ADVANCED TAXATION

Suggested Answers
Final Examinations – Summer 2011

A.1 Mr. Khan

Computation of Taxable income and Tax thereon
Tax Year 20X4

Rs. in ‘000
Income from Salary
Basic salary for six months (350,000 × 6) 2,100
Conveyance allowance (50,000 × 6) 300
Value of accommodation (45% of basic salary or fair market rent whichever is higher) 945
(Rule 4)
Company maintained car (2.0 million × 5% × 1/2) 50
Interest free loan [(2.5 million – 1.5 million) × 0.13 x 6/12] 65
Interest on amount of loan utilized for the purchase of asset [ Sec.13(8) ] -
Amount of loan waived by TL (2.5 million × 25%) 625
Compensation under redundancy scheme (B) 4,000
Unapproved gratuity (2.0 million – 75K exempt under clause 13 of Part I of Second 1,925
Schedule)
Car purchased (1.5 million – 1.0 million) [ Sec. 13(11)] 500
Total Salary Income 10,510

Income from property

Rent from Mr. Riaz for the Shop – March to June (137,500 × 4) 550
Non-adjustable security deposit ( 500,000 x 1/10) [ Sec. 16(1)] 50
Refundable security deposit – not taxable (Rs. 600,000) -
Rent from bank for the residential portion –April to June 2011 (100,000 × 3) 300
Total Property Income – Separate Block of Income (C) 900

Capital Gain
Sale of share of a listed company -
(Gain on sale of listed shares, which were held for the period of more than 12 months
is not taxable)
-
11,410
Less: Donation paid to an un-approved trust (inadmissible deduction) -
Taxable income 11,410

Computation of tax liability and tax payable:

(as salary income is more than 50% of the total income so Mr. Khan shall be treated
as salaried person)
Total taxable income 11,410
Less: Property income ( separate block) (900)
Less: Redundancy payment ( on the assumption that Mr. Khan, by notice in writing to
the Commissioner, would elect to be taxed on the basis of average rate of tax) (4,000)
Salary Income ( excluding redundancy payment) (A) 6,510
(a) Tax on Rs. 6,510 K @ 20% 1,302
(b) On redundancy payment at the average rate of tax (4.0 million x 18%) 720
(c) On income from property ( 12,500 + 7.5% x 500,000) 50
Total tax liability 2,072
Less: Tax deducted at source from:
Salary income (1,837)
Property income (197.5)
Balance tax payable 37.5

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 ADVANCED TAXATION
Suggested Answers
Final Examinations – Summer 2011

A.2 (a) Tax paid on stocks acquired before registration:

The tax paid on goods purchased by Ms. Hina who subsequently got voluntary registration under
the Act or the rules made thereunder, shall be treated as input tax, subject to the following
conditions:

In case of locally purchased packed dates:

(i) The dates were purchased from a registered person against a valid sales tax invoice.
(ii) The invoice was issued during a period of thirty days before making the application for
registration; and
(iii) Such dates constitute her verifiable unsold stock on the date of application for voluntary
registration.

In case of imported coffee:

(i) The tax paid on the coffee at import stage must be during a period of ninety days before
making an application for registration.
(ii) She holds the bill of entry relating to such coffee; and
(iii) The unsold or un-consumed stocks are verifiable on the date of application for voluntary
registration.

(b) In view of the above, the following amount of input tax can be claimed by Ms. Hina with her sales
tax return for the month of May 2011.

In case of locally purchased packed dates: 41,325

(458 packets of dates purchased on March 28, 2011)

In case of imported coffee: 39,900

(42 kg of coffee imported on February 25, 2011)
81,225

A.3 (i) The Commissioner’s contention is incorrect as the tax collected on import of plant and
machinery by an industrial undertaking for its own use is not final tax and hence it is adjustable.

(ii) Apportionment is only required for those expenditures which are common in nature.

The expenditures included in cost of goods manufactured should not be apportioned unless
these include any item which can be considered as a common expenditure.

The Commissioner’s contention with regard to cost of goods manufactured is, therefore,
incorrect unless he can prove otherwise, as discussed above.

(iii) Immovable property is not covered under the definition of “Capital asset”, therefore, any gain on
sale of immovable property would not be considered as a capital gain. However, such gain would
be treated as income from business and would be charged to tax accordingly. The amount of gain
is calculated as follows:

Rs. in million
Sale proceed of immovable property 120
Less: Tax WDV
Cost of immovable property ( consideration received) 120
Tax depreciation charged ( Rs. 90m – Rs. 70m) (20)
Tax WDV 100
Tax gain on disposal 20

Therefore, the gain of Rs. 20 million would be offered to tax as income from business instead of
Rs. 50 million as shown in the financial statements.

