company and its shares are not traded on any stock
exchange so this condition is also met.
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 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

Since all of the above conditions of controlled foreign company is fulfilled, SL is

classified as controlled foreign company and consequently its income equal to taxable
income determined in accordance with the provisions of the ordinance as if SL is a
resident taxpayer, shall be included in taxable income of GCPL. Under Income tax
ordinance 2001, 1/5 of income from property is allowed as repair allowance so UAE
400,000 (500,000 × 20%) is subject to tax in Pakistan after applying following
formula.
A × (B ÷ 100)
A = 400,000 × 42 ÷ 100 = 168,000
168,000 × 80 = 13.44 million
Rs. 13.44 million shall be included in taxable income of GCPL

In addition to above, GCPL shall be allowed a foreign tax credit of Rs. 1.5 million.

(iii) Lease of factory building with machinery:

Both lease rent of Rs. 18 million (2×9) and brokerage fees of Rs. 0.820 million are
correctly excluded from the business income.

However, their classification under ‘Property income’ is incorrect. Income from the
lease of the building together with plant and machinery is classified under ‘Other
source income’. Further, an allowance of Rs. 3.6 million in respect of 1/5th of rental
income for repairs is not available against the ‘Other source income’.

In computing GCPL’s income chargeable to tax under the head “Income from other
sources”, a full deduction of Rs. 0.82 million is to be allowed for the brokerage fees
and is not to be restricted to 4% of the gross rental income.

On making payment to the commercial importer for the used plant and machinery,
GCPL was not required to deduct withholding tax, based on the premise that the
plant and machinery were sold by the importer in the same condition as they were
when imported.

Consequently, GCPL is entitled to claim:

▪ initial allowance of Rs. 9.5 million (Rs. 38 × 25%) against the plant and
machinery used for the first time in Pakistan, irrespective of the fact that it was
imported in a used condition, and
▪ normal depreciation deductions of Rs. 9.8 (Rs. 98 million × 10%) against the
factory building, and a deduction of Rs. 4.275 million (Rs. 38 million × 0.75 ×
0.15) against the used plant and machinery installed in the factory
building. No initial allowance in respect of factory building is available.

(iv) Loss from discontinued business:

The addition of a loss of Rs. 15 million to profit before tax, on the basis that it relates
to a business activity that ceased during the previous tax year, is an incorrect
treatment.

Income derived by a person in a tax year from a business that has ceased, before the
commencement of the year is chargeable to tax as if the business had not ceased at
the time the income was derived. As income includes loss of income, GCPL is
entitled to adjust the loss from discontinued business against its business income.

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 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

(v) Depreciation:
Adding back of accounting depreciation is correct. However, tax depreciation
(including initial allowance) of Rs. 23.575 million as computed above, related to the
new factory building and plant and machinery, installed therein, shall be deducted
under the head ‘income from other sources’ instead of under the head ‘income from
business’. The deduction of rest of the tax depreciation under the head ‘income from
business’ is correct.

(vi) Recouped expenditure:

Recoupment of expenditure can only be included in the income chargeable to tax, in
the tax year in which it is received if previously the same has been allowed as a
deduction in computing the taxable income. In given scenario, taxation of recouped
expenditure is depend on that whether the exports in tax year 2023 were subject to
tax under FTR or NTR. If it was FTR, the recoupment of expenditure shall not be
chargeable to tax as it was not allowed as a deduction in computing the taxable
income of tax year 2023. However, if GCPL had opted the NTR regime for its exports
in 2023, then this recoupment of expenditure shall be chargeable to tax in 2024 being
the expense was allowed as a deduction in computing the taxable income of tax year
2023. Moreover, it will be chargeable to tax under the head ‘income from business’
instead of ‘income from other sources’.

A.5 (a) As there is a change in sales tax rate from 17% to 18% on 14 February 2023, supply
of CCTV cameras made by CE shall be charged at such rate as in force at the time of
supply.
Time of supply is the time when the goods are delivered or made available to the
recipient. However, part payment is accounted for in the return for that tax period in
which part payment is received.
In given scenario, cameras are delivered to Ahmed on 25 February 2023 so this date
is considered as time of supply, irrespective of their installation. However, since 20%
was paid as an advance on 1 January 2023 so this date is considered as time of supply
for 20% part payment.
In light of above, Rs. 60,000 (300,000×20%) was subject to sales tax rate of 17% i.e.
rate in force in January 2023. However, Rs. 240,000 (300,000×80%) was subject to
revised sales tax rate of 18% i.e. the rate in force on 25 February 2023.
Resultantly, the sales tax amount on this transaction was computed to be Rs. 53,400
(Rs. 10,200+Rs. 43,200).

(b) Drawback on re-export:

On import of ready-made garments from Taiwan, BPL paid sales tax of
Rs. 400,000 (2,000,000×20%) at the import stage.
Since BPL re-exported the garments to Morocco, BPL is entitled to be repaid the
seven-eight of the sales tax paid at the import stage as a drawback i.e. Rs. 350,000
[400,000×7÷8], subject to the following conditions.
▪ The Customs Act, 1969, applies to this drawback process, similar to customs
duties.
▪ There is a two-year time limit for re-exporting the garments from the date of
import i.e. on or before 30 June 2023. Since the re-export occurred after the
deadline, BPL can request an extension from the Board if it has a valid reason.
The Board has the authority to extend the re-export period by an additional one
year.

