Date: 19TH Aug.

, 2024

Certificate in Accounting and Finance Stage Examination

MOCK
Tax Practices
CAF 02
3 hours – 100 marks
Additional reading time – 15 minutes

Instructions:
1. Attempt all 09 questions.
2. Tax rates are given on the last page.

Question 1
Wasay, a citizen of Pakistan, was working on a foreign vessel belonging to Drop Shipping Company (DSL)
based in America for the past three years. His monthly salary was USD 20,000 which was remitted to his
Pakistani bank account through normal banking channel. The amount received during the tax year 2023 was
converted to Pak Rupees at an average exchange rate of USD 1 = PKR 231.
On 1 October 2022, he resigned from DSL and joined Hamza Pharma Limited (HPL) in Pakistan as a General
Manager. He was offered following monthly salary and allowance in HPL:
Rupees
Basic salary 800,000
Medical allowance 88,000

In addition to the above, he was also provided the following:

(i) Bonus equal to two monthly basic salaries. However, bonus amount was adjusted in proportion to the
duration of his stay in the company. The bonus amount was paid to him on 5 July 2023.
(ii) Provident fund contribution of Rs. 65,000 per month. An equal amount per month was also contributed by
Wasay to the fund.
(iii) Two company maintained cars. Both cars were purchased on 1 October 2022. The car costing Rs.
4,000,000 was used for official purposes whereas the car costing Rs. 2,000,000 was used for personal
purposes.
(iv) A special allowance of Rs. 25,000 per month to meet expenses wholly and necessarily incurred in the
performance of his official duties. Actual expenses incurred by him during the year were Rs. 200,000.
(v) Free lunch from the restaurant owned by one of HPL’s directors. The fair market value of food provided to
him during the year was Rs. 135,000.
Other information relevant to tax year 2023 is as under:
1. Withholding tax deducted by HPL from Wasay’s salary during the tax year 2023 amounted to Rs. 1,500,000.
2. On 1 December 2022, Wasay obtained a loan of Rs. 30 million from a scheduled bank at 15% mark-up per
annum to acquire a residential house.
3. During the year, he received dividends of Rs. 600,000 from a listed company. The amount was net of
withholding income tax at the rate of 15% and Zakat of Rs. 90,000 deducted under the Zakat and Usher
Ordinance, 1980.

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Required: Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under
the appropriate head of income, the total income, taxable income and net tax payable by or refundable to Wasay
for the tax year 2023. (20 marks)
Question 2
Kumar & Co. is an association of persons (AOP) with three members namely Bilal, Okahsa and Suleman (Pvt.)
Limited (SPL), sharing profit and loss in the ratio of 20:30:50 respectively.
Following information is available with regard to AOP and its members for the tax years 2022 and 2023:
(i) AOP’s income for tax years 2022 and 2023

2022 2023
---------- Rupees -----------
Income from business* (20,000,000) 30,000,000
Dividend income - 6,000,000
*Net of annual fixed commission of Rs. 8,000,000 to SPL

(ii) On 1 February 2023, Bilal earned capital gain of Rs. 5,500,000 on sale of his property which was
purchased on 1 January 2020.
(iii) Okasha also operates a sole proprietor business from which he earned profits of Rs. 8,000,000 and Rs.
2,300,000 in tax years 2022 and 2023 respectively.
Required: Under the provisions of the Income Tax Ordinance, 2001 compute the following for the tax years 2022
and 2023:

• Taxable income of AOP

• Taxable income and tax liability of Bilal and Okasha (12 marks)
Note: Show all relevant exemptions, exclusions and disallowances. Tax rates for tax year 2022 are the same as
tax year 2023. Ignore minimum tax under section 113.

Question 3
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:

1. Briefly discuss the terms ‘Normal assessment’ and ‘Best judgement assessment’. (02 marks)

2. State the requirements that should be complied with by a sole proprietor on discontinuance
of business. (02 marks)

3. List the additional records which are required to be kept by a sole proprietor whose business
income exceeds Rs. 500,000 as compared to a sole proprietor whose business income is
upto Rs. 500,000. (02 marks)
4. Under the Income Tax Ordinance, 2001 identify four situations under which an appeal may
be filed with the Commissioner (Appeals). (02 marks)

Question 4

State any four non-revenue objectives which the government achieves by imposing taxation. (04 marks)

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Question 5

Sakina Garments Limited (SGL) had filed its tax return for the tax year 2018 on 30 September 2018. On 25
February 2023, the Commissioner of Income Tax, on the basis of definite information, issued a notice u/s 122
(5) to SGL for the audit of books of account for the tax year 2018. The accountant informed the chief executive
officer that tax audit for the tax year 2018 had already been conducted in 2022 and an amended assessment
order u/s 122(5A) was issued by the Commissioner on 24 February 2023.

