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ICAP
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Note:
Updated for the Finance Act 2016
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C
Advanced Taxation
Contents
Page
Section A Questions 1
Section B Answers 63
I
Advanced Taxation
Question Answer
page page
21 ZJ Limited 25 102
22 Desi (Pvt) Limited - Thin Capitalization 27 104
Chapter 3 sales tax
23 Olive Limited 28 106
24 Kamyab Engineering Limited (KEL) 29 108
25 Gadget Limited (GL) 30 110
26 Sunshine Limited (SL) 31 112
27 Ummeid Limited (UL) 32 114
28 Mazboot Furnishers (MF) 33 116
29 Tender Pops Limited (TPL) 35 118
30 Masawi Limited (ML) 36 119
31 Omega Limited (OL) 37 120
32 Harfun Limited (HL) 38 122
33 Razi Limited (RL) 39 124
34 Karma Limited 40 126
Chapter 4 Capital Gain
35 Mr. Parekh 42 128
36 Capital Gain 42 129
Chapter 5 Other Areas Income Tax
37 Book Author 43 131
Foreign Source Income - Returning
38 43 131
expatriate
39 Transfer of Assets 43 131
40 Employee Share Scheme 43 132
41 Bad debts, Recovery of bad debts 43 133
Herbal Trading (HT) - Disposal of
42 44 134
business
Withdrawal of approval to Non-
43 45 136
Profit/foundations (IT Rules)
44 Residential Status 45 136
45 Beetle Limited (BL) 46 138
46 Credit for sales tax registered person 47 139
Skilled (Pvt.) Limited - Taxability of Joints
47 47 139
Venture
48 Short term resident 47 140
49 Group Taxation 47 140
50 Tax avoidance scheme 47 141
51 Compulsory taxation under FTR 47 141
Question Answer
page page
52 Selection of Audit 48 142
53 Khalq Limited (KL) - Government grant 48 143
54 Moon Limited (ML) - foreign payment 48 143
Mr. Pansari - dividend from exempt
55 48 143
income
Gadget Limited (GL) - payment to non-
56 49 144
resident
57 Opting out of PTR 49 144
58 Associates 49 145
59 Tax evasion and avoidance 49 145
Derivative Product, Wash Sales, Tax
60 49 146
Swap Sales
61 Methods for Cost of stock in trade 49 146
62 Salary of foreign government employee 49 146
Exception to Pakistan source Royalty &
63 50 147
FTS
64 Profit on debt 50 148
65 Tax admissible vs tax reliefs 50 148
66 Resale price method 50 148
Group Taxation and Pre commencement
67 50 149
Expenditure
Sweet Limited (SL) - Advance Tax and
68 50 150
default penalty
Depreciable Asset, Eligible Depreciable
69 51 151
Asset
70 Speculation Business 51 151
Disposal of business by AOP to Wholly
71 51 151
owned company
72 Mr. Hoshyar - Penalty 51 152
73 Advance Ruling 51 152
74 Automatic selection of audit 51 153
75 Rejection of reward to whistle-blower 52 153
76 Imputable Income, PMEX 52 153
77 Definite information 52 153
Chapter 6 Other Areas Sales Tax
78 Mr. Furqan - Returns, De-registration 53 154
79 Withholding agents 53 155
Qualification / Disqualification of
80 53 155
Representative
81 Consideration in kind - supply 53 156
Question Answer
page page
82 Stock acquired before registration 54 157
83 Inadmissible input tax 54 157
84 Recovery of tax arrears 55 158
85 Representative of non-resident 55 159
e-intermediary appointment,
86 55 159
responsibilities, cancellation
87 Representatives and personal liability 55 161
88 Service of notice-non resident 55 161
89 Registration 55 162
90 Credit note 56 162
91 Time of supply, CREST, supply chain 56 162
92 Scope of special audit (ST-Rules) 56 163
93 Joint and several liability 56 163
94 Property not liable to attachment 56 164
95 Continuance of Proceeding (death) 57 165
96 Appointment of committee - disputes 57 165
Similar supply open market price,
97 57 166
special returns
Black Listing and Suspension of
98 57 166
registration
99 Registration of retailers 57 167
100 Registration of Retailers 57 167
101 Non- active taxpayer 58 168
102 Temporary Registration 58 168
103 Taxable services 58 169
104 Mr. Munaf - Refund 58 169
Chapter 7 Other areas federal excise act.
105 Fill in the blanks 59 170
106 Applicable value and rate of duty, supply 59 170
107 Records 59 170
108 Non-fund banking services, Franchiser 59 171
109 Excess duty collected 59 171
110 Person liable to pay FED 59 172
111 Alternative Source 60 172
112 Duty drawback 60 172
Discontinued business enterprise,
113 60 173
transfer of ownership
114 Due date and duty due 60 173
Question Answer
page page
115 Default surcharge, KIBOR 60 174
Conveyance, distributor, recovery of duty,
116 60 174
particular of service invoice
117 Cottage industry 61 175
118 Construed manufacturer, sales tax mode 61 175
119 Closure of business 61 176
120 Franchise 61 176
Withdrawal of Registration suspension
121 61 176
order
122 Consequences of wrong registration 61 176
(Repetition of Q106)Determination of
123 61 177
value for duty
Circumstances and Procedure of De-
124 61 177
registration
A
Advanced Taxation
SECTION
Questions
CHAPTER 01 INDIVIDUAL
(v) On January 01, 2017, Mr. Adil started using one of the office equipment at his
residence. The market price of the equipment at that time was Rs. 1.5 million
with a written down value of Rs. 1.0 million.
(vi) On July 01, 2016, Mr. Adil let out his apartment to a close relative at a monthly
rent of Rs. 10,500. The fair market rent in the area was Rs. 12,250. He also
received a non-adjustable deposit of Rs. 110,000. Another non-adjustable
deposit of Rs. 85,000 received from an earlier tenant in July 2014 was refunded.
(vii) Mr. Adil purchased 50,000 shares of Rs. 10 each, of an unlisted public company
in July 2012 at the rate of Rs. 150 per share. In August 2013, he received bonus
shares, ranking pari passu, in the ratio of 1 bonus share for every 5 shares held.
In May 2017, he sold 80% of his bonus shares at a price of Rs. 135 per share.
Required:
In the light of the provisions of Income Tax Ordinance, 2001, compute the taxable
income and tax liability of the following for the tax year 2017:
(a) Burq Enterprises
(b) Mr. Adil
2 Mr. Khan
Mr. Khan has been working for a listed company Turtle Limited (TL) for the last many
years. The details of his emoluments during the tax year ended June 30, 2017 are as
under:
Rupees
Basic salary (per month) 350,000
Conveyance allowance (per month) 50,000
In addition to the above cash emoluments, Mr. Khan was also provided with the
following:
(a) A rent free furnished accommodation with a fair market rent of Rs. 100,000 per
month.
(b) An 1800cc company maintained car, both for business and private use. The car
was purchased by TL on July 1, 2014 at a fair market value of Rs. 2,000,000.
(c) On July 1, 2016 he was provided with an interest free loan of Rs. 2,500,000
which is repayable in lump sum in December 2017. The prescribed benchmark
rate is 10% per annum. On December 1, 2016 Mr. Khan utilized 60% of the
amount of loan for purchasing a double storey bungalow. The total cost of the
bungalow was Rs. 25,000,000. The bungalow, on its ground floor, also had a
suitable space for opening a departmental store.
In order to increase its operational efficiency, TL announced a redundancy scheme to
its employees. Mr. Khan opting for the scheme resigned from TL with effect from
January 1, 2017. Upon resignation, 25% of his outstanding loan balance was waived
by TL and the remaining loan amount was adjusted from his final settlement. He
received the following payments from TL:
Rupees
Compensation under the redundancy scheme 4,000,000
Gratuity under unapproved scheme 2,000,000
(i) Tax of Rs. 1,837,000 was withheld by TL from the above payments.
(ii) Mr. Khan was allowed to purchase the 1800cc car at an accounting book value
of Rs. 1,000,000 which he sold in the open market at a price of Rs. 1,500,000.
(iii) On March 1, 2017, Mr. Khan rented out the ground floor of his bungalow to Mr.
Riaz, for establishing a departmental store, at a monthly rent of Rs. 137,500.
Due to the strategic location of the store, he also received adjustable and non-
adjustable deposits of Rs. 600,000 and Rs. 500,000 respectively.
(iv) On April 1, 2017, he rented out the residential portion of the bungalow to a
Commercial Bank for their marketing executive. He received gross amount of
Rs. 2,400,000 as two years advance rent. The Bank deducted tax of Rs.
197,500 from such payment.
(v) A donation of Rs. 500,000 was made to an un-approved trust for the construction
of mosque.
(vi) In July 2014, Mr. Khan was issued shares in TL. The fair market value of shares
at the time of issue was Rs. 500,000. He disposed off these shares in June 2017
at a gain of Rs. 500,000.
Required:
Compute the taxable income, tax liability and tax payable/ refundable, if any, to Mr.
Khan for the tax year 2017. The average rate of tax of Mr. Khan for the last three
years was 18%.
3 Mr. Yaqeen
Mr. Yaqeen, a Pakistani citizen, returned to Pakistan on 30 June 2016 after residing
for six years in Norway. On 1 July 2016 he joined a private hospital KKUH and
received following emoluments:
Rupees
Basic salary (per month) 500,000
Medical allowance (per month) 60,000
Leave fare assistance 240,000
On 1 January 2017, Mr. Yaqeen resigned from the hospital and joined Dil (Private)
Limited (DPL), a company engaged in health care and production of dental products.
Mr. Yaqeen received Rs. 3,000,000 from DPL as consideration for joining the
company. DPL agreed to pay following emoluments to Mr. Yaqeen for the tax year
2017:
Rupees
Basic salary (per month) 800,000
Medical allowance (per month) 80,000
Utilities allowance (per month) 100,000
On 1 January 2017, DPL provided him with refrigerator, cooking range and washing
machine for his use at home. The book value of these appliances was Rs. 200,000
and these were returnable to the company after four years. 15% depreciation was
charged by DPL on these appliances.
On 31 March 2017, he was given an option to purchase 2,000 shares of DPL at Rs. 50
per share. The breakup value of the company on that date was Rs. 150 per share.
On 1 April 2017, he received a loan of Rs. 5,000,000 from DPL for the purchase of a
house. The profit on loan was payable at the rate of 8% per annum. The prescribed
bench mark rate is 10% per annum.
Other information relevant to Mr. Yaqeen for the tax year 2017 is as under:
(i) On 15 April 2017, he fell ill and was admitted to KKUH where he had been
working during his employment. The hospital incurred Rs. 50,000 on his
treatment but charged nothing to him.
(ii) On 30 April 2017, he received salary arrears of Rs. 900,000 from his ex-
employer in Norway.
(iii) Mr. Yaqeen had 30 acres of agricultural land in Dheer which he did not cultivate
himself. During tax year 2017, he received annual rent of Rs 600,000 from the
tenant cultivating the land.
(iv) On 1 May 2017, he spent Rs. 800,000 on the renovation of his residential
house. The entire amount was obtained as a loan from a scheduled bank on
which a profit of Rs. 20,000 was paid to the bank during the tax year 2017.
(v) On 15 June 2017, he received insurance claim of Rs. 600,000 against theft of a
painting which was stolen on 31 May 2017. The painting was purchased by him
on 1 January 2016 for Rs. 350,000. He had paid insurance premium of Rs.
24,000 and also paid lawyers fee of Rs. 50,000 who represented him in the
settlement proceedings.
(vi) On 15 July 2016, Mr. Yaqeen received 20,000 shares in AB (Private) Limited
(ABL), a company incorporated under the Companies Ordinance, 1984 as a
dividend in specie. On 30 June 2017, he sold 15,000 shares in ABL for Rs.
425,000. The fair market value of these shares, on the date of issue, was
estimated at Rs. 25 per share.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and
net tax payable for the tax year 2017. Give brief reasons for the treatment of items in
(v) and (vi) above. Also explain the treatment of any items that are not appearing in
your computation.
4 Mr. Sohail
Mr. Sohail, a resident individual, owns a building in Clifton area of Karachi. On 1
October 2016, he rented out the building to Mr. Baqir at an annual rent of Rs.
1,200,000. This amount included Rs. 15,000 per month for arranging two security
guards for the building. Following expenses were incurred by Mr. Sohail on the
building during the tax year 2017.
Rupees
Repairs and renovation 35,000
Property tax 20,000
Insurance premium 10,000
Rent collection charges 3,000
Mr. Sohail also paid a salary of Rs. 4,000 per month to each of the two security guards
at the building.
Required:
Under the provision of Income Tax Ordinance, 2001 calculate the taxable income of
Mr. Sohail under the appropriate heads of income for the tax year 2017.
5 Mr. Iqbal
Mr. Iqbal, aged 45 years, is working as a Chief Engineer in a listed company Tameer
Limited (TL). The company is engaged in the manufacture of chipboards for the local
market. He derived following emoluments during the tax year ended 30 June 2017:
Rupees
Basic salary (per month) 300,000
Cost of living allowance (per month) 50,000
Milk allowance (per month) 10,000
In addition to the above emoluments, Mr. Iqbal was also provided the following:
(i) Special bonus equal to one months basic salary paid on 5 June 2017.
(ii) A new company maintained car for his personal use. The car was purchased on
1 March 2017 at a cost of Rs. 1,800,000. However, the cost of the car would
have been Rs. 3,000,000 had the company obtained it on finance lease. Mr.
Iqbal, in accordance with the terms of his employment, purchased his previous
car from TL for Rs. 250,000. This car was provided to him solely for business
purposes. The fair market value of the car at the time of sale to Mr. Iqbal was Rs.
600,000.
(iii) A reimbursement of Rs. 36,000 in respect of drivers salary. Mr. Iqbal paid Rs.
60,000 to the driver for four months.
(iv) A fully furnished accommodation in DHA, Karachi. The fair market value of the
rent was estimated to be Rs. 85,000 per month.
(v) An option to acquire 4,000 shares in TLs parent company, Tameer Inc. which is
listed on New York Stock Exchange was granted to him in May 2016. Mr. Iqbal
exercised the option on 5 January 2017 at a price of USD 1.5 per share. The
market value of the shares at the close of business on 5 January 2017 was USD
2.5 per share. He sold 3,000 shares on 30 June 2017 at a price of USD 3 per
share. The dollar rupee parity on both the above dates was USD 1 = Rs.100.
(vi) On 15 May 2017 Mr. Iqbal was provided 800 shares in TL as a reward for his
excellent performance. However, he was restricted from selling or transferring
these shares before 16 November 2017. The market value of these shares at the
close of business on 15 May 2017 was Rs. 12.5 per share.