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 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.6 (a) Zang Limited

Computation of sales tax
For the month of November 2023
Value of supply Rate of Sales tax / FED
(Rs. in million) tax/ FED (Rs. in million)
Input Tax
Tempered glass 15.00 inadmissible -
Packaging material from local manufacturer 24.00 18% 4.32
Furniture 3.00 inadmissible -
Purchase from unregistered persons 1.20 inadmissible -
Import of deep freezers 62.00 25% 15.50
VAT on deep freezers 62.00 - -
Import of touch screens 25.00 18% 4.50
VAT on touch screens 25.00 - -
Import of solar panels 21.00 Exempt -
VAT on solar panels 21.00 - -
Import of plastic 100.00 18% 18.00
(88/0.88)
VAT on plastic 100.00 - -
Payment of royalty [see part (b)] 15.00 -
Tickets to Saudi Arabia [see part (b)] 5.00 -
Travel agent fee [see part (b)] 0.20 -
Total input tax for the month 42.32
Less: Input tax on exempt supplies (W-1) (4.42)
Less: Inadmissible input tax due to supplies to unregistered 15.50/62×
person over threshold in a month 35(45–10) (8.75)
29.15
Output Tax
Microwave ovens 100.00 18% 18.00
Replacement of faulty units of microwave oven [see part (b)] -
Commercial ovens 14.50 18% 2.61
Sale of solar panel through online marketplace to 25.00 Exempt -
unregistered persons (22.5/0.90)
Microwave ovens sold to scrap dealer 1.50 18% 0.27
Supply of deep freezers to retailers 45.00 25% 11.25
Donation of refrigerators to a hospital 20.00 Exempt -
Total output tax 32.13
Less: lower of:
- 90% of output tax (32.13×90%) 28.92
- input tax 29.15 (28.92)
3.21
Further tax @ 4% on sales through online marketplace 25.00 - -
Further tax @ 4% on scrap sales to unregistered person 1.50 4% 0.06
Further tax @ 4% on sales to unregistered tier-1 retailer 45.00 - -
WHT on purchases from unregistered persons 1.20 5/118 0.05
WHT on purchase from SG 15.00 5/118 0.64
Royalty to ME-FED payable 15.00 10% 1.50
Sales tax / FED payable 5.46
Sales tax to be carried forward (29.15 – 28.92) 0.23

W-1: Apportionment of input tax Supplies Input tax

Taxable supplies except exempt supplies and supplies to unregistered 101.5 22.40
person over threshold (10 million) in a month (100+1.5)
Exempt Supplies 20.0 4.42
121.5 26.82
(42.32-15.5)
OR
(4.32+4.5+18.0)

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 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

(b) ▪ The ‘sale price’ of the microwave ovens sold includes the cost of replacement units
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 supply of
replacement units to meet the warranty claim.

▪ Royalty is chargeable @ 16% under Punjab Sales Tax on Services Act, 2011 and
the input is not claimable under reverse charge mode in PRA.
OR
Royalty is chargeable @ 10% under Federal Excise Act, 2005. And as it is not in
VAT mode, therefore, no input is claimable against it in Sales Tax Return.

▪ FED is chargeable @ Rs. 5,000 per ticket but as it is not in VAT mode, therefore,
cannot be claimed in the Sales Tax Return.
Travel agent services are subject to tax @ 5% under Punjab Sales Tax without input
tax adjustment. However, this provision is not applied on services for Hajj and
Umrah.

A.7 In this scenario, Dawood Khan, FCA, may potentially be in breach of the following
fundamental principles of the ICAP's Code of Ethics for chartered accountants:

Professional Behaviour:
The principle of professional behaviour expects members to act in a manner consistent with
the reputation of the profession and to avoid any action that discredits the profession. Dawood
Khan response, indicating a lack of concern about potential financial and tax irregularities,
may raise questions about the firm's commitment to ethical conduct and professional
behaviour in addressing significant issues identified during an engagement.

Integrity:
Dawood Khan response may raise concerns about the principle of integrity. Integrity requires
honesty and straightforwardness in all professional and business relationships. By dismissing
potential financial and tax misconduct without investigation, there may be a lack of integrity
in addressing ethical concerns.
Following is the threat that Razia Sultana may face in the above circumstances:
▪ There could be an intimidation threat if Razia Sultana is concerned about the
consequences of reporting the irregularities, such as potential repercussions within the
firm.

Safeguards:
Identified threat is significant as Razia Sultana is being instructed from the highest level of
the firm’s management. In order to reduce the threat to an acceptable level, one or more of
the following safeguards should be applied:
▪ Discuss the matter with Dawood Khan and persuade him to follow code of ethics.
▪ Consider informing appropriate authorities like senior tax partner.
▪ Thoroughly document her findings.
▪ Seek legal advice/guidance from the regulatory bodies, if necessary.
▪ consider resigning from the job, if the threat could not be reduced to an acceptable level.

(The End)

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