Required: Under the provisions of the Income Tax Ordinance, 2001:

(a) Explain the term ‘Definite information’. (03)
(b) Discuss whether the Commissioner is empowered to make further amendment in the
assessment order issued on 24 February 2023. (07)

Question 6
Suad Bakers (SB) is a bakery business owned by Mumtaz and her two brothers, Ehtisham and Gulzar, who
share profits in the ratio of 60:20:20, respectively. SB has three retail outlets located in Karachi, and it also owns
agriculture land that is rented to a chicken farmer. SB is registered with sales tax authorities as a Tier-1 retailer.

The following information has been extracted from the records of SB for the year ended 30 June 2023:

Rs. in million
Net sales 600
Less: Cost of sales (300)
Gross profit 300
Less: Operating expenses (173)
Profit before tax 127

Additional information:
(i) Net sales include rental received from the chicken farmer, as detailed below:

• A monthly payment of Rs. 0.7 million.

• Supply of 120 Paitis of eggs (agriculture produce) every month. Each Paiti holds a market value of Rs.
7,200. SB consumed these eggs in the production of various bakery items, but they are not accounted for
in the abovementioned cost of sales.

(ii) Cost of sales include:

• purchase of various raw materials worth Rs. 27 million on which no withholding tax was deducted at the
time of payment. SB made total purchases of Rs. 200 million during the year.
• purchase of milk powder worth Rs. 10 million, of which 10% is delivered to the homes of the three partners
for their personal use.
• salaries of Rs. 8.2 million, Rs. 6 million, and Rs. 4.8 million to Mumtaz, Ehtisham, and Gulzar, respectively.
• purchase of a new bakery plant worth Rs. 15 million.

(iii) Operating expenses include:

• purchase of point-of-sale machines worth Rs. 0.5 million which were installed on 1 July 2022 in all outlets
to integrate with FBR’s computerized system for real time reporting of sales.

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 • payment of Rs. 5.6 million on 1 January 2023 to an IT company for the development of an application to
facilitate online orders from customers. The useful life of this application is expected to be five years and
is available for use from 1 October 2023.

(iv) On 1 February 2023, Mumtaz contributed her personal van to the business, which she had purchased at a
cost of Rs. 7 million on 1 January 2022. The fair market value of the van at the time of transfer was Rs.9
million.

Required: Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute
under the correct head of income, the total income, taxable income, and tax liability of SB for the tax year 2023.
(18 marks) Ignore minimum tax under section 113.Show all relevant exemptions, exclusions and disallowances.

Question 7

Give two examples, each of tax avoidance and tax evasion. Also suggest the appropriate tax measures to
prevent that tax evasion.( 6 marks )

Question 8
Hashim Associates (HA), a sole proprietor business, is registered under the Sales Tax Act, 1990 as
manufacturer cum importer and is engaged in the manufacturing and supply of consumer products. Following
information has been extracted from HA’s records for the month of February 2023:
Rupees
Supplies
Taxable goods to registered customers 3,750,000
Taxable goods to un-registered 1,250,000
customers
Exports of taxable goods to Saudi Arabia 1,700,000

Purchases
Taxable goods from registered suppliers 1,880,000
Taxable goods from un-registered 1,020,000
suppliers
Packing material from un-registered 415,000
suppliers

Additional information:
(i) Supplies of taxable goods to registered customers include:

• goods worth Rs. 222,000 (net of special discount of Rs. 85,000). These goods were sold to an
associated undertaking. The special discount was not reflected on the invoice.
• goods worth Rs. 130,000 supplied to a customer in Murree. HA had received full payment against the
goods in November 2022.
(ii) Supplies of taxable goods to unregistered customers include sales of Rs. 230,000 to end consumers.
(iii) Purchases from registered suppliers include:

• goods worth Rs. 150,000 purchased from Hussain Enterprises on 5 February 2023. On 20 February
2023, Hussain Enterprises informed HA that with effect from 1 February 2021, its registration has been
suspended by the Commissioner Inland Revenue.

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 • goods worth Rs. 85,000 purchased in cash.
• goods worth Rs. 55,000 purchased from Abdul Bashir Traders. The supplier did not declare the sale of
these goods in its tax return for the month of February 2023.