Mr. Iqbal received additional income from the following sources, for the tax year 2017:
(i) Brokerage fee of Rs. 200,000 in connection with the transfer of two apartments
in Islamabad. The brokerage fee was received in cash. Mr. Iqbal incurred an
expense of Rs. 30,000 against telephone costs and air travel to Islamabad in
connection with the above deal. He also paid Rs. 10,000 as a gift to his brother
for showing the apartments to his clients in Islamabad.
(ii) Profit of Rs. 150,000 on a savings account maintained with an Islamic bank.
The bank deducted withholding tax of Rs. 15,000 and Zakat of Rs. 25,000.
(iii) He also received an income tax refund of Rs. 225,000 related to tax year 2015.
The amount included Rs. 25,000 being compensation for delayed refund.
(iv) Annual rent of Rs. 800,000 from letting out a building to KK Enterprise.
Following expenses were incurred by Mr. Iqbal in relation to the building:
repairs Rs. 200,000, fire insurance premium Rs. 30,000, ground rent Rs.
10,000, watchmans salary Rs. 8,000 and interest of Rs. 15,000 on a loan
obtained for building renovation by creating first charge on the building in
favour of a scheduled bank.
Other related information is as under:
TL deducted withholding tax of Rs. 1,200,000 from Mr. Iqbals salary during tax
year 2017.
On 1 July 2016, Mr. Iqbal acquired a life insurance policy and paid a premium
of Rs. 500,000. He also contributed Rs. 1,600,000 to an approved pension
fund.
On 1 August 2016, he purchased 50,000 shares in a listed company AB
Limited at a price of Rs. 20 each. On 1 January 2017, AB Limited announced
20% right shares to existing shareholders at a price of Rs. 18 per share. On 25
January 2017, Mr. Iqbal subscribed the right issue in full.
During tax year 2016 his assessed taxable income was Rs. 3,000,000.
Required:
Under the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income and income tax payable by or refundable to Mr. Iqbal for the tax year
ended 30 June 2017.
Note: Show all exemptions, exclusions and disallowances where relevant.
6 Mr. Saif
Mr. Saif is a country manager in Rio (Pvt.) Limited (RPL), a company engaged in the
business of manufacturing and supply of beauty products. During tax year 2017, RPL
paid him a monthly basic salary of Rs. 600,000. He is also entitled to a bonus of Rs.
900,000 to be paid in July 2017.
In addition to above, Mr. Saif was also provided the following:
(i) A company maintained car for both his personal and official use. The car was
obtained on lease in 2016 at total rentals of Rs. 2,000,000 to be paid over the
lease term. The fair market value of the car at the commencement of lease was
Rs. 1,500,000. RPL also paid Rs. 100,000 for its maintenance to a local
workshop.
(ii) A fully furnished two storey bungalow in a posh locality. The annual rental value
of the bungalow was Rs. 2,400,000.
On 1 January 2017, Mr. Saif let out the first floor of the bungalow to his brother
Mr. Moiz at a monthly rent of Rs. 75,000 and also insured it against the risk of
fire. The premium payable to the insurance company amounted to Rs. 50,000.
Mr. Saif paid 50% of the premium immediately and agreed to pay the balance
on 1 July 2017. He also bought an LCD TV for Rs. 70,000 for the first floor.
(iii) Reimbursement of Rs. 120,000 against air tickets for family vacation. Total cost
of tickets was Rs. 200,000. Mr. Saif paid Rs. 10,000 as advance tax on
purchase of tickets.
(iv) On 1 January 2017, RPL sold certain items of old stock to Mr. Saif for Rs.
5,000. The net realizable value of the stock in RPLs books as on 30 June 2016
and 31 December 2016 were Rs. 12,000 and Rs. 14,000 respectively. The
original cost of the stock was Rs. 25,000.
(v) Withholding tax deducted by RPL from Saifs salary amounted to Rs. 2,100,000.
Following further information is also available:
(i) On 1 July 2016, he borrowed Rs. 3,000,000 from a bank at 11% mark-up. The
amount is payable in two equal annual instalments starting from 1 July 2017.
Out of the above loan, Mr. Saif utilized Rs. 2,550,000 for the acquisition of a
plot of land in an industrial area and Rs. 450,000 for the purchase of a car for
his son. On 1 September, 2016 he let out the plot of land to Mr. Amir at a
monthly rent of Rs. 25,000. He also received an un-adjustable deposit of
Rs. 150,000 and paid Rs. 10,000 for levelling and cutting of grass, Rs. 15,000
against ground rent and Rs. 18,000 for rent collection.
(ii) On 1 May 2017 he sold 1,200 shares in Mio Limited at Rs. 50 per share and
incurred incidental expenses of 0.5% of sale proceeds. Mio Limited is an
unlisted company in which 55% of the shares are held by Chinese
Government. Mr. Saif had received these shares on 30 June 2016 as dividend
in specie from Rahat (Pvt.) Limited. He holds 12,800 shares in Rahat (Pvt.)
Limited costing Rs. 35 each.
(iii) In August 2016, Mr. Saif started a fitness club for corporate executives. The
admission and monthly membership fees for the potential members were fixed
at Rs. 25,000 and Rs. 5,000 respectively. A group of 20 persons joined the club
in August 2016 whereas 25 persons joined in January 2017 and 30 in March
2017.
Following items were included in clubs profit and loss account for the tax year
2017:
Monthly salary of Rs. 60,000 to Mr. Saif and Rs. 45,000 to his son by way
of a direct transfer of funds to their bank accounts. His son is a trainer at
the club. Withholding tax deducted from their salaries amounted to Rs.
13,000 and Rs. 4,750 respectively.
Rs. 2,750,000 against import of old fitness machines from China. The
withholding tax paid at import stage was Rs. 150,000.
Fine of Rs. 15,000 which was paid when the truck delivering the fitness
machines from the port to the club was found to be overloaded.
A fire occurred in a section of the club and repairs had to be undertaken as
follows:
Cost of replacing electrical wiring damaged by fire Rs. 85,000
7 Mr. Pansari
8 Big Pharma
Big Pharma Limited (BPL) is engaged in the manufacturing of pharmaceuticals
products. The Company has three branches in Pakistan and one branch each in Qatar
and Oman. BPL sells its products through various distributors. Assume that the
companys profit and loss account and the related details for the period ending June
30, 2017 are as under:
Rs. in 000
Sales 96,000
Cost of sales (66,850)
Gross profit 29,150
Administrative and selling expenses (10,600)
Finance cost (3,100)
Other charges (including WWF of Rs. 0.350 million) (2,400)
Other income 4,100
Profit before taxation 17,150
Opening and closing balance of provision for bad debt account was Rs. 2.50 million
and 3.10 million respectively. Bad debts written off during the year include an interest
free loan of Rs. 0.20 million provided to Oman branch.
Finance cost includes unrealized exchange loss of Rs. 1.35 million and interest of Rs.
1.30 million paid on a working capital loan acquired from a non-resident foreign bank.
No tax was deducted by the company on payment of interest considering the bank did
not have any permanent establishment in Pakistan.
Required:
Compute the income tax liability of the company for the tax year 2017. Tax rate
applicable to the company is 31%.
Assume that the dollar rupee parity during the year ended June 30, 2017 remained
constant at US$1=Rs. 85.
Required:
(a) State, with reasons, which of the above lenders can be classified as Foreign
controller in relation to the thin capitalisation rules under the Income Tax
Ordinance, 2001.
(b) Calculate the deductible profit on debt for the tax year ended June 30, 2017.
Rupees
Sales 10,500,000
Cost of sales (4,410,000)
Gross profit 6,090,000
Salaries and wages (3,165,000)
Rent and rates (582,000)
Travelling and entertainment (273,000)
Depreciation (975,000)
Profit before taxation 1,095,000
Salaries and wages include salaries of Rs. 1,100,000 and Rs. 970,000 to be paid to
Mateen and Vaqas respectively.
Depreciation relates to delivery vehicles. In the first year, tax depreciation allowance
on these vehicles is estimated at Rs. 1,462,500.
Required:
Under the provisions of Income Tax Ordinance, 2001 advice Mateen and Vaqas on
the preferable structure of their business, whether it should be a partnership or a
limited liability company, in terms of the amount of tax payable, for the tax year 2017
assuming that they have no other sources of income.
Rs. in 000
Sales 1,100,000
Cost of sales (792,000)
Gross profit 308,000
Administrative and selling expenses (135,000)
Financial charges (110,000)
Other charges (27,500)
Other income 117,000
Profit before taxation 152,500
Additional information:
(i) In July 2016, ML purchased and installed plant and machinery for the purpose of
balancing, modernization and replacement of existing plant and machinery from an
Austrian based non-resident supplier at a cost of Rs. 52 million. The title in goods
was transferred outside Pakistan. ML did not deduct any tax from payments made
to the supplier. The plant is depreciated on a straight line basis over its useful life of
ten years. The investment in plant was made with borrowed funds.
(ii) Cost of sales includes a penalty of Rs. 0.5 million paid in respect of breach of
customs regulations.
(iii) Administrative expenses include amounts of Rs. 4.8 million, paid against purchase
of industrial software having a useful life of three years and Rs. 5 million paid in cash
for electricity expenses. The software was installed and used with effect from 01
April 2017.
(iv) Other charges include a donation of Rs. 13 million paid to a university established
under provincial law by the Government of Punjab.
(v) Other income includes the following:
An amount of Rs. 27 million earned from consultancy services provided to the
UAE Government. The gross receipts from such services were Rs. 90 million.
No tax was paid by the company in UAE on such income.
A royalty of Rs. 50 million which was received from Solar Pte Limited, a
company based in Singapore, for providing scientific and commercial
knowledge under an agreement. Withholding tax of Rs. 10 million was
deducted by Solar Pte Limited from such payment. This amount is included in
other charges.
The above amounts were brought into Pakistan in foreign exchange through normal
banking channels in compliance with the foreign exchange regulations of the State
Bank of Pakistan.
(vi) Unadjusted business loss, brought forward from tax year 2010, amounted to Rs. 50
million. This loss is inclusive of an unabsorbed tax depreciation of Rs.11 million and
amortisation of pre-commencement expenditure of Rs. 7.7 million.
(vii) Following taxes were deducted / paid by the company during the year:
Rs. in 000
Advance tax paid under section 147 5,000
Paid on import of raw material 55
Paid on import of plant and machinery 1,560
Deducted by banks on profit on debt 250
(viii) Assume that tax depreciation on all assets acquired before July 2016 is the same as
their accounting depreciation.
Required:
(a) Under the provisions of Income Tax Ordinance, 2001 compute the taxable income
and net tax liability of ML for the tax year 2017.
(Show all exemptions, exclusions and disallowances where relevant.)
(b) Based on the computation of tax liability in (a) above, briefly explain whether the
advance tax paid quarterly by ML under section 147 could result in any further tax
liability to the company with reference to the provisions of Income Tax Ordinance,
2001.
Receipts Costs
Tax Year
Rupees
2015 3,000,000 3,105,000
2016 3,000,000 2,632,500
2017 3,000,000 1,012,500
Required:
Under the provisions of Income Tax Ordinance, 2001 calculate the taxable income for
each of the above three tax years.
(ii) The above profit/(loss) for each company has been arrived at after
inclusion/adjustment of the following:
In case of SL:
Rs. 1,000,000 paid by SL towards a scientific research conducted in
Belgium. The research helped SL in improving the quality of its products.
Income of Rs. 150,000 on account of profit on debt.
Gain of Rs. 100,000 on sale of machinery to VL. The cost of machinery was
Rs. 300,000 and its tax written down value at the time of transfer to VL was
Rs. 200,000.
In case of VL:
Rs. 80,000 written off against a loan provided to an employee.
Sales promotion expenses of Rs. 600,000 paid by VL to Moon Advertisers.
The benefits are expected to extend to three years.
A loss of Rs. 500,000 on disposal of shares in a private company. These
shares were acquired by VL on 31 March 2015.
In case of ML:
Net income of Rs. 600,000 from a goods transportation business. ML started
this business during the year and earned gross revenue of Rs. 1,500,000.
Withholding tax of Rs. 30,000 was deducted by customers from MLs gross
receipts.
A gain of Rs. 400,000 on disposal of shares in a private company. These
shares were acquired by ML on 01 April 2015.
Income of Rs. 300,000 on account of profit on debt.
(iii) Accounting depreciation of SL, VL and ML amounted to Rs. 760,000, Rs.
660,000 and Rs. 100,000 respectively.
(iv) A delivery truck costing Rs. 1,500,000 was purchased by ML during the year for
its new transportation business.
(v) The tax written down values of the plant and machinery of SL, VL and ML as at
01 April 2016 were Rs. 4,500,000, Rs. 4,200,000 and Rs. Nil respectively.
(vi) Tax depreciation on all assets, other than plant and machinery and delivery
truck, of SL, VL and ML amounted to Rs. 495,000, Rs. 330,000 and Rs. 135,000
respectively.
(vii) The assessed losses brought forward from tax year 2016 were as follows:
SL VL ML
Rs. in 000
Business loss 200 500 50
Unabsorbed tax depreciation 250 500 100
Capital loss 750 250 200
SL VL ML
Rs. in 000
Advance tax u/s 147, 148 and 153 789 275 -
Motor vehicle tax under u/s 234 - - 40
Required:
Assuming SL wants to avail the benefits of group relief as envisaged under the
Income Tax Ordinance, 2001, compute the taxable income, net tax payable /
refundable and unabsorbed losses, if any, to be carried forward for each of the above
three companies for the tax year 2017.
Note: Show all relevant exemptions, exclusions and disallowances.
Rs. in 000
Sales 39,150
Additional information:
(i) 20% of the above sales are made to customers in Indonesia and Singapore.
Export sales are stated after deduction of foreign withholding tax of Rs.
1,170,000.
(ii) Local sales are inclusive of 16% sales tax. All the above expenses, other than
cost of sales, are related only to the companys local sales.
(iii) On 1 January 2016, Capsule plc. a Malaysian company which owns 60% of the
share capital in PPL, granted a loan of Rs. 8,500,000 to PPL at a mark-up of
12% per annum. The loan was given for the production of Hepatitis vaccines in
(iv) On 15 June 2016, Capsule plc., under a group scheme, awarded its own
shares to some of the senior employees of PPL. As the shares were vested
immediately, PPL recognised an expense of Rs. 1,758,000 at a grant date fair
value of the award, with a credit recognised in equity. The expense is included
in other charges.
Rs. 600,000 payable as rent to the landlord for PPLs parking area.
Withholding tax has not been deducted from this amount.
(vi) On 1 July 2016, PPL granted an interest free loan of Rs. 500,000 to one of its
shareholders.
(viii) Other income includes gain on sales of delivery van of Rs. 130,000. The van
was acquired on 1 January 2015 at a cost of Rs. 900,000 and was depreciated
at the rate of 20% per annum. No depreciation is charged by PPL in the year of
disposal.
(ix) Accounting depreciation charged to cost of sales and administrative and selling
expenses amounted to Rs. 1,440,000 and Rs. 810,000 respectively.