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 ADVANCED TAXATION
Suggested Answers
Final Examinations – Summer 2011

(iv) Where a person has been allowed a deduction for any expenditure incurred in deriving income
from business and the person has not paid the liability or a part of the liability to which the
deduction relates within three years of the end of the tax year in which the deduction was
allowed, the unpaid amount should be chargeable to tax under the head business income in the
first tax year following the expiry of three years’ period.

The Commissioner’s observation is, therefore, correct that such Royalty having not been paid for
over three years should have been offered to tax in the current tax year.

(v) Bad debt is allowed if the amount of debt was previously included in the person’s income from
business or in respect of money lent by a financial institution in deriving income from business.
Since BL is not a financial institution, loan written off could not be allowed as Bad debt and,
therefore, the Commissioner’s contention is correct.

A.4 Gadget Limited (GL)

Computation of Net Sales Tax Liability
For the Tax Period May 2011
Rs. in ‘000
Taxable
Sales Tax
Value
Sales Tax Credit (Input Tax)
Domestic purchases:
− Steel sheets, copper wire, aluminum and allied R.M 2,500 425
− Lubricants, spare parts and stores excluding cash purchases (5,400 – 900) 4,500 765
− Gift items for customers -carpets, fancy watches etc. - -
− Printed stationary for the maintenance of factory record 500 85
Federal Excise Duty on Services Under Sales Tax Mode:
− On banking services
 L/C opening charges 500 50
 Safe custody fee 100 10
− On billboard advertisement 700 70
8,800 1,405
Less: Purchases returned 900 (153)
Input tax attributable to both taxable and zero rated goods 1,252
Less: un-adjustable input tax ( export and zero rated) W-1 (668)
Input tax for the month 584

Rs. in ‘000
Taxable
Sales Tax
Value
Sales Tax Debit ( Output Tax)
Domestic supply of manufactured goods:
− Electric switch-gears and electric motors to diplomatic mission in Islamabad 1,900 0
− Air Coolers to customers based in LHR, ISD and FSD 7,000 1,190
− Supply of motors and switches for consumption onboard a container ship 650 0
Export of electric air coolers to customers in Spain and Zanzibar 3,800 0

Federal Excise Duty on Services Under Sales Tax Mode:

On franchise services 1,400 140
Output tax for the month 1,330
Sales tax withheld by the return filer as withholding agent from the payment on
account of stationery (1%) 500 5
Admissible credit (90% of 1,330 or 584 whichever is lower) (584)
Sales tax payable (1,330 + 5 – 584) 751
Refund claim (input on export and zero rated supplies) W-1 668

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 ADVANCED TAXATION
Suggested Answers
Final Examinations – Summer 2011

Rs. in ‘000
Taxable
Sales Tax
Value
W-1
Domestic purchases:
− Steel sheets, copper wire, aluminum and allied R.M 2,500 425
− Lubricants, spare parts and stores 4,500 765
− stationary for the maintenance of inventory record 500 85
Federal Excise Duty on Services Under Sales Tax Mode:
− On banking services
 L/C opening charges 500 50
 Safe custody fee 100 10
− On bill board advertisement 700 70
Total 1,405

Total sales of manufactured goods 13,350

Export supplies 3,800
Other zero rated supplies (1,900 + 650) 2,550
6,350

Input tax on zero rated and export to be claimed as a refund 668

(6,350 /13,350 x 1,405)

A.5 (a) Tax credit to a person registered under the Sales Tax Act, 1990:
A registered manufacturer under the Sales Tax Act, 1990 shall be entitled to a tax credit of two
and a half percent of tax payable for a tax year. Subject to the following conditions:

(i) Ninety percent of its sales during the said tax year are to persons who are registered
under the Sales Tax Act, 1990.
(ii) The person shall provide complete details of the persons to whom the sales were made.
(iii) The income is not covered under final tax or minimum tax.
(iv) Any unadjusted tax credit for the tax year shall not be carried forward to the next year.

(b) Principles of taxation of joint venture:

(i) A joint venture is treated as an association of persons and is liable to tax separately from
its members.

In case a joint venture has net taxable income, tax would be calculated according to the
rules and principles applicable to the relevant head of income.

In case a joint venture incurs a loss in a tax year, the entire loss would be carried forward
to the following tax year and so on for a maximum period of six tax years.

(ii) Share of profits of company to be added to taxable income:

The share of profit derived by SPL and ECPL from the joint venture shall be added to their
respective taxable incomes. Tax liability of each company will then be calculated on their
total taxable income.