(iv) Taxable goods worth Rs. 150,000 were used in the business meeting held for the promotion of HA’s
business.
(v) A machine costing Rs.2,700,000 was acquired and commissioned into operation in February 2023. The
machine was used for both taxable and zero rated supplies.
(vi) Electricity bill of Rs. 92,000 for the month of September 2022 was paid in October 2022. However, related
input tax of Rs. 13,030 has still inadvertently remained unclaimed.
(vii) The auditors have proposed to make a provision of 50% against obsolete and expired stock of Rs.
350,550. The goods are lying in warehouse since July 2019. Input tax relating to this stock was claimed
in July 2019.
(viii) Sales tax credit of Rs. 425,000 has been brought forward from previous tax period.
All the above figures are exclusive of sales tax, except where it is specified otherwise. Sales tax is payable at
the rate of 18%.
Required: In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the
amount of sales tax payable by or refundable to HA and input tax to be carried forward, if any, for the tax period
February 2023. (18 marks)
Question 9
Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, explain whether the following
persons are required to be registered with the Inland Revenue Department:

1. A manufacturer of taxable supplies located in the residential area of Korangi, Karachi. (01 marks)
2. A retailer whose annual turnover is Rs. 20 million. (01 marks)
3. A distributor of exempt supplies. (01 marks)
4. An exporter of taxable goods. (01 marks)

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 EXTRACTS FROM THE INCOME TAX ORDINANCE, 2001

Tax rates for salaried individuals

Sr # Taxable Income Rate of tax

1. Where the taxable income does not exceed Rs.600,000 0%

2. Where the taxable income exceeds Rs.600,000 but does 2.5% of the amount exceeding Rs.600,000
not exceed Rs.1200,000

3. Where the taxable income exceeds Rs.1,200,000 but Rs.15,000 + 12.5% of the amount exceeding
does not exceed Rs.2,400,000 Rs.1,200,000

4. Where the taxable income exceeds Rs.2,400,000 but Rs.165,000 + 22.5% of the amount exceeding
does not exceed Rs.3,600,000 Rs.2,400,000

5. Where the taxable income exceeds Rs.3,600,000 but Rs.435,000 + 27.5% of the amount exceeding
does not exceed Rs.6,000,000 Rs.3,600,000

6. Where the taxable income exceeds Rs.6,000,000 Rs.1095,000 + 35% of the amount exceeding
Rs.6,000,000

Tax rates for non-salaried individuals and AOP

Sr # Taxable income Rate of tax

1. Where the taxable income does not exceed Rs. 600,000 0%

2. Where the taxable income exceeds Rs.600,000 but does 7.5% of the amount exceeding Rs.600,000
not exceed Rs.800,000

3. Where the taxable income exceeds Rs.800,000 but does Rs.15,000 + 15% of the amount exceeding
not exceed Rs.1,200,000 Rs.800,000

4. Where the taxable income exceeds Rs.1,200,000 but does Rs.75,000 + 20% of the amount exceeding
not exceed Rs.2,400,000 Rs.1,200,000

5. Where the taxable income exceeds Rs.2,400,000 but does Rs.315,000 + 25% of the amount exceeding
not exceed Rs.3,000,000 Rs.2,400,000

6. Where the taxable income exceeds Rs.3,000,000 but does Rs.465,000 + 30% of the amount exceeding
not exceed Rs.4,000,000 Rs.3,000,000

7. Where the taxable income exceeds Rs.4,000,000 Rs.765,000 + 35% of the amount exceeding
Rs.4,000,000

Initial allowance
The rate of initial allowance shall be 25% for plant and machinery.

Depreciation rate
Depreciation rate specified for the purpose of section 22 for plant and machinery is 15%.

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 Tax rates for Capital Gain on Disposal of Securities

Rate of Tax for Tax

Year 2023 and
S# HOLDING PERIOD
onwards
1 Where holding period of a security does not exceed one year. 15%

2 Where holding period of a security exceeds one year but does not 12.5%
exceed two years.

3 Where holding period of a security exceeds two years but does not 10%
exceed three years.

4 Where holding period of a security exceeds three years but does not 7.5%
exceed four years.

5 Where holding period of a security exceeds four years but does not 5%
exceed five years.

6 Where holding period of a security exceeds five years but does not 2.5%
exceed six years.

7 Where holding period of a security exceeds six years. 0%

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