(x) Tax depreciation on assets acquired before January 2016 amounted to Rs.
1,800,000.
(xi) Tax paid u/s 147 amounted to Rs. 400,000 whereas tax deducted u/s 154 by
banks from export proceeds amounted to Rs. 78,300.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and
net tax payable for the tax year 2017. Give reasons for the treatment of items in (iii)
and (vii) above. Also explain the treatment of items not appearing in your computation.
The actual costs incurred by ML for the tax years 2016 and 2017 were Rs. 33,000,000
and Rs. 27,000,000 respectively.
Required:
Under the provisions of Income Tax Ordinance, 2001 calculate MLs taxable income
and withholding tax credit, if any, for the tax years 2016 and 2017.
(vi) One of BLs subsidiary company, which is qualified for group relief, surrendered
its proportionate assessed losses of Rs. 250,000 in favour of ZL. These losses
include brought forward business loss of Rs. 25,000, capital loss of Rs. 45,000
and an unabsorbed tax depreciation of Rs. 10,000.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income of
Zeta Limited for the tax year 2017 and the amount of loss, if any, to be carried forward
to next tax year. State the reason where any of the loss cannot be adjusted against
the given income.
Note: The order in which various deductions are to be set-off against ZLs
income should be followed.
(vii) Tax paid u/s 147 amounted to Rs. 260,000 whereas tax deducted by banks u/s
151 from profit on debt amounted to Rs. 18,000.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute the taxable income and net tax payable by/refundable to BL for the tax year
2017.
Note: Show all relevant exemptions, exclusions and disallowances.
Rupees
Sales 2,348,000
21 ZJ Limited
(ii) Net profit of Rs. 20,000,000 from ZJLs associates. ZJL records its earnings
from associates using equity method of accounting.
(iii) Gain on sale of securities in Mali Limited (ML), a listed company, amounting to
Rs. 6,000,000. On 1 July 2013, ZJL acquired 200,000 shares in ML at Rs. 50
per share constituting 55% interest in ML. On 1 August 2016, ZJL sold 100,000
shares in ML at a negotiated price of Rs. 85 per share to a foreign investor. The
market value of these shares at the time of sale was Rs. 80 per share. On 15
September 2016, ZJL sold the remaining 100,000 shares in ML at a negotiated
price of Rs. 75 per share to a local investor. The market value of the shares at
the time of sale was Rs. 78 per share. The gain was computed at the average of
the negotiated prices.
ZJL reported the above transactions to the relevant Stock Exchange through its
broker and was also in compliance with all the requirements of the SECP.
Other information: (not reflected in the above financial results)
(i) On 30 June 2016, ZJL received Rs. 1,250,000 as share of income from AOP.
The gross turnover of the AOP was Rs. 30,000,000. ZJL holds 35% interest in
the AOP.
Further information:
(i) ZJL has filed the option to opt out of the final tax regime.
(ii) Total tax depreciation amounts to Rs. 4,300,000.
(iii) Tax paid u/s 147 was Rs. 1,000,000, tax deducted on import of packing
materials u/s 148 was Rs. 1,200,000, tax deducted by distributors u/s 153 was
Rs. 1,050,000 and tax deducted on realization of export proceeds u/s 154 was
Rs. 300,000.
(iv) The assessed losses brought forward from tax years 2015 and 2016 were as
follows:
2016 2015
------- Rupees -------
Business loss 2,900,000 3,550,000
Unabsorbed tax depreciation 2,550,000 -
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute the taxable income, net tax payable by or refundable to ZJL for tax year 2017
and amount of tax to be carried forward along with the amount of default surcharge, if
any.
Note:
Your computation should commence with the profit before tax figure of Rs.
46,500,000.
Ignore WWF and WPPF.
Show all relevant exemptions, exclusions and disallowances.
Desi (Pvt.) Limited (DPL), a resident company, is 70% owned by Mega Inc. USA
(MI).On 15 March 2016, DPL received a loan of US$ 3.0 million (equivalent to PKR
315.0 million) from MI with interest at the rate of 11% per annum. Interest is to be paid
half yearly in arrears. Repayments of the principal would commence after 2016. The
loan was received to finance a rural development project in Punjab duly approved by
the Federal Government in accordance with the Second Schedule.
On 1 June 2016, DPL received another loan of US$ 1.6 million (equivalent to PKR 168
million) from MI with interest at the rate of 6% per annum. Interest on this loan is to be
paid monthly in arrears. This loan was received for the construction of a new factory
building. The principal repayment would commence from November 2017.
On 31 August 2016, DPL wrote-off Rs. 1.0 million in respect of a debt owed by one of
MIs associates who was based in Australia. The outstanding debt balance in DPLs
books at the end of 30 September 2016 was Rs. 4.0 million.
Following information has been extracted from DPLs records for the year ended 30
September 2016.
Rs. in million
Assets (including the above outstanding debt of Rs. 4.0 million) 3,500
Liabilities 2,870
Net profit after taxation for the year 350
Amount credited during the year to asset revaluation reserve 150
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the amount of
interest on debt that shall be allowed as expense, for tax year 2017.
23 Olive Limited
Olive Limited (OL) is registered at the Large Taxpayer Unit of the Inland Revenue
Department. It is engaged in the manufacture and trading of FMCG in the country.
During the month of May 2017 following activities were carried out by the company:
Rs. in 000
Purchases:
(Items subject to sales tax):
Import of raw material for in-house consumption 15,000
Import of finished products 8,000
Packing material manufactured locally 6,000
Supplies:
Manufactured products:
- Local sales 20,000
- Exempt goods 4,000
- Export to Bangladesh 4,000
Commercial imports 10,000
Required:
In view of the provisions of Sales Tax Act, 1990, and applicable provincial law,
compute the following for the tax period May 2017. Show computation wherever
necessary.
(a) Sales tax liability and net sales tax payable with return also compute the
amount of withholding tax, if any.
Rs. in 000
Purchases:
Local:
Components from registered suppliers 70,700
Components from un-registered suppliers 15,250
Import of finished goods (inclusive of custom duty and FED) 10,000
Supplies:
Manufactured goods:
Local taxable supplies to registered persons 40,000
Local taxable supplies to un-registered persons 24,000
Exempt goods 11,000
Export to Malaysia 13,000
Commercial imports 12,500
Additional information:
(i) Supplies of Alpha to registered persons include sale of Rs. 2,000,000 to an
associated company. The open market price of Alpha at the time of sale was Rs.
4,000,000.
(ii) Free replacement of defective units is made in the case of Alpha, which is sold
under warranty. The market value of replacement units during the month of
November 2016 was Rs. 1,000,000.
(iii) SL provided 50,000 units of Beta to its employees free of charge.
(iv) In November 2016, SL imported new machinery from Japan for the purpose of
launching a new product Zeta. The production of Zeta is expected to commence
from April 2017. Sales tax paid on this machinery amounted to Rs. 3,000,000.
(v) Input tax of Rs. 500,000 was inadvertently not adjusted in the return for the
month of October 2016.
(vi) The local supplies of Gama are exempt from the charge of sales tax.
(vii) All purchases are from registered suppliers.
All the above figures are exclusive of sales tax, wherever applicable. Sales tax is
payable at the rate of 17%. The above products are not subject to duty under the
Federal Excise Act, 2005.
Required:
In the light of the provisions of Sales Tax Act, 1990 and Rules made thereunder,
calculate the sales tax payable/refundable/carried forward, if any, for the tax period
November 2016.
Rupees
Purchases:
Local:
Raw material from registered suppliers 25,000,000
Raw material from un-registered suppliers 10,000,000
Import of raw material 4,000,000
Supplies:
Local:
Taxable supplies to registered persons 20,500,000
Taxable supplies to un-registered persons 9,000,000
Exempt goods 6,000,000
Export to Portugal 12,500,000
Additional information:
(i) Raw materials purchased from a registered supplier in April 2017 were
destroyed by fire. However, UL received full insurance claim of Rs. 1,000,000
against such loss. Input tax paid on such raw material was however adjusted by
UL in its April 2017 return.
(ii) On scrutiny of the companys previous sales tax returns, the internal auditor has
pointed out that input tax on raw materials of Rs. 200,000 purchased in October
2016 from a local registered supplier has not been claimed / adjusted by UL.
(iii) UL under misapprehension collected additional sales tax of Rs. 64,000 from one
of its customers. 70% of the goods on which additional sales tax was collected
are still lying with the customer as unsold stock.
(iv) Taxable supplies to registered persons include the following:
Goods worth Rs. 500,000 supplied to AB Limited which is registered as an
exporter with the Large Taxpayer Unit.
Supplies of Rs. 2,000,000 to a domestic airline for regular maintenance of
an aircraft weighing 8,500 kilograms.
(v) Raw materials purchased from local registered suppliers include an invoice of
Rs. 100,000 which was issued in the name of a director of UL.
All the above amounts are exclusive of sales tax, wherever applicable. Sales tax is
payable at the rate of 17%. The value of imported raw material is inclusive of custom
duty and federal excise duty. However, other goods are not subject to duty under the
Federal Excise Act, 2005.
Required:
In the light of the provisions of Sales Tax Act, 1990 and Rules made thereunder,
calculate the sales tax payable by or refundable to UL for the tax period May 2017.
Give brief reasons for the treatment of:
Goods destroyed by fire;
The input tax not claimed in the return for the month of October 2016; and
Additional sales tax collected from the customer.
Mazboot Furnishers (MF), a retailer, has been in operation for a number of years but
was not registered with Inland Revenue Department due to low turnover. However,
after engaging in engraving process of household furniture, MF was compelled to
register with the sales tax authorities and got registration as a manufacturer-cum-
retailer. The application for registration was made on 1 November 2016 and the
certificate of registration was issued on 7 November 2016.
Following information has been extracted from MFs records for the month of
November 2016:
Rupees
Sales 700,000
Less: Cost of sales
Opening stock 125,000
Purchases 250,000
375,000
Less: Closing stock (95,000)
280,000
Add: Engraving charges 50,000
(330,000)
Gross profit 370,000
Less: Operating expenses
Salaries and wages (45,000)
Rent (25,000)
Insurance (30,000)
Bank charges (15,000)
General expenses (25,000)
Depreciation (15,000)
(155,000)
Net profit 215,000
Additional information:
(i) 20% of the sales relates to goods purchased locally and exported to customers
in Iran whereas 5% of the sales were made against international tenders.
(ii) Opening stock is verifiable and consists of purchases made in different months
as follows:
(iv) Insurance expense includes Rs. 25,000 paid against fire and theft insurance
whereas Rs. 5,000 relates to staffs health insurance policies.
(v) General expenses comprises of charges paid against inland carriage of furniture
by air, purchase of shoes for field staff, expenses incurred on the purchase of
printed stationery and staff entertainment expenses in the ratio of 40:25:20:15
respectively.
(vi) 65% of the depreciation relates to a car which was acquired for Rs. 780,000
whereas 25% depreciation pertains to a wood engraving machine purchased for
Rs. 300,000. The car as well as engraving machine was acquired at the
beginning of November 2015.
(vii) All purchases, unless otherwise mentioned, are from local registered suppliers
against prescribed sales tax invoices.
All the above figures are exclusive of sales tax, wherever applicable. Sales tax
(other than services) is payable at the rate of 17%. The goods supplied by MF are not
subject to duty under the Federal Excise Act, 2005.
Required:
Under the provisions of Sales Tax Act, 1990, PRA and Rules made thereunder,
calculate the following for filing the sales tax return for November 2016.
(a) Sales tax payable/refundable/carried forward, if any. Also compute the amount
of withholding tax, if any.
(b) Give brief reasons for the treatment accorded to opening stock.
Rupees
Purchases:
Local items governed under third schedule (75,000 @ Rs. 150 each) 11,250,000
Supplies:
Local third schedule items to wholesalers (55,000 @ Rs. 180 each) 9,900,000
(i) TPL has entered into a hire purchase agreement with Web Limited for the
supply of goods worth Rs. 459,000 inclusive of 2% mark-up.
(ii) Goods worth Rs. 200,000 were supplied to a creditor against final settlement of
his debt of Rs. 175,000.
(iii) Taxable supplies to registered persons include the sale of old stock at a
discounted price of Rs. 350,000. TPL allowed an unusually high discount of
30% to the customer. The discount amount was however reflected on the
invoice.
(v) TPL received advance of Rs. 100,000 for the supply of goods to one of its
customers.
(vi) Third schedule items are sold in the market at a retail price of Rs. 200 per unit.
(vii) Supplies against international tender were made to WFP in full compliance with
the procedures laid down by State Bank of Pakistan and foreign exchange
regulations.
All the above figures are exclusive of sales tax, wherever applicable. Sales tax is
payable at the rate of 17%.
Required:
Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, calculate
the sales tax payable by or refundable to TPL for the tax period May 2017.
3 Rupees
Purchases:
Raw material:
From local registered suppliers 5,000,000
From local un-registered suppliers 1,000,000
Import 800,000
Supplies:
Taxable supplies to registered persons 4,675,000
Taxable supplies to un-registered persons 2,125,000
Taxable supplies to duty free shops 1,020,000
Export to Qatar 680,000
Omega Limited (OL), a conglomerate, is registered at the large taxpayers unit (LTU) of
Inland Revenue Department, Karachi for the last one year. OL is engaged in multiple
businesses across Pakistan. However, due to regulatory issues, OL commenced its
business operations in May 2017. Following information has been extracted from OLs
records for the month of May 2017:
(i) Taxable purchases of Rs. 100,000 were made from an unregistered supplier.
(ii) Invoices issued by OLs bank against various excisable / taxable services
rendered to OL shows a sum of Rs. 5,000 as sales tax towards services
rendered in Lahore, Rs. 2,000 towards Punjab sales tax for services rendered in
Lahore and Rs. 500 as service charges for issuing a new cheque book in
Karachi on the last working day of the month.
(iii) OLs Textile Division rendered toll manufacturing to Big Associates for which
value of supply has been estimated at Rs. 45,000. Big Associates operates a
large garments unit which is registered under the sales tax act as an AOP.
During the month, finished cloth of Rs. 500,000 was sold to Asia Airways Limited
for its aircrafts seats. Sales invoices were settled during the month.
(iv) Sales tax of Rs. 5,000 was paid on imports made ten days before the start of
business.
(v) OL sold goods worth Rs. 250,000 to Small Corporation, a proprietary concern
registered under the Sales Tax Act, 1990. However, due to limited storage
capacity at buyers premises the goods are still lying at OLs godown. In view of
its revenue recognition policy, OL has not recognized any revenue in the
accounts.
(vi) Other purchases amounting to Rs. 725,000 were made on 45 days credit from
corporate suppliers. All the suppliers were withholding tax agents.