Tax liability so arrived at will be reduced by an amount of tax credit calculated in

accordance with the following formula:
(A/B) x C
Where -
A is the amount of share of profit received by SPL or ECPL from the joint venture;
B is the taxable income of the joint venture; and
C is the amount of tax assessed on the joint venture.
SPL and ECPL’s share in the loss of the joint venture would not be allocated to them.

Where SPL and ECPL’s share in the profit of a joint venture are added to their respective
taxable income; They would not be permitted a subsequent set-off in case the venture
sustains a loss.
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 ADVANCED TAXATION
Suggested Answers
Final Examinations – Summer 2011

However, SPL & ECPL being the members of a joint venture shall be allowed to set-off
their own tax losses against their share of profit from the venture and pay tax on their
adjusted income.

In case, the net effect of the above set-off results in a tax loss, both the companies shall be
entitled to carry forward their respective losses to the following tax year.

(c) Foreign-source income of short-term resident individuals:

Short- term resident individual is an individual who is:-

(i) a resident solely by reason of his employment; and

(ii) present in Pakistan for a period or periods not exceeding three years.

The foreign source income of such individuals shall be exempt from tax under the
Ordinance.

However, the following incomes are not covered under this exemption provision:

(i) any income derived from a business of the person established in Pakistan; or
(ii) any foreign-source income brought into or received in Pakistan by the person.

A.6 Group Taxation:

Holding companies and subsidiary companies of 100% owned group may opt to be taxed as
one fiscal unit.

Following conditions are required to be fulfilled for availing such benefit:

(a) Besides consolidated group accounts as required under the Companies Ordinance,
1984, computation of income and tax payable shall be made for tax purposes.

(b) The companies in the group shall give irrevocable option for taxation as one fiscal unit.
(c) The group taxation shall be restricted to companies locally incorporated under the
Companies Ordinance, 1984.
(d) The relief under group taxation would not be available to losses prior to the formation
of the group.
(e) The option of group taxation shall be available to those group companies which comply
with such corporate governance requirements as may be specified by the Securities and
Exchange Commission of Pakistan from time to time and are designated as companies
entitled to avail group taxation.
(f) Group taxation may be regulated through rules as may be made by the Board.

A.7 (a) Certain transactions not admissible:

(i) Notwithstanding, the payment was made through a crossed pay order drawn on
the business bank account of the buyer, the transaction is inadmissible for the
purpose of claiming input tax since the payment was made after 180 days of the
issuance of the tax invoice.

(ii) The payments made through credit card are treated as transactions through the
banking channel, subject to the condition that such transactions are verifiable
from the bank statements of the respective buyer and the supplier.

Under the circumstances, since Mr. Baba paid the amount using his personal
credit card which would not be verifiable from the bank account of X Limited ( i.e.
business bank account), the company shall not be entitled to claim input tax
credit, adjustment or deduction, or refund, repayment or draw- back or zero
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 ADVANCED TAXATION
Suggested Answers
Final Examinations – Summer 2011

rating of tax payment.

(iii) The tax charged on the acquisition of fixed assets shall be adjustable against the
output tax in twelve equal monthly installments. Z Limited would therefore, be
entitled to claim Rs. 2.125 million each month in equal installment.
(iv) Since extra tax has been paid on the specified electric goods they shall be exempt
from payment of sales tax on subsequent supplies. However, no input tax
adjustment would be allowed to Mr. Haq on such purchases. Therefore he would
not be entitled to claim the entire amount of Rs. 88,750.

(b) Definite information includes information on:

(i) sales or purchases of any goods made by the taxpayer
(ii) receipts of the taxpayer from services rendered; or
(iii) any other receipts that may be chargeable to tax under the Ordinance; and
(iv) the acquisition, possession or disposal of any money, asset, valuable article by the
tax payer; or
(v) investment made by the taxpayer; or
(vi) expenditure incurred by the taxpayer.

A.8 (a) Collection of excess duty:

Every person who for any reason whatever has collected or collects any duty, which is
not payable as duty or which is in excess of the duty actually payable and the incidence
of which has been passed on to the consumer, shall pay the amount so collected to the
Federal Government and all the provisions of Federal Excise Act or rules made there
under shall apply for the recovery of such amount and claim for the refund of any such
amount paid or recovered shall not be admissible on any ground whatever.

(b) Duty on services provided free of charge:

Where any services are liable to duty under Federal Excise Act at a rate dependent on
the charges therefore, the duty shall be paid on total amount of charges for the services
including the ancillary facilities or utilities, if any, irrespective whether such services
have been rendered or provided on payment of charge or free of charge or on any
concessional basis.

(THE END)

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