(vii) OLs Furniture Division supplied furniture of Rs. 125,000 to an unregistered
school in Karachi. However, in view of negative market feedback and
consequential losses, OL has decided to close down the Furniture Division at
the end of May 2017. Stock of unsold furniture at the close of month amounted
to Rs. 200,000.
(viii) As part of a strategic tripartite contract, OL supplied tooth brushes worth
Rs. 400,000 in small villages and towns at a discounted price of Rs. 250,000.
The terms of the contract stipulate that the balance amount of Rs. 150,000 will
be reimbursed to the company by the Government of Pakistan.
(ix) OL paid an advance of Rs. 75,000 to a registered supplier, Pearl Limited,
against future purchases. However, Pearl Limited has not issued any document
against the advance receipt.
(x) OL sold sugar worth Rs. 240,000 to SPL. The sugar was purchased in February
2017.
(xi) OL procured tyres and tubes of Rs. 850,000 from a distributor for trading
purposes.
All the above figures are exclusive of sales tax, wherever applicable. Sales tax
(other than services) is payable at the rate of 17%.
Required:
In the light of the provisions of Sales Tax Act, 1990 / relevant provincial laws and
Rules made thereunder, compute the sales tax payable by or refundable to OL for
filing the sales tax return for the tax period May 2017.
Razi Limited (RL) is engaged in the business of production and supply of large variety
of consumer goods. RL is registered with the Inland Revenue Department for sales tax
purposes. Following data has been extracted from RLs records for the month of May
2017:
Rs. in 000
Purchases:
Raw material:
From local registered suppliers 8,000
From local un-registered suppliers 2,000
Import 900
Import of foam from China 1,200
Supplies:
Local:
Taxable supplies to registered persons 7,200
Taxable supplies to un-registered
persons 3,500
Exempt goods 250
Sale of foam imported from China 1,500
Export to Malta 600
Additional information:
(i) RL imported specific machinery at Rs. 1,000,000 from Taiwan for the purpose
of production of shampoo. The machinery is covered under Eight Schedule of
the Sales Tax Act, 1990.
(ii) Purchases from local registered suppliers include purchase of waste papers of
Rs. 300,000 from Parsa Limited.
(iii) 7,500 boxes of tissue papers were purchased from registered suppliers, not
included above, at a wholesale price of Rs. 60 per box. The retail price of these
boxes was Rs. 90 per box. These tissue papers were used by RL as a packing
material.
(iv) Taxable supplies to registered persons include the following:
Shampoo worth Rs. 700,000 supplied to a registered exporter Baramad
Limited.
Tiles of Rs. 650,000 supplied to Raja (Pvt.) Limited. These tiles were
purchased directly from the manufacturer in April 2017.
(v) Taxable supplies to un-registered persons include supply of storage batteries
worth Rs. 400,000 to a private school. Purchase invoice confirms that these
batteries were purchased in March 2017 from an importer for Rs. 325,000
against payment of sales tax at the rate of 17%.
(vi) Shampoo and tissue papers are covered under Third Schedule and waste
papers are covered under Eighth Schedule of the Sales Tax Act, 1990
whereas foam, tiles and storage batteries are designated as specified goods
under Chapter XIII of the Sales Tax Special Procedures Rules, 2007. All the
other items are not specified in the Third Schedule of the Sales Tax Act, 1990.
(vii) At the end of May 2017, there was no outstanding liability against items
mentioned in (ii), (iii) and (iv) above.
All the above figures are exclusive of sales tax, wherever applicable. Except for the
item specified under Eight Schedule, sales tax is payable at the rate of 17%.
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 RL for the tax period
May 2017. Also compute the amount of withholding tax, if any.
Note: Show all relevant exemptions, exclusions and disallowances.
34 Karma Limited
Karma Limited (KL) is registered at the large taxpayers unit (LTU) of Inland Revenue
Department and is engaged in the business of import, manufacture and supply of
various products. Following information has been extracted from KLs records for
November 2016.
Rupees
Purchases:
Raw material:
From local registered suppliers 12,000,000
From local un-registered suppliers (Third Schedule items) 3,000,000
Import 5,000,000
Supplies:
Taxable supplies to registered persons 9,500,000
Taxable supplies to un-registered persons 6,500,000
Additional information:
(i) Raw material purchased from local un-registered suppliers includes goods
worth Rs. 950,000 which were returned by an un-registered customer. These
goods were sold in August 2016. Proper debit/credit notes were raised in
respect of the returned goods.
(ii) The imports include raw materials worth Rs. 2,000,000 which were imported for
the purpose of manufacture of fat filled milk, specified against S. No. 12 of the
Fifth Schedule. KL has complied with all the requirements of Chapter XIV of the
Sales Tax Special Procedure Rules, 2007 in this regard.
(iii) Taxable supplies to registered persons include the following:
35 Mr. Parekh
Mr. Parekh acquired and disposed of 3,500 shares of a listed company, Big Limited
(BL). The details are as follows:
Acquisition Disposal
Dated No. of Rate No. of Rate
shares shares
31-03-2016 1,400 20 - -
15-09-2016 700 22 - -
01-04-2017 900 18 - -
01-05-2017 - - 600 17
07-05-2017 - - 800 19
21-05-2017 - - 700 18
31-05-2017 500 23 400 25
31-05-2017 - - 1,000 27
Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made there under,
calculate the amount of capital gain / loss and tax thereon, if any, on the above
transactions. Ignore incidental expenses on cost of acquisition of securities.
36 Capital Gain
Under the provisions of Income Tax Ordinance, 2001 and Rules made there under,
compute the taxable income or explain the tax treatment, wherever applicable, in each
of the following cases:
(i) Hamid held 2,000 shares in Beta Limited (BL) which he had acquired on 1 July
2016 at Rs. 15 each. BL subsequently merged into Gama Limited (GL) through a
scheme approved by the High Court. GL issued 1 share for 2 shares held in BL.
(ii) Bari acquired 100 shares in Pie Limited (PL) on 1 January 2017 at Rs. 40 per
share and deposited them into CDC account. On the same date i.e. 1 January
2017, PL declared 25% bonus shares with 1 April 2017 as the date of
entitlement. On 31 March 2017, the market value of these shares was Rs. 50
each. On 15 April 2017 Bari disposed of 50 shares in PL at Rs. 40 each. The
bonus shares were credited to Baris account on 15 May 2017. He sold the
remaining shares including bonus shares on 18 May 2017 at Rs. 40 each.
(iii) Anjum borrowed 5,000 shares from Nazia for a short term. The value of the
borrowed shares was agreed at Rs. 100 per share. Anjum agreed to pay, for the
specified period, a mark-up of Rs. 2 per share to Nazia at the time of settlement.
Anjum sold the borrowed securities at Rs. 105 each and subsequently, on the
date of return of borrowed securities, re-purchased 5,000 shares at Rs. 95 per
share.
37 Book Author
In the light of the provisions of Income Tax Ordinance, 2001, briefly explain the
taxability of income the following situation.
Mr. Danishwar, a renowned author, completed his book on Human Behavior in more
than two and a half years time. He received a lump sum amount of Rs. 900,000 in
May 2017 on account of royalty.
39 Transfer of Assets
In the light of the provisions of Income Tax Ordinance, 2001, briefly explain the
taxability of income the following situation.
Mr. Ravi transferred his house to a trust with a condition that out of the total rental
income of Rs. 840,000 per annum, Rs. 500,000 would be paid to his wife and the
balance of Rs. 340,000 would be paid to his minor son Ashok. Ravi also provided Rs.
350,000 to the trustees for the acquisition of his property.
(b) Barn Limited (BL) wrote off a debt amounting to Rs. 500,000 in June 2014. A suit
was, however, filed by the company for the recovery of the debt. Tax authorities
allowed Rs. 350,000 as a deduction in tax year 2014. In tax year 2017, court
adjudicated the case in favour of BL. In view of the provisions of Income Tax
Ordinance, 2001 compute the amount which would be added to income or
expense, as the case may be, if the company.
(i) Recovers Rs. 200,000
(ii) Recovers Rs. 120,000
18,000,000 18,000,000
Following information is available relating to the proposed scheme of transfer and the
status of MPL:
(i) 50% of the purchase consideration would be paid to Mr. Adnan in terms of fully
paid shares of MPL whereas the remaining 50% would be paid in cash.
(ii) The break-up value of each share of MPL as at April 30, 2017 is Rs. 15.
(iii) MPL has a share capital of Rs. 30 million consisting of equity shares of Rs. 10
each. Mr. Adnan owns 70% of the paid up share capital of MPL whereas the
remaining 30% is equally owned by his spouse Razia, whose income is clubbed
with Mr. Adnan, and his elder brother Rais. Due to financial constraints, Rais is
considering to dispose off his ownership interest in the company.
(iv) MPL would assume all the liabilities of HT with the exception of Rs. 2 million,
which is payable to Barkat Enterprises.
(v) The net realizable value of stock in trade as at April 30, 2017 is Rs. 4 million.
(vi) Rs. 1.0 million receivable against sale of medicines to Parker & Sons last year is
not recoverable due to insolvency of the customer. All possible efforts have
already been made by HT for the recovery of debt.
(vii) Following is the tax written down value (WDV) and fair market value (FMV) of
HTs patents and fixed assets as at April 30, 2017:
Rupees
Cost Tax WDV FMV
Fixed assets 7,000,000 3,000,000 5,200,000
Patents 5,000,000 2,500,000 2,300,000
Required:
(a) Any transaction that is related to disposal of assets becomes the subject matter
of gain or loss. Advise Mr. Adnan about the conditions, which are required to be
fulfilled under the Income Tax Ordinance, 2001 if he wishes to avoid recording
any gain or loss on the disposal of his business to MPL.
(b) Advise the necessary changes, if any, required to be made by Mr. Adnan in his
proposed scheme of transfer in order for it to be in compliance with the
conditions identified in part (a) above.
(c) Calculate the following, assuming the conditions in (a) above have been fully
complied with.
(i) Number and the value of shares to be received by Mr. Adnan from MPL.
(ii) MPLs cost of acquisition of assets.
(iii) Mr. Adnans cost in respect of the shares received by him as consideration.
44 Residential Status
In view of the provisions of Income Tax Ordinance, 2001 and the stated rules,
determine the residential status of the following persons for the tax year ended June
30, 2017 under the given circumstances.
(i) Mr. Mubeen came to Pakistan for the first time on a special assignment from his
company on April 01, 2016 and left the country on September 30, 2016.
(ii) Mr. Rana, who had never travelled abroad in his life, got a job in Canada. He
went to Canada on December 29, 2016 to assume his responsibilities as a CFO.
In June, 2017 his company sent him to India on a training workshop. On June
30, 2017 on his way back to Canada he had to stay in Karachi for a whole day in
transit.
(iii) Mr. Baber, a Federal Government Employee was posted to the Pakistan mission
in Geneva from July 01, 2016 to June 30, 2017.
(iv) Mr. Francis, a sugar dealer in Brazil, came to Pakistan on July 31, 2016. During
his visit he stayed at Lahore for 60 days and spent the rest of the days in
Karachi. He left the country on January 31, 2017. Assume that the
Commissioner has granted him permission to use calendar year as a special tax
year.
49 Group Taxation
Al Maratib, a large group of companies is contemplating to avail the benefits of Group
Taxation by offering it to be taxed as one fiscal unit.
Required:
In the light of the provisions of Income Tax Ordinance, 2001 explain the provisions of
Group Taxation to the chairman of the group.
(ii) The tax implication in each of the following cases while determining chargeable
income of the branch office in Pakistan.
Head office expenditure
Compensation for management services performed by the branch
52 Selection of Audit
Identify the authority and briefly describe the methods by which a person may be
selected for the audit of its Income Tax affairs in the tax year 2016. Also state whether
a person can again be selected for audit in tax year 2017 if nothing was found during
its audit in the tax year 2016.
Khalq Limited (KL) is engaged in the manufacture and supply of polio vaccines. In
order to meet the increasing demand for vaccines, KL expanded its manufacturing
facilities in July 2016. This expansion project involved a capital expenditure of Rs. 75
million including a cost of Rs. 50 million which was spent on the acquisition of new
plant and machinery.
The Federal Government, realising the importance of the project, voluntarily paid a
grant of Rs. 20 million to KL towards the cost of new machinery. KL transferred the
amount of grant to capital reserve in its financial statements for the year ended 31
March, 2017. The management is of the view that Rs. 20 million should be claimed as
exempt from tax in the return of income for the tax year 2017. Discuss the tax
treatment under the provisions of Income Tax Ordinance, 2001.
Moon Limited (ML), an unlisted public company, engaged in the manufacture of sports
goods, remitted US $ 30,000 to JH Hospital in Boston, USA for the medical treatment
of its CEO. According to the terms of his employment, the CEO is entitled to free
provision of medical treatment and hospitalization. The amount was remitted on 1
March 2017 in compliance with the regulations of the State Bank of Pakistan. The
management of ML is of the view that the expenditure would not be allowed as a
deductible expense in tax year 2017 as no tax was withheld from the payment to JH
Hospital in Boston, USA. Discuss the tax treatment under the provisions of Income
Tax Ordinance, 2001
Gadget Limited (GL) is a public company engaged in the manufacture and sale of
electrical appliances. During tax year 2017, GL launched an advertising campaign for
the promotion of a new product. An Indian artist was hired for making a TV
commercial at an agreed remuneration of Rs. 10 million. GLs management is of the
view that in order to claim the expense as deductible, payment of Rs. 10 million should
be made through normal banking channel and no tax should be deducted from the
payment as the entire advertisement was produced in India. Discuss the tax treatment
under the provisions of Income Tax Ordinance, 2001.
58 Associates
What is meant by Associates? State the circumstances under which the following
may be regarded as associates:
A member of an association of persons and the association
A shareholder in a company and the company
64 Profit on debt
What do you understand by profit on a debt? Describe the circumstances under
which any profit received by a non-resident person on a security issued by a resident
person shall be exempt from tax under the Income Tax Ordinance, 2001.
Under the provisions of the Income Tax Ordinance, 2001 briefly discuss the following:
Depreciable asset and Eligible depreciable asset.
70 Speculation Business
In tax year 2017, Mr. Surmawala suffered a net loss of Rs. 850,000 on account of a
forward contract for the purchase and sale of gold in the Mercantile Exchange and
settled the contract otherwise than by the actual delivery or transfer of gold.
Mr. Hoshyar, a non-salaried individual, filed his return of income for tax year 2017 on
27 November 2017 and paid a total tax of Rs. 2,173,000 on his declared income.
Required:
Under the provisions of the Income Tax Ordinance, 2001 analyse the above situation
and:
(i) Compute the amount of penalty which may be payable by Mr. Hoshyar in
addition to his above tax liability.
(ii) Explain whether Mr. Hoshyar would be liable to pay any penalty, if his declared
income in return filed u/s 114 was below the taxable limit.
73 Advance Ruling
The concept of Advance Ruling was brought into tax laws to facilitate foreign
investors. Under the provisions of the Income Tax Ordinance, 2001 and Rules made
thereunder, explain the following:
The meaning of the term Advance Ruling, who may issue such a ruling and within
what time it is required to be issued.
77 Definite information
The Commissioner may amend an assessment order for a tax year only on the basis
of definite information acquired from an audit or otherwise. What do you understand
by the term Definite information as described in the Income Tax Ordinance, 2001?
79 Withholding agents
List the persons specified as Withholding agents for the purpose of collection of
sales tax under the Sales Tax Special Procedure (Withholding) Rules, 2007.
81 Consideration in kind-supply
(a) Folad Limited (FL) has supplied 50 tons of Iron Bars to Tameer Limited (TL). The
market price of the supply is Rs. 2.5 million exclusive of sales tax. Owing to
financial difficulties, TL has requested to settle the price by transferring a piece
of land having a market value of Rs. 2.3 million and to pay Rs. 75,000 in final
settlement along with the applicable sales tax by way of a cheque drawn in
favour of FL.
Required
Comment on the chargeability of sales tax in the above situation.
(b) Under the provisions of Sales Tax Rules, 2006 narrate the procedure to be
followed by Tameer Limited, in the above situation, if it decides to return 20 tons
of Iron Bars to Folad Limited due to sub-standard quality. Assume that both FL
and TL are registered taxpayers.
85 Representative of non-resident
In view of the provisions of Sales Tax Act, 1990 identify the persons who may be
regarded as the representative of a non-resident person for a tax year.
89 Registration
Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, briefly
explain whether the persons under each of the following situations are required to be
registered with Inland Revenue Department. Also compute the amount of sales tax, if
any, payable by or refundable to such persons. The rate of sales tax is 17%.
(i) A manufacturer whose annual turnover during the last twelve months ended 31
March 2017 is Rs. 4,500,000 and the amount of his annual utility bills for the
same period is Rs. 800,000.
(ii) A distributor whose annual turnover during the last twelve months is
Rs. 3,000,000.
(iii) An importer whose annual turnover is Rs. 12,000,000.
(iv) A commercial exporter who intends to claim a refund of Rs. 200,000.
90 Credit note
Aroma Limited (AL), a company registered under the Sales Tax Act, 1990 is engaged
in the business of production and supply of assorted blend of tea in the local market.
Mr. Pali, the sales director, requested the finance manager to issue a credit note in
favour of one of ALs customers, who had bought 50 kg of a special blend of tea on 4
December 2016. Finance manager issued the credit note on 5 June 2017.
Required:
In view of the Sales Tax Rules, 2006 explain whether AL can adjust the amount of its
output tax in relation to the above credit note in its return for June 2017.
Under the Sales Tax Rules, 2006 the Board or the Commissioner may appoint a
Chartered Accountant for conducting special audit of the records of a registered
person.
Explain the scope of special audit under the above circumstances.
Under the provisions of the Sales Tax Act, 1990 describe the following:
(i) The effects of blacklisting or suspension of a registration.
(ii) Exemption of tax not levied or short levied as a result of general practice.
99 Registration of retailers
In the light of the provisions of the Sales Tax Special Procedures Rules, 2007:
Identify the categories of retailers who are required to be registered as a retailer and
pay sales tax on standard rate of 17% under the Sales Tax Act, 1990 and Rules made
thereunder.
In the light of the provisions of the Sales Tax Special Procedures Rules, 2007:
Briefly describe the mechanism of charging sales tax from retailers not falling in
categories specified in above question.
Explain the following with reference to the provisions of Federal Excise Act, 2005.
(i) Applicable value and rate of duty
(ii) Supply
107 Records
Briefly describe the requirements relating to the maintenance and keeping of records
by a person registered under the provisions of Federal Excise Act, 2005.
Explain the following under the provisions of Federal Excise Act/Rules, 2005.
(i) Non-fund banking services
(ii) Franchiser
Explain the provisions of Federal Excise Act, 2005 with regard to the following:
(a) Excess duty collected from the customer.
Under the provisions of the Federal Excise Act, 2005 briefly describe the following:
The liability for payment of excise duty in case of closure of a private company and
sale of a business to another person as an ongoing concern.
120 Franchise
Under the provisions of the Federal Excise Act, 2005 define Franchise
Under the provisions of Federal Excise Act, 2005 and Rules made thereunder,
explain:
How and under what circumstances a collector may withdraw the order for
suspension of a persons registration.
Under the provisions of Federal Excise Act, 2005 and Rules made thereunder,
explain:
The consequences of wrong registration due to inadvertence or misconstruction.
B
Advanced Taxation
SECTION
Answers
CHAPTER 01 INDIVIDUAL
W-5: Rupees
Tax deductible on services is treated as Minimum Tax. Hence BURQ ENTERPRISE is
required to pay tax as higher of Normal Liability or Minimum Tax (including turnover
tax under section 113) deducted at source.
Calculation of Tax liability under Normal Tax regime is as under:
Upto Rs. 6,000,000 1,319,500
Balance (47,109,000-6,000,000) x 35% 14,388,150
15,707,650
MR. ADIL
Personal status: Individual
Residential status: Resident
Tax Year: 2017
Income year ending: June 30, 2017
Computation of income and tax liability of Mr. Adil
Income from Business Rupees
Share of profit from AOP for rate purposes only (W-6) 15,100,675
Income from Property
Rental income from the apartment (Fair market rent) 147,000
Non-adjustable rent [{110,000-[(85,000/10) x 2]} /10] 9,300
156,300
Capital Gain
Loss on sale of bonus shares Note (W-7) (120,000) (120,000)
15,136,975
Less: Income from property (taxable as separate block of income) (156,300)
Add: Loss on sale of bonus shares as capital loss is allowed to be 120,000
adjusted only against capital gain 15,100,675
There is no tax liability under normal tax regime
and separate block of income
Any salary drawn by member of AOP is appropriation of profit and chargeable to tax
being share of member in the total income of AOP.
Bonus shares are now taxable @ 5% such tax is deducted on the MV (Ex Price) of
Bonus Shares on the first day after closure of books. In the absence of information it is
assumed that Rs. 150 is ex price which will be treated as cost of bonus shares.
Note: Cost of original old shares would remain same before and after bonus shares
are issued.
2 Mr. Khan
Personal status: Individual
Residential status: Resident
Computation of Taxable income and Tax thereon
Tax Year 2017
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 945
whichever is higher) (Rule 4)
Company maintained car (2.0 million 5% 1/2) 50
Interest free loan [(2.5 million) 10% x 6/12] 125
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 4,000
Unapproved gratuity (2.0 million 75K exempt under clause 13 of 1,925
Capital Gain
Sale of share of a listed company 500
(Gain on sale of listed shares, which were held for the period of more
than 24 months but less than four years - Rs. 500,000 taxable as SBI)
11,070
Less: Donation paid to an un-approved trust (inadmissible deduction) -
Taxable income 11,070
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 11,070
Less: Capital gain (Separate Block Income) (500)
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) 6,570
3 Mr. Yaqeen
Personal status: Individual
Residential status: Resident
Computation of income tax liability For the tax year 2017
Income from Salary: Rs. 000
From KKUH:
Basic salary (500 x 6) 3,000
Medical allowance (60 x 6) 360
Less: exempt up to 10% of basic salary (300)
60
Leave fare assistance 240
From DPL:
Basic Salary (800 x 6) 4,800
Medical allowance (80 x 6)[exempt being 10% of basic salary] -
Utilities allowance (100 x 6) 600
Amount received as consideration for joining DPL 3,000
Assets received for use at home (200 x 15% /2) 15
Perquisite in the form of concessional loan (10%-8% x 5,000 x (3/12)) 25
Total income under the head salary 11,740
Capital Gain:
Gain on disposal of painting (W-1) 176
Less: 1/4th of gain is exempt due to sale after one year (44)
Net gain on disposal of painting 132
Sale of shares in ABL(W-2) 50
182
Taxable income for the year 11,922
4 Mr. Sohail
5 Mr. Iqbal
6 Mr. Saif
Notes
Items not included in computation:
(a) Bonus in July 2017: Salary is taxable on receipt basis hence it will be taxed in
Tax year 2018.
(b) Maintenance of car: It is not separate perquisite and included in notional figure
calculated in W-1 below.
(c) Insurance premium: 50% premium paid in July 2017 will not be allowed as
income from other source as it is taxable on receipt basis.
(d) LCD TV: Being capital in nature is not allowed. Further, no depreciation / initial
allowance allowed in computing income under the held income from other
sources except in case of lease of building together with plant and machinery.
N-1
Donation to pak board: In case of donation to institution mentioned in 2nd schedule u/c
61, straight deduction is allowed subject to lower of actual amount or 30% taxable
income.
N-2
Income / Loss under the head of income from Property: cannot be adjusted against
income under other heads as the same is now fully covered under final tax regime.
W-1 Perquisite representing car:
The perquisite shall be computed as below:
FMV of the car at the commencement of lease term 1,500,000
5% of the FMV (1,500,000 5%) 75,000
The annual rental value of the bangalow at Rs. 2,400,000 is less than 45% of basic
pay, hence the same shall be considered for the purpose of computing the value of
perquisite representing accommodation.
W-3 Depreciation:
Fire Screen Fitness
machine
Cost of fitness machine 200,000 2,750,000
Less: Initial depreciation @ 25% (50,000) (687,500)
150,000 2,062,500
Normal depreciation @ 15% 22,500 (309,375)
WDV at 30-06- 2017 127,500 1,753,125
7 Mr. Pansari
Personal Status: Individual
Residential Status: Resident
Computation of Taxable Income and Income Tax Liability
For the tax year 2017
Income from Salary: Rupees
Basic salary per month (Rs. 450,000 x 12) 5,400,000
Conveyance allowance per month (Rs. 50,000 x 12) [N-1] 600,000
Conveyance for business and private use (Rs. 3,000,000 x 5%) [N-2] 150,000
Leave encashment (benefit due but voluntarily waived off is fully
taxable) [U/S 69(c)] 75,000
Marginal Perquisites (Rs. 500 x 2 x 12) [N-3] 12,000
Employee Shares Scheme:
Gain on acquisition of shares from Trio Limited (8,000 x 2x 102) 1,632,000
Pension from Ex-employer [N-4] -
Directors meeting fee [N-5] 200,000
Total income from salary 8,069,000
Capital Gain
Gain on sales of shares of Trio Limited (6,000 x (8.5 5 ) x 102) 2,142,000
Brought forward capital loss on sale of Ghareeb (Pvt.) Limited [N-7] (25,000)
2,117,000
Income from other sources
Royalty received from K Publishing [N-6] 2,000,000
8 Big Pharma
Personal Status: Company
Residential Status: Resident
Computation of income tax liability
For the tax year 2017
Rs. in 000
Accounting profit before taxation 17,150
Add: Inadmissible expenses:
Accounting depreciation recorded in:
Cost of sales 3,200
Administrative expenses 800
Provision for slow moving stock 1,300
Demurrage -
Royalty -
Damages paid to distributors on breach of -
contract
Provision for bad debts 1,100
Small items of office equipments charged off 1,400
Unrealized exchange loss 1,350
Interest on foreign debt (u/s 152(3) no approval 1,300
from CIR obtained)
WWF as per accounts 350
Loss from Oman branch 3,400
Profit from Qatar branch (2,700)
Net loss from foreign source (to be carried 700
forward for adjustment against foreign source
income of the following tax year, if any.)
11,500
28,650
Less: Admissible expenses:
Tax depreciation (assumed inclusive of 6,000
office equipment given in question)
Bad debts written off (W1) 300
(6,300)
Taxable income 22,350
Less: brought forward tax loss (6,100)
Taxable income 16,250
WWF (W2) (350)
Net taxable income 15,900
An AOP is liable to pay tax separately from its members and where an AOP has
paid tax, the amount received by members (including salaries) out of the income
of AOP is exempt from tax. Since both Mateen and Vaqas have no other income
except for the share in AOP, no tax is payable by them separately.
(ii) Company (Public/Private) Rupees
Taxable income as per (i) above 2,677,500
Less: Salaries:
Mateen (1,100,000)
Vaqas (970,000)
Adjusted taxable income 607,500
Tax @ 31% 188,325
Profit after tax 419,175
Calculation of Dividend:
Accounting profit before tax 1,095,000
Less: Tax (as calculated above) ( 188,325)
Profit after tax 906,675
Dividend on Rs. 906,675 @ 60% ( 544,005)
Profit retained after dividend 362,670
Calculation of Dividend:
Accounting profit before tax 1,095,000
Less: Tax (as calculated above) (186,150)
Profit after tax 908,850
Dividend on Rs. 908,850 @ 60% (545,310)
Profit retained after dividend 363,540
Total tax payable by the business:
On company profits (1% of sales or ACT 1,095,000 x 17%) 186,150
Add: Tax payable on salaries by -
Mateen (1,100,000)[14,500 + 10%(1,100,000 750,000) 49,500
Vaqas (970,000)[14,500 + 10%(970,000 750,000) 36,500
Tax payable on dividend:
Mateen (545,310 x 60% =327,186 x 12.5%) 40,898
Vaqas (545,310 x 40% =218,124 x 12.5%) 27,266
Total tax payable in case of a company (C) 340,314
Based on the above information it would be better for Mateen and Vaqas to operate as
a limited liability company in small company category, if possible, being lowest tax
impact (Rs. 340,314). Even as normal limited liability company the tax impact is Rs.
342,325 as against the amount of tax of Rs. 388,875 payable in case of partnership.
Since the amount of tax payable on taxable income is higher than the
turnover tax, alternative corporate tax, the company would pay normal tax on
its income.
ML was required to estimate the tax payable for the relevant tax year at any time
before the second instalment was due. In case the tax payable was likely to be
more than the amount otherwise payable on the turnover basis, the taxpayer
shall furnish to the CIR on or before the due date of the second quarter an
estimate of the amount of tax payable by the taxpayer and thereafter pay 50% of
such amount by the due date of the second quarter of the tax year after making
adjustment for the amount (if any) already paid. The remaining 50% of the
estimate shall be paid after the second quarter in two equal instalments payable
by the due date of the third and fourth quarter of the tax year.
Where the tax paid under section 147 is less than ninety per cent of the tax
chargeable for the relevant tax year, the taxpayer is liable to pay default
surcharge at the rate of 12% per annum on the amount of shortfall for the period.
Such default surcharge shall be calculated from the first day of April in that year
to the date on which assessment is made or the thirtieth day of June of the
financial year next following, whichever is the earlier.
Under the given circumstances, the total advance tax paid by ML under section
147 along with the amount of taxes suffered at source amounted to Rs. 6.865
million which is less than ninety per cent of the amount of tax charged to ML for
the tax year 2017. Therefore, ML is exposed to the levy of default surcharge
under section 205 (1B).
Working:
Tax Year
3,105,000
2015 46%
6,750,000
2,632,500
2016 39%
6,750,000
1,012,500
2017 15%
6,750,000
Note:
It is assumed that RPL is a public company listed on registered stock exchange in
Pakistan. Therefore its income will be assessed under normal tax regime. [Section
153]
In case RPL is not listed, gross receipts will be treated as taxable income tax
deductible @ 7% will be final tax liability of RPL. [Section 153]
No turnover tax u/s 113 and alternative corporate tax has been computed as the same
are less than tax computed under normal tax regime on the taxable income of the
company.
Notes:
(i) Profit on debt paid by a resident in respect of a debt utilized for the purpose of
carrying on business outside Pakistan through a permanent establishment is
against foreign source income. Therefore, profit on debt paid by SL shall not be
admissible against local source income. However, it is admissible against
income earned from China branch.
(ii) Since excess provision for bad debts had not been previously allowed as
deductible expense. Therefore it would not be chargeable to tax. [Section 29]
(iii) Donation paid to Prime Ministers Relief Fund is exempt from tax and is allowed
as a direct deduction from taxable income. [Clause 61 of Part I of 2nd Schedule]
(iv) In case of Korea and China branches, since the foreign income tax paid Rs.
250,000 and Rs. 400,000 respectively is in excess of the Pakistan income tax of
Rs. 248,000 and NIL respectively, the tax credit allowed would be restricted to
Rs. 248,000 and NIL. Further, the excess amount of Rs. 2,000 and Rs.
400,000 respectively would not be allowed to be refunded, carried back to the
previous tax year, or carried forward to the next tax year. [Section 103]
Motor vehicle tax paid under u/s 234 (final tax) - - (40)
Net tax payable / (refundable) 7.80 (215) 151
N-1
1% MTL U/S 113 170 60 35
17% ATC U/S 113C 629 - 221
31% NTR 781.2 - 84.01
Notes:
N-1: Since normal liability under transport business is more than tax already
deducted, therefore provision of minimum tax in respect of transport service income
shall not apply.
W-1 Tax depreciation for the year:
Rupees in 000
Plant &
Machinery and Others Total
Delivery Trucks
Depreciati
Opening Addition /
Assets Total Rate on for the
WDV (Deletion)
year
Delivery truck ML
ML
Addition 1,500
Good transport vehicle plying for hire is eligible depreciable asset, hence initial
allowance @ 25% to be calculated.
Capital Gain:
Gain for the year 800
Less: B/f capital loss tax year 2010 -
Less: B/f capital loss tax year 2011 (65)
735
Income from Other Sources:
Income for the year 100
Add: deemed income 85
185
Taxable income for the year 890
Business loss carried forward to next tax year Nil
Unabsorbed depreciation carried forward to next tax year
Speculation loss carried forward to next tax year 100
Note:
(1) Only the loss which has been assessed or determined under the provisions of
Income Tax Ordinance, 2001 can be carried forward and set-off under the
respective provisions of the Ordinance, therefore the un-assessed business
loss carried forward from tax year 2016 cannot be set-off against the business
income of 2017. [Section 56]
(2) Capital loss brought forward from tax year 2010 cannot be set off against
capital gains of tax year 2017 as no loss can be carried forward to more than
six tax years immediately succeeding the tax year for which the loss was first
computed. [Section 59]
(3) The speculation loss carried forward from tax year 2015 can only be set-off
against income from speculation business chargeable to tax in tax year 2017.
Since in tax year 2017, ZL has no speculation income, therefore the brought
forward loss would be carried forward to the next tax year. However, such a
loss cannot be carried forward to more than six tax years immediately
succeeding the tax year for which the loss was first computed i.e. 2015.
[Section 58]
(4) Under group relief only the losses other than the capital and brought forward
losses can be surrendered in favour of a subsidiary of a holding company.
[Section 59B]
Capital Gain:
Gain on sale of shares in Nafa (700,000-230,000) 470,000
th
Less: 1/4 of gain is exempt due to sale after one year (117,500)
Total income from Capital Gains B 352,500
Income from Other Sources:
Profit on debt (Bank profit) 180,000
Income from lease of manufacturing unit
Gross lease rentals (150,000 9) 1,350,000
Less:
Property tax (96,000)
Tax dep. on building (3,800,000 10%) (380,000)
Tax dep. on machinery (1,500,000 15%) [no initial allowance on
used machinery] (225,000)
(701,000)
649,000
Total income from other sources - C 829,000
Total income for the year (A+B+C) 1,498,500
Less: Donation [1,498,500 20%] (299,700)
Income before WWF 1,198,800
Less: WWF (needs computation) W-2 (23,976)
Taxable income for the year 1,174,824
Tax for the year (N-3) 2,438.77 1,695.58 105.15 516 4,755.50
Less: paid u/s 147 (3,450.00) - - - (3,450.00)
Paid u/s 153 - - - - -
Paid u/s 154(3c)
[169,558 x 1%]*1 - (1,695.58) - - (1,695.58)
Paid u/s 233 - - - (432) (432)
Tax payable / (refundable) (1,011.2
for tax year 3) - 105.15 84 (822.08)
CGTon shares W-4 A 191.25
Total tax refundable (630.83)
1
* (175,95185%=149,558+20,000=169,558)
Note: Fee received from Bahrain and capital gain on sale of shares in Blue Limited is
exempt from tax and since no direct expenditure was incurred in earning such income,
no expenditure would be allowed against such income.
Notes:
1. It is assumed that direct cost / related expenses (except freight given in the question)
against receipt of rendering of dying and embroidery services to export house have
already accounted for in the preceding tax year. Therefore no further cost / expenses
shall be allocated in the current year.
2. Clearing and forwarding expenses i.e. services paid without any withholding
deduction, therefore inadmissible expense.
3. Export sales will be FTR on the basis of actual gross receipts during the tax year i.e.
1% of gross export receipt deducted will be the final tax liability for that tax year.
21 ZJ Limited
Personal Status: Company
Residential Status: Resident
Computation of Taxable Income and Income Tax Liability
For the tax year 2017
Income from Business: Rs. in 000
Profit before taxation 46,500
Add / (Less): Inadmissible items / transactions
Export sale to Red Cross in Somalia-NTR income
[since opt out of PTR] -
Adjustment of opening stock-absorption cost method [25,69028,460] (2,770)
Adjustment of closing stock-absorption cost method [32,35029,200] 3,150
Accounting depreciation (cost of sales) 2,210
Withholding tax collected on a plot of land 600
Exp. to increase software featuresintangible 1,800
Cost of ramps capital expenditure 650
Accounting depreciation (Adm. & selling expenses) 1,980
Sale proceeds of vehicles sold to employees (2,450)
Tax gain on sale of vehicles - [5,250 3,320] 1,930
Income from associate- accounted for using equity method (20,000)
Gain on sale of securities (6,000)
Total business income / (loss) before depreciation/amortization 27,600
Less: B/f assessed business losses from 2014 & 2015 [3,550 + 2,900] (6,450)
21,150
Less: Tax depreciation (4,300)
Dep. on ramp @100% (cost restricted to Rs. 250,000 per ramp) (500)
Amortization of software expenses (1,80010) (180)
Unabsorbed depreciation from tax year 2015 (2,550)
Total business income for the year A 13,620
Capital Gain:
Gain on disposal of plot (10,0003,000)[Separate block of income] 7,000
Gain on sale of securities in ML [(8550 100,000) + (7850 100 K)]
U/R 13P(d) related to negotiated deal transactions 6,300
Separate block of income
B 13,300
W-1: Computation of turnover for the purpose of minimum tax u/s 113
Rs. in 000
Turnover as per un-audited financial statements- net 218,500
Add: ZJLs share in AOPs gross sales [30,000 35%] 10,500
Less export sale minimum tax separately calculated (30,000)
Adjusted turnover 199,000
Rupees
Interest paid/accrued for DPL in tax year 2017:
Debt where thin capit. rule is applicable (315 million 11% 200365) 18,986,301
Interest paid/accrued for DPL in tax year 2017:
Debt where thin capit. rule is not applicable 3,369,205
(168 million 6% 122365)
Deductible profit on debt for the tax year 2017:
For BP loan = 18,986,3011.2209 15,551,070
Profit on debt paid/accrued for DPL in tax year 2017:
Debt not covered under thin capitalization rule (fully deductible) 3,369,205
Total interest allowed 18,920,275
Therefore total profit on debt allowable for tax purposes under the provisions of
Income Tax Ordinance, 2001 is Rs. 18,920,275.
Note: Any alternative approach in arriving at the above deductible profit on debt of Rs.
15,551,070 is also considered.
23 Olive Limited
Notes:
N-1: The restriction of 90% is not applicable in case of commercial imports provided
value of imports subject to 3% value addition tax exceeds 50% of value of all taxable
purchases. Since such value is < 50% in the question therefore 90% rule is also
applicable on commercial imports.
N-2: Sales tax @ 16% [serial # 3, 2nd schedule of Punjab Sales Tax on services].
100% withholding tax [Rule 5 Punjab ST on services (withholding) Rules 2015.
N-3: Input on fixed asset is excluded while comparing 90% and is adjustable in totality.
N-4: From July 01, 2016 sales tax input paid on services shall not be allowed under
the Sales Tax Act, 1990. So whether advertisement is exempt or not input tax shall not
be allowed.
W-1: Apportionment of input tax Gross Taxable
Sales Tax
Value Value
----- Rs. in 000 -----
Domestic Purchases(excluding fixed assets) 6,000 6,000 1,020
Imports excluding fixed assets-domestic 15,000 15,000 2,550
consumption
Fixed Assets 1,200 1,200 204
24 Kamyab Engineering
Computation of Sales Tax Payable / Refundable
For the tax period November 2016
Rs. in 000
Taxable Value Sales Tax
Sales Tax Credit (Input Tax)
Domestic purchases:
From registered persons 70,700 12,019
From unregistered persons - -
Commercial imports @ (17+3) 20% - W-1 10,000 1,980
Electricity Bills - 60
Gas Bills - 21
Mobile Phone - 26
Uniforms for line staff - -
Purchases from non-register - -
14,106
Less: Inadmissible / un-adjustable input tax (W-2) (3,307)
Input tax for the month 10,799
Input tax on purchases outstanding for more than 180
days is presumed to be taken care of in Octobers
return. (W-4)
Sales tax debit (output tax)
Domestic supplies of manufactured goods:
to registered persons 40,000 6,800
to unregistered persons 24,000 4,080
Exempt goods - -
Export to Malaysia - -
Supplies of imported goods (W-3) 12,460 2,118
Output tax for the month 12,998
Less: WH Tax deducted by WH Agents RPs (40,000
x 17% x 20%) 1,360
11,638
Sales tax payable ( 11,638-10,799) (A) 839
Further tax 2% of local taxable supplies to un-
registered persons i.e. 24,000 x 2 % (B)
No extra tax has been charged on the assumption
that the appliances supplied by the registered person
do not fall in rule 58S of the Sales Tax Special
Procedure Rules, 2007. 480
WHT on purchases 70,700 x 17% x 20% 2,404
(C) WHT on uniform (85,000 x 20%) 17
(A)+ (B) + (C) 3,740
W-4:
A person is required to make payment through banking channel within 180 days. In
case of delay beyond 180 days, related input tax is disallowed. 180 days lapsed in
August and hence related input tax reversal would have been made by KEL in
September return. Hence there will be no treatment for Rs. 34,000 (200,000x17%).
N-1: Withholding tax provisions on advertisement services on billboard under ICT shall
be same as applicable under Sales Tax Act, 1990 by virtue of Rule 3(3) of ICT (on
services), 2012 read with Rule 2(3A) of Sales Tax Special Procedure (Withholding)
Rules, 2007 therefore 100% of sales tax amount i.e. Rs. 112,000 has been deducted
by the Company being as recipient of advertisement services.
N-2: From July 1, 2016 sales tax input paid on services shall not be allowed under the
Sales Tax Act, 1990.
Complete input tax will be disallowed. However refund of Rs. 714 can be claimed in
respect of zero rated.
Note:
Sales tax withholding is not applicable on 3rd schedule items.
(W-1)
Refund claim (input on zero rated supply to AB limited)
(W-1) 51,177
Refund claim (input on zero rated supply for aircraft)
(W-1) 204,708
Gross Taxable
W-1: Apportionment of input tax Sales Tax
Value Value
----- Rs. in 000 -----
Domestic Purchases- registered suppliers 25,000,000 24,900,000 4,233,000
Imports - domestic consumption 4,000,000 4,000,000 680,000
Residual input tax TOTAL 4,913,000
Rupees
Total sales of manufactured goods 48,000,000
Exempt supplies 6,000,000
Inadmissible input on exempt supplies (4,913 x 6,000/48,000) (A) 614,125
Export supplies 12,500,000
Refundable input tax on export (4,913 x 12,500/48,000) (B) 1,279,428
Zero rated supplies to AB Limited 500,000
Refundable input tax on Zero rated supplies (4,913 x 500/48,000) (C) 51,177
Zero rated supplies for aircraft maintenance (weight > 8,000 Kg.) 2,000,000
Refundable input tax on Zero rated supplies (4,913 x 2,000/48,000) (D) 204,708
In case of goods imported by MF, the tax paid thereon during a period of ninety
days before making an application for registration has been treated as an input
tax assuming MF holds the bill of entry relating to such goods and also that these
are verifiable unsold or un-consumed stocks on the date of compulsory
registration or on the date of application for registration or for voluntary
registration.
Therefore, in view of the above, input tax paid on goods purchased locally by MF
in October 2016 i.e. not more than 30 days prior to application for registration and
input tax paid at import stage on goods imported in August 2016 i.e. not more
than 90 days prior to application for registration can be claimed by MF with its
November 2016 return. However, he cannot claim input tax on local purchases of
Rs. 25,000 on 10th Sep as period of 30 days has lapsed.
6,456,600
Admissible credit (90% of 7,123,000 or input tax whichever is lower) ( 5,975,000)
WHT from raw material purchases (20(m) x 17% x 20%) 680,000
Sales Tax payable (6,456,600 - 5,975,000) + 680,000 1,161,600
Notes:
N-1:Since consumer goods are consumed by end consumers, hence 2% additional
sales tax shall not be charged on sales to non-registered persons.
N-2:Sales tax withholding is not Applicable on Local third schedule items.
Rupees
Total sales 8,600,000
Supplies to duty free shop 1,020,000
Export supplies 680,000
Refundable input tax (986,000 1,700,0008,600,000) 194,906
34 Karma Limited
35 Mr. Parekh
Computation of capital gain on sale of securities:
Purchases/Acquisitions Disposal
No. of
Date Price Cost** 01-5-17 07-5-17 21-5-17 31-5-17 31-5-17 31-5-17
Shares
31-3-16 1,400 20 28,000 600 800
15-9-16 700 22 15,400 700
01-4-17 900 18 16,200 400 500
31-5-17 500 23 11,500 500
Total 3,500 71,100 600 800 700 400 500 500
* Average rate taken for sale purchase on the same day as per Rule 13N(5)
** Incidental expenses @ 0.50% of cost of acquisition of securities has been ignored.
36 Capital Gain
(i) The extinguishment of 2,000 shares in BL will be treated as tax neutral event
(as there is no change in ownership of the shareholder (Hamid) is involved) and
1,000 shares in GL will have the same cost base i.e. Rs. 30,000 (Rs. 30 per
share).Therefore, no CGT will be collected on such transfer. If subsequently
Hamid sells shares of GL, capital gain will be computed taking into account the
date of acquisition i.e. July 01, 2016.
CGT
50 75 125
*As per income tax rule 13P(q) market value on book closure will be treated as
cost of bonus shares
Bonus Shares:
Pie Limited shall also collect 5% of value of bonus shares determined on the
basis of day end price on first day of closure of books. i.e; Rs. 25x50x5%= 62.5
Tax paid shall be final tax
Assumption: Cost of acquisition and sale proceeds are deemed to include 0.5%
as incidental expenses.
37 Book Author
Where the time taken by an author of a literary or artistic work to complete the work
exceeds twenty-four months, the author may elect to treat any lump sum amount
received by the author in a tax year on account of royalties in respect of the work as
having been received in that tax year and the preceding two tax years in equal
proportions.
Therefore, Mr. Danishwar can spread the amount of Rs. 900,000 over the period of
three years in equal proportions i.e. Rs 300,000 each starting from tax year 2017 to
preceding two tax years 2016 and 2015.
Any foreign-source income derived by a citizen of Pakistan in a tax year who was not a
resident individual in any of the four tax years preceding the tax year in which the
individual became a resident shall be exempt from tax in the tax year in which the
individual became a resident individual and in the following tax year.
Since, Mr. Bari became a resident in tax year 2016, the foreign source income derived
in the tax year 2017 would be exempt from tax.
39 Transfer of Assets
Any income arising from any asset transferred by a person directly or indirectly to the
persons spouse or minor child shall be treated as the income of the transferor.
The above provision shall not apply to any transfer made for adequate consideration.
However, a transfer shall not be treated as made for adequate consideration if the
transferor has provided, by way of loan or otherwise, to the transferee, directly or
indirectly, the funds for the acquisition of the asset.
Therefore, in this case, Rs. 840,000 received by Mrs. Ravi and Ashok will be included
in the taxable income of Mr. Ravi.
A person shall be allowed a deduction for a bad debt in a tax year if the following
conditions are satisfied, namely:
(ii) The debt or part of the debt is written off in the accounts of the person in
the tax year; and
(iii) There are reasonable grounds for believing that the debt is irrecoverable.
The amount of the deduction allowed to a person for a tax year shall not exceed
the amount of the debt written off in the accounts of the person in the tax year.
Rupees
Rupees
44 Residential Status
Resident Individual:[Section 82 read with Rule 14 of the Income Tax Rules, 2002]
(i) Residential status of the following persons for the tax year ended June 30, 2017
under the given circumstances.
For the tax year ended June 30, 2017, the relevant period is July 01, 2016 to
June 30, 2017. Therefore, the stay of Mr. Mubeen for the purpose of tax year
2017 is:
Month Days
July 2016 31
August 2016 31
September 2016 30
Total 92
Since his stay in Pakistan is less than 183 days in tax year 2017, he is a non- resident
for tax purposes.
(ii) Since Mr. Rana never travelled abroad in his life before proceeding to Canada for
assuming his job responsibilities, the number of days he spent in Pakistan for the tax
year 2017 is:
Month Days
July 2016 31
August 2016 31
September 2016 30
October 2016 31
November 2016 30
December 2016 29
30 June 2017 1
Total 183
The day he spent in Pakistan on June 30, 2017, while in transit, would be
counted as day of his presence in Pakistan.
Therefore, Mr. Rana is a resident person as his total stay in tax year 2017 is
equal to183 days.
(iii) A Federal Government Employee posted abroad in terms of his employment is
considered as a resident person irrespective of his physical presence in
Pakistan.
Therefore, Mr. Baber is a resident individual for tax year 2017.
((iv) In case of Mr. Francis, it is immaterial where he stayed in Pakistan. The
calculation will be made from the day of his arrival in Pakistan to the day of his
departure from Pakistan. Therefore, the total number of days he spent in
Pakistan during the calendar year 2016i.e. the year starting from January 01,
2016 to December 31, 2016(Special tax year 2017) is:
Month Days
July 2016 1
August 2016 31
September 2016 30
October 2016 31
November2016 30
December 2016 31
Total 154
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.[Section
37(5) &22(13)(b)
(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 Commissioners 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.[Section 34(5)]
(v) Bad debt is allowed if the amount of debt was previously included in the persons
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 Commissioners
contention is correct. [Section 29]
Tax credit to a person registered under the Sales Tax Act, 1990: [Section 65A]
A registered manufacturer under the Sales Tax Act, 1990 shall be entitled to a tax
credit of three 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.
49 Group Taxation
(i) Compulsory taxation under Final Tax Regime: [U/C 41 PART-IV Of 2nd
Schedule]
Taxes withheld from the payments made to a non-resident person on the
execution of a construction contract constitute final tax on the income from such
contracts only when such person opts to be taxed under Presumptive Tax
Regime.
Provided that the non-resident person:
Furnishes a declaration of option in writing;
Such declaration is furnished within 3 months of the commencement of the
tax year;
Such declaration shall be irrevocable; and
Shall remain in force for 3 years.
(ii) Taxation of a permanent establishment in Pakistan of a non-resident
person:
The tax implication in each of the following cases, while determining the
chargeable income of the permanent establishment, would be:
Head office expenditure: [U/S 105(2)]
In computing the income of a permanent establishment in Pakistan of a non-
resident person chargeable to tax under the head Income from Business for
a tax year:
No deduction shall be allowed for head office expenditure in excess of the
amount as bears to the turnover of the permanent establishment in Pakistan
the same proportion as the non-residents total head office expenditure bears
to its worldwide turnover.
No account shall be taken of amounts charged by the P.E to the head office
by way of compensation for management services performed by the P.E.
52 Selection of Audit
Following methods are provided under the Ordinance for selecting a person for audit
of his income tax affairs:
(1) The Board may select a person for the audit of its Income Tax affairs through
computer ballot which may be random or parametric as the Board may deem fit.
(2) The Commissioner may call for any record or documents including books of
accounts maintained by a person under the Ordinance or any other law for the
time being in force for conducting audit of the income tax affairs.
The Commissioner shall however, first record the reasons for the above action in
writing and shall also communicate those reasons to a person.
The fact that a person has been audited in a tax year 2016 shall not preclude it
from being audited again in the next and following tax years, provided that there
are reasonable grounds for conducting such audit.
(3) A Person shall be automatically selected for and if: [Section 214D]
(b) Tax payable with the return of income has not been paid.
Government grant: [Clause 102A of Part I of 2nd Schedule to the ITO, 2001]
Rs. 20 million is not income for tax purpose but is a capital receipt on grounds that
(a) Amount was voluntarily paid by Federal Government.
(b) company did not ask for grant.
(c) Amount received did not arise out of any legal /contractual obligation.
(d) Amount is not traceable to any source of income.
Cost of asset [Section 76(10)]
Further in determining the cost of asset, any subsidy or grant received shall be
reduced/ deducted from cost to the extent the said grant is not chargeable to tax.
Hence cost of plant and machinery will be 50 20 = 30 million.
(a) Dividend received from exempt income: [Clause 105B of Part I of 2nd
Schedule]
Where any income is exempt from tax under the Ordinance, the exemption, in
the absence of a specific provision to the contrary, shall be limited to the original
recipient of that income and shall not extend to any person receiving any
payment wholly or in part out of that income.
However, keeping in view provision of clause 105B part I of 2nd Schedule the
benefit of the RFLs exempt income, being wholly agricultural in nature, will be
extended to Mr. Pansari who has received dividend from such exempt income
and therefore, Rs. 45,000 received by him as dividend will be exempt from tax.
Since GL is a Pakistan resident company, Rs. 10 million receivable by the Indian artist
would be regarded as her Pakistan source income.
GL is also required to deduct withholding tax at the specified rate from such payment,
as every person paying an amount to a non-resident person is required to deduct tax
from the gross amount paid at the specified rate.
In view of the above, GL after deducting withholding tax from the payment of Rs. 10
million can claim it as deductible expenditure.
58 Associates Define
Two persons shall be associates where the relationship between the two is such that
one may reasonably be expected to act in accordance with the intentions of the other,
or both persons may reasonably be expected to act in accordance with the intentions
of a third person.
Where the member, either alone or together with an associate or associates under
another application of this section, controls fifty per cent or more of the rights to
income or capital of the association;
Tax evasion:
It arises when a taxpayer intentionally conceals the true nature of his/her tax affairs,
for instance failing to declare income on his/her tax return. For example when cash
sales are concealed to reduce income and assets.
Tax avoidance:
It refers to all attempts to minimise a taxpayers liability through legal means and
without violating the tax laws.
Means a financial product which derives its value from the underlying security or
other assets, may be traded on a stock exchange of Pakistan and includes
deliverable futures contracts, cash settled futures contracts, contracts of rights
and options.
Where the investor having realized loss (as in the case of a wash sale) on a
particular security does not repurchase the same security but chooses another
similar security in the same sector thus not only minimizing or eliminating
altogether liability on account of tax on capital gain, but also maintaining the
portfolio broadly at the same risk return profile.
A Provincial Government;
A Local Government;
A company;
64 Profit on Debt
SL was required to estimate the tax payable for the relevant tax year at any time
before the second instalment was due and in case the tax payable was likely to be
more than the amount otherwise payable on the turnover basis, the taxpayer shall
furnish to the CIR on or before the due date of the second quarter in estimate of the
amount of tax payable by the taxpayer and thereafter pay 50% of such amount by the
due date of the second quarter of the tax year after making adjustment for the amount
(if any) already paid. The remaining 50% of the estimate shall be paid after the second
quarter in two equal instalments payable by the due date of the third and fourth
quarter of the tax year.
Where the tax paid under section 147 is less than ninety per cent of the tax
chargeable for the relevant tax year, the taxpayer is liable to pay default surcharge at
the rate of 12% per annum on the amount of shortfall for the period. Such default
surcharge shall be calculated from the first day of April in that year to the date on
which assessment is made or the thirtieth day of June of the financial year next
following, whichever is the earlier.
Under the given circumstances, the total advance tax paid by SL under section 147
along with the amount of taxes suffered at source amounted to Rs. 23 million which is
less than ninety per cent of the amount of tax charged to SL for the tax year 2016.
Therefore, SL is exposed to the levy of default surcharge under section 205(1B).
Rupees
Period of default (from 1 April 2016) to (30 June 2017) (91 days +
365 days) 456 days
Depreciable asset means any tangible movable property, immovable property (other
than unimproved land), or structural improvement to immovable property, owned by a
person that
(a) has a normal useful life exceeding one year;
(b) is likely to lose value as a result of normal wear and tear, or obsolescence; and
(c) is used wholly or partly by the person in deriving income from business chargeable
to tax,
but shall not include any tangible movable property, immovable property, or structural
improvement to immovable property in relation to which a deduction has been allowed
under another section of this Ordinance for the entire cost of the property or
improvement in the tax year in which the property is acquired or improvement made
by the person.
70 Speculation Business
each member of the association must have an interest in the shares in the
same proportion to the members interest in the business assets immediately
before the disposal;
the company must undertake to discharge any liability in respect of the assets
disposed of to the company;
any liability in respect of the assets disposed of to the company must not
exceed the associations cost of the asset at the time of the disposal;
the fair market value of the share or shares received by the association for the
disposal must be substantially the same as the fair market value of the assets
disposed of to the company, as reduced by any liability that the company has
undertaken to discharge in respect of the assets; and
the company must not be exempt from tax for the tax year in which the
disposal takes place.
Therefore, the amount of penalty payable by Mr. Hoshyar would be Rs. 126,034.
(ii) Penalty where declared income in the return was below taxable limit:
A person who fails to furnish a return of income where his declared income is
below the taxable limit as required under section 114 within the due date, such
person shall pay a penalty of twenty thousand rupees.
73 Advance Ruling
The advance ruling is required to be issued by the Board within 90 days of the receipt
of a valid application in writing by a non-resident person.
77 Define Information
(i) Returns:
Being a registered person, Mr. Furqan was required to file a nil /null return for
each tax period irrespective of the fact that he did not carry out any taxable
activity after the registration.
Failure of Mr. Furqan to file a return by the due date may result in imposition of
penalty.
(ii) De-registration:
Mr. Furqan may be liable for deregistration due to any of the following reasons:
Every registered person who ceases to carry on his business or whose supplies
become exempt from tax, or who ceases to remain registered shall apply to the
Commissioner Inland Revenue having jurisdiction for cancellation of his
registration in Form STR-3, and the Commissioner, on such application or on its
own initiative, may issue order of de-registration or cancellation of the
registration of such person from such date as may be specified, but not later than
ninety days from the date of such application or the date all the dues outstanding
against such person are deposited by him, whichever is later and such person
shall cause to be de-registered through computerized system accordingly.
The Commissioner, upon completion of any audit proceedings or inquiry which
may have been initiated consequent upon the application of the registered
person for de-registration, shall complete the proceedings or inquiry within ninety
days from the date of application and direct the applicant to discharge any
outstanding liability which may have been raised therein by filing a final return
under section 28:
Provided that the person applying for de-registration shall not be de-registered
unless he provides record for the purpose of audit or inquiry.
79 Withholding agents
Withholding agents:
Following persons are specified as withholding agents for the purpose of deduction
and deposit of sales tax:
(iv) Companies as defined in the Income Tax Ordinance, 2001, which is registered
for Sales Tax, Federal Excise Duty or income tax;
(v) Recipients of services of advertisement, who are registered for sales tax.
Withholding agent includes the accounting office which is responsible for making
payment against the purchases made by a government department.
Persons authorized to represent a taxpayer: [Rule 59, Sales Tax Rules, 2006]
The following persons are authorized to represent a taxpayer before the adjudicating
authority and Appellate Tribunal, namely:
(a) A person in the employment of the taxpayer working on a full-time basis and
holding at least a bachelors degree in any discipline from a university
recognized by the Higher Education Commission provided that such person shall
represent only the taxpayer in whose employment he is working on full-time
basis;
(b) An advocate entered in any rolls, and practicing as such, under the Legal
Practitioners and Bar Councils Act, 1973;
(d) A person who has retired or resigned after putting in satisfactory service in the
Sales Tax Department or Customs Department or Federal Excise Department for
a period of not less than ten years in a post or posts not inferior to that of an
Assistant Collector;
(e) An accountant.
(a) Any person who has been convicted as a result of any criminal proceedings
under any law for the time being in force in Pakistan;
(b) A person who has been dismissed or compulsorily retired from service;
(d) A person who has been found guilty of misconduct as defined in sales tax rules.
81 Consideration in Kind-Supply
In case the consideration for a supply is in kind or is partly in kind and partly in money,
the value of the supply shall mean the open market price of the supply excluding the
amount of tax.
Therefore, value of supply shall be Rs 2,500,000 and not the consideration received
i.e. Rs 2,375,000.
However, if the sales tax invoice reflects trade discount of Rs 125,000 and discount
allowed is in conformity with the normal business practices, then the value of taxable
supply will be taken at Rs 2,375,000.
Return of supply:
(i) TL shall issue a Debit Note (in duplicate) in respect of Iron Bars supplied to it by
Folad Limited (FL), indicating the quantity being returned, its value determined
on the basis of the value of Iron Bars as shown in the tax invoice issued by FL
and the amount of related sales tax paid thereon, as well as the following,
namely:
(ii) The original copy of the debit note shall be sent to FL and the duplicate copy shall
be retained by TL for record.
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:
(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.
(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
(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 2017.
81,225
(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. [Section 73(2)]
(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 rating
of tax payment. [Section 73(1)]
(iii) The tax charged on the acquisition of fixed assets shall be adjustable against the
output tax. Z Limited would therefore, be entitled to claim Rs. 25.5 million.
[Section 8B(1)]
(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. [Rule 58S & 58T,
Sales Tax Special Procedure Rules, 2007]
For the purpose of recovery of tax, penalty or any other demand raised under the
Sales Tax Act, 1990 the officer of Inland Revenue shall have the same powers which
under the Code of Civil Procedure 1908 (V of 1908), a Civil Court has for the purpose
of recovery of an amount due under a decree.
Where any amount of tax is due from any person, the officer of Inland Revenue may:-
(i) Deduct the amount from any money owing to person from whom such amount is
recoverable and which may be at the disposal or in the control of such officer or
any officer of Income Tax, Customs or Federal Excise Department;
(ii) Require by a notice in writing any person who holds or may subsequently hold
any money for or on account of the person from whom tax may be recoverable to
pay to such officer the amount specified in the notice;
(iii) Stop removal of any goods from the business premises of such person till such
time the amount of tax is paid or recovered in full;
(iv) Require by a notice in writing any person to stop clearance of imported goods or
manufactured goods or attach bank accounts;
(v) Seal the business premises till such time the amount of tax is paid or recovered
in full;
(vi) Attach and sell or sell without attachment any movable or immovable property of
the registered person from whom tax is due; and
(vii) Recover such amount by attachment and sale of any moveable or immovable
property of the guarantor, person, company, bank or financial institution where a
guarantor or any other person, company, bank or financial institution fails to
make payment under such guarantee, bond or instrument.
85 Representative of non-resident
(ii) Who has any business connection with the non-resident person;
(iii) From or through whom the non-resident person is in receipt of any income,
whether directly or indirectly;
(iv) Who holds, or controls the receipt or disposal of any money belonging to the
non-resident person;
(i) Individual under legal disability: The guardian or manager who receives or is
entitled to receive income on behalf, or for the benefit of the individual.
(iii) Federal Government: Any individual responsible for accounting for the receipt
and payment of moneys or funds on behalf of the Federal Government.
Under following circumstances, every representative shall be personally liable for the
payment of any tax due by him in the capacity of representative, where he
(ii) Disposes of or parts with any moneys or funds belonging to the registered
person that is in the possession of the representative or which comes to the
representative after the tax is payable, if such tax could legally have been paid
from or out of such moneys or funds.
Any notice required to be served on any non-resident person, for the purposes of
Sales Tax Act, shall be treated as properly served on the non-resident person if:
(ii) Sent by registered post or courier service to the persons registered office or
address for service of notices under the Act, in Pakistan, or where the person
does not have such office or address, the notice is sent by registered post to any
office or place of business of the person in Pakistan; or
(iii) Served on the person in the manner prescribed for service of a summons under
the code of Civil Procedure, 1908 (Act V of 1908)
89 Registration
Requirement of registration:
(i) Manufacturers other than those classified as cottage industry are required to be
registered under the Sales Tax Rules 2006. Cottage industries are those whose
annual turnover from taxable supplies made in any tax period during the last
twelve months ending any tax period does not exceed Rs. 10,000,000 or whose
annual utility bills for the same period does not exceed Rs. 800,000. Therefore,
in this case since the manufacturer is a cottage industry, it is not required to be
registered and pay any sales tax.
(ii) Since a distributor is required to be registered with Inland Revenue Department
irrespective of his turnover, therefore, in this case the distributor would register
with the Inland Revenue Department and pay sales tax of Rs. 510,000 on his
turnover of Rs. 3,000,000.
(iii) Since an importer is required to be registered with Inland Revenue Department
irrespective of his turnover, therefore, in this case the importer would be required
to register himself with the Inland Revenue Department. Sales tax at import
stage would be paid on the basis of import value. However, the amount of output
tax would be Rs. 2,040,000 (Rs. 12Million x 17%).
(iv) A commercial exporter is not required to be registered with Inland Revenue
Department. However, an exporter who intends to obtain sales tax refund
against his zero-rated supplies must get registration before making an
application for such refund. Therefore, in this case since the exporter intends to
claim a refund of Rs. 200,000 he must get himself registered with Inland
Revenue Department.
90 Credit Note
a supply of goods, other than under hire purchase agreement, means the
time at which the goods are delivered or made available to the recipient of
the supply or the time when any payment is received by the supplier in
respect of that supply, whichever is earlier;
Services, means the time at which the services are rendered or provided;
Provided that in respect of any of the above cases, where any part payment
is received,
For the supply in a tax period, it shall be accounted for the return for that
tax period
In respect of exempt supply, it shall be accounted for in the return for the
tax period during which the exemption is withdrawn from such supply.
(ii) CREST: [U/S 2(5AC)]
Supply chain means the series of transactions between buyers and sellers from
the stage of first purchase or import to the stage of final supply.
(i) Whether the records, tax invoices and monthly returns have been maintained,
issued or furnished correctly by the registered person; and
(ii) Whether the monthly returns furnished by the registered person correctly reflect
that-
All taxable supplies in the tax period as revealed by the records and tax
invoices; and
All input tax, output tax and the net amount of sales tax payable or
refundable, as the case may be, are in accordance with the provisions of the
Sales Tax Act and are duly substantiated by the records required to be
maintained for the purpose.
(i) Joint and several liability of registered persons in supply chain [U/S 8A]
Provided that the Board may by notification in the official gazette, exempt any
transaction or transactions from the provision of this section.
In case the goods are entered for home consumption, on the date on
which a goods declaration is presented under section 79 of the
Customs Act, 1969; and
In case the goods are cleared from warehouse, on the date on which a
goods declaration for clearance of such goods is presented under
section 104 of the Customs Act, 1969;
Provided further that if the tax is not paid within seven days of the
presenting of the goods declaration under section 104 of the Customs Act
the tax shall be charged at the rate as is in force on the date on which tax is
actually paid.
(i) The necessary wearing apparel, cooking vessels, beds and bedding of the
defaulter, his wife and children, and such personal ornaments, as, in accordance
with religious usage, cannot be parted with by any woman;
(ii) Tools of artisan, and, where the defaulter is an agriculturist, his implements of
husbandry and such cattle and seed grain as may, in the opinion of the Recovery
Officer, be necessary to enable him to earn his livelihood as such;
(iv) The wages of labourers and domestic servants, whether payable in money or in
kind;
(v) Salary to the extent of first hundred rupees and one half of the remainder;
(vi) All compulsory deposits and other sources in or derived from any fund to which
the Provident Funds Act, 1925, for the time being applies, in so far as they are
declared by the said Act not to be liable to attachment;
(vii) Any allowance forming part of the emoluments of .any servant of the
Government or local authority which the Federal Government or Provincial
Government may, by notification in the official Gazette, declare to be exempt
from attachment, and any subsistence grant or allowance made to any such
servant while under suspension;
(viii) Any expectancy of succession by survivor-ship or other merely contingent or
possible right or interest; and
(ix) A right to future maintenance.
No proceedings shall cease to be in force by reason of the death of the defaulter (Mr.
Khayanat).
If, at any time before or after the issue of a demand note to the Recovery Officer, Mr.
Khayanat dies, the proceedings may be continued against the legal heirs of Mr.
Khayanat, who shall be liable to pay, out of the properties left by the deceased
defaulter to the extent to which the properties are capable of meeting the outstanding
Government dues, and it would be considered that as if the legal heirs were the
defaulter.
Similar supply in relation to the open market price of goods means any other
supply of goods which closely or substantially resembles the characteristics,
quantity, components and materials of the aforementioned goods.
A person registered under the Sales Tax Act, 1990 shall furnish special
return within such date and in such form indicating information such as
quantity manufactured or produced, purchases made, goods supplied or
payment of arrears made, etc., for such period as the Board may, by a
notification in official gazette, specify; and
(ii) Exemption of tax not levied or short levied as a result of general practice
[U/S 65]
Notwithstanding anything contained in the Sales Tax Act, 1990 if in respect of
any supply the Federal Government is satisfied that inadvertently and as a
general practice:
(a) Tax has not been charged in any area on any supply which was otherwise
taxable, or according to the said practice the amount charged was less than
the amount that should have actually been charged;
(b) The registered person did not recover any tax prior to the date it was
discovered that the supply was liable to tax; and
(c) The registered person started paying the tax from the date when it was found
that the supply was chargeable to tax;
It may, by a notification in the official Gazette, direct that the tax not levied or
short levied as a result of that inadvertent practice, shall not be required to be
paid for the period prior to the discovery of such inadvertent practice.
99 Registration of Retailers
Retailers not falling in the categories specified above, shall be charged sales tax
through their electricity bills by the persons making supplies of electric power, at the
rates specified, in the manner as specified hereunder, which shall be in addition to the
standard sales tax and further sales tax charged on supply of electricity.
Monthly Bill up to Rs. 20,000 5%
Monthly Bill exceeds Rs. 20,000 7.5%
A registered person who falls in any of the following categories is regarded as a non-
active tax payer:
Who fails to file the return by the due date for two consecutive tax periods;
Who fails to file an Income Tax return u/s 114 or statement under section 115, of
the Income Tax Ordinance, 2001, by the due date; and
Who fails to file two consecutive monthly or an annual withholding tax statement
under section 165 of the Income Tax Ordinance, 2001.
Avail any concession under the Sales Tax Act or Rules made there under.
Where a person files application for sales tax registration as a manufacturer without
having installed machinery, for the purpose of import of machinery to be installed by
him, temporary registration as manufacturer shall be allowed to him for a period of
sixty days subject to furnishing of the complete list of machinery to be imported along
with Bill of Lading (BL) or Goods Declaration (GDs) in lieu of the requirements
prescribed in clause (h) of sub-rule (2) of Rule 5.
A taxable service is a service listed in the Second Schedule to the Provincial Act,
which is provided:
The above deals with services provided by registered persons, regardless of whether
those services are provided to resident persons or non-resident persons.
Rupees
Date on which refund was due [45 days from 15-9-2016] [U/S 29-10-2016
10(1)]
Additional amount to be paid [75,000 10% 32/365] [U/S 67] Rs. 658
107 Records
Records: [Section 17(1)]
Every person registered for the purposes of Federal Excise Act, 2005 shall maintain and
keep for a period of six years or till such further period the final decision in any
proceedings including proceedings for assessment, appeal, revision, reference,
petition and any, proceedings before an Alternative Dispute Resolution Committee is
finalized at his business premises or registered office in English or Urdu language
the following records of excisable goods purchased, manufactured and cleared
(including those cleared without payment of excise duty) by him or by his agent acting on
his behalf in such form and manner as would permit ready ascertainment of his liability of
duty, namely:
(i) Records of clearances and sales made indicating the description, quantity and
value of goods, name and address of the person to whom sales were made
and the amount of the duty charged;
(ii) Records of goods purchased showing the description, quantity and value of
goods, name, address and registration number of the supplier and the amount
of the duty, if any, on purchases;
(iii) Records of goods cleared and sold without payment of duty;
(iv) Records of invoices, bills, accounts, agreements, contracts, orders and other
allied business matters;
(v) Record relating to gate passes, inward or outward, and transport receipts;
(vi) Records of production, stocks and inventory;
(vii) Records of imports and exports; and
(viii) Such other records as may be specified by the Board.
Means any person who enters into franchise and includes any associate of
franchiser to enter into franchise on his behalf, and the term franchisee shall be
construed accordingly.
(ii) In case of goods imported into Pakistan, of the person importing such goods;
The alternative sources on which duty may be levied and collected by the
Board: [U/S 3(3)]
(i) The Board may, by notification in the official Gazette, in lieu of levying and
collecting duties of excise on goods and services, as the case may be, levy and
collect duties, on the production capacity of plants, machinery, undertakings,
establishments or installations producing or manufacturing such goods. or
(ii) On fixed basis, as it may deem fit, on any goods or class of goods or on any
services or class of services, payable by any establishment or undertaking
producing or manufacturing such goods or providing or rendering of such
services.
Notwithstanding the provisions of this Act or the rules made there under, where a
registered person pays the amount of duty less than the duty due as indicated in
his return, the short paid amount of duty along with default surcharge shall be
recovered from such person by stopping removal of any goods from his business
premises and through attachment of his business bank accounts without
prejudice to any other action under the Federal Excise Act or the rules made
there under:
Provided that no penalty under this Act or rules made there under shall be
imposed unless a show cause notice is given to such person.
A registered person shall be required to issue serially numbered invoice for each
transaction at the time of providing or rendering services containing the following
particulars:
120 Franchise
Franchise: [U/S 2(12a)]
Franchise means an authority given by franchiser under which the franchisee is
contractually or otherwise granted any right to produce, manufacture, sell or trade in or
do any other business activity in respect of goods or to provide service or to undertake
any process identified with franchiser against a fee or consideration including royalty
or technical fee, whether or not a trade mark, service mark, trade name, logo, brand
name or any such representation or symbol, as the case may be, is involved.
If at any time it is established that a person was not liable to registration but was
wrongly registered under this rule due to inadvertence, error or misconstruction, the
CRO shall cancel his registration. In case of such cancellation of registration, such
person shall not be liable to pay any duty, default surcharge or penalty under the Act
or rules made there under, subject to the conditions, limitations and restrictions
prescribed under section 11 of the Act.
In case of the failure of a registered person to file a tax return for six consecutive
months, the Commissioner, without prejudice to any action that may be taken under
any other provision of the Sales Tax Act, after issuing a notice in writing and after
giving an opportunity of being heard to such person shall issue order of de-registration
of such person and the computerized system shall be caused to de-register the
person accordingly.