THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Principles of Taxation Certificate in Accounting and Finance –
Autumn 2018

General:

The overall performance in this attempt improved significantly as 60% students were able to pass
as compared to 34% in the previous attempt. The students who could not pass even in this
attempt, especially those who had already undertaken more than two or three previous attempts
must seriously rethink their strategy.

Some candidates could not articulate and communicate their answers as clearly as they should
have done. Inadequate presentation was a major concern with those candidates. However, the
major reason for failure was lack of knowledge as many students did not attempt the whole or
parts of the questions.

Many candidates ignored important instructions, for example, when asked to calculate the
taxable income / loss under correct head of income, a number of candidates did not pay attention.

Question-wise comments.

Question 1

This practical question carrying 16-mark required the candidates to compute total income,
taxable income and net tax payable by or refundable to a salaried individual also having income
from property, capital gain and income from other sources. The overall performance was very
encouraging with excellent presentation, structured layout and 70% of the students secured
passing marks. The common mistakes were as follows:

 Many candidates did not pay attention to the requirement of calculating the income under
correct head of income.
 Medical allowance in excess of 10% of basic salary was considered as taxable; whereas,
since health insurance was being provided, the entire medical allowance should have been
treated as taxable. In some cases, health insurance premium of Rs. 50,000 was included in
total income.
 While computing the gain on disposal of shares, the market value on the date of allotment
was considered as the cost; instead of the market value on the date when restriction to sell
was removed. Moreover, in many cases, the gain was included in salary income. These
candidates did not appreciate that salary income is recorded in the year in which the
restriction on transfer of shares is removed, at the fair value of the shares on that date and
that is why when the shares are actually sold, the amount already included in salary is treated
as cost, for the purpose of calculation of capital gain.

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 Examiners’ Comments on Principles of Taxation - Autumn 2018

 Income as singer amounting to Rs. 225,000 was treated as business income instead of income
from other sources. Some students treated it as taxable under final tax regime.
 Majority of the candidates calculated tax credit incorrectly using total income as the
denominator instead of taxable income.
 Tax rates for non-salary tax payer were applied.
 Mark up on concessional loan of Rs. 5 million was ignored.
 In respect of income from property, 20% repair charges and collection charges was claimed
as expense and deducted from rent.

Question 2

This question consisted of three parts. The overall performance was reasonable as 52%
candidates secured passing marks. Part wise comments are given below.

Question 2(a)

The requirement in this part was to describe Normal tax year, Special tax year and Transitional
tax year. Generally the students responded well as regards Normal and Special Tax year.
However, in the case of transitional tax year, many students were confused and could not
produce appropriate explanation.

Question 2(b)

In this part, the candidates were asked to state the requirement regarding change of tax year from
normal to special. Generally the performance was good. However, many candidates failed to
explain the most critical point that to be eligible to use special tax year it was important to
display a compelling need for the change. Many students were of the view that the taxpayer may
choose any period of 12 months as his tax year. Many students were silent in this regard i.e. did
not mention any thing about approval of application for change in tax year being dependent on
satisfaction of the commissioner and that while granting such an approval the commissioner may
impose such conditions as he may deem fit. Further, many candidates were of the view that the
change has to be approved by the FBR. Some students also gave irrelevant examples of
insurance and banking companies using special tax year.

Question 2(c)

The performance in this part remained poor. Somehow, majority of the students instead of giving
specific answer i.e. Tax year 20X9 and due date for filling the return i.e. 30 September 20X9,
explained the rule, which was not required.

Question 3

This question consisted of three parts. The overall performance was reasonable as 51%
candidates secured passing marks. Part wise comments are given below.

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 Examiners’ Comments on Principles of Taxation - Autumn 2018

Question 3(a)

This part of the question tested the concept of minimum tax. The given scenario was about a
resident AOP engaged in manufacturing activities; which was assessed under normal tax regime.
The AOP’s sale, taxable income and sales tax and excise duty included in the sale were given.
Candidates’ demonstrated weak knowledge as majority of them only calculated tax liability
under normal tax regime. Some of the other common mistakes were as follows:

 Turnover tax was computed on gross sales i.e. without deducting sales tax and excise duty
included in the sales.
 Sales Tax and Federal Excise Duty were considered as not allowable tax deductions and were
added to taxable income.
 Minimum (turn over) tax was calculated at the rate of 1% instead of 1.25%.

Question 3(b)

This part tested the knowledge of section 29 of the Income Tax Ordinance, 2001. The given
scenario contained information regarding amounts written off and amounts allowed by the tax
authorities in the previous year and the amounts recovered from these debtors in the next tax
year. The requirement was to compute the taxable income taking into consideration the given
information. The overall response was encouraging as majority of the candidates performed well.
The most common mistakes was that the candidates failed to appreciate that the amounts which
had been recovered during the year must have been included in current years accounting profit as
the entire amount of debts had been written off in the previous year. Accordingly, they did not
deduct these amounts from accounting profit in arriving at the taxable income.

Question 3(c)

This part was about a tax payer which earned income from trading and speculation. The
requirement was to compute the taxable income/(loss) and the amount of loss to be carried
forward.

The performance in this part was very poor. Some of the common mistakes were as follows:

 Many candidates deducted the amount of penalty of Rs. 0.4 million paid to custom
authorities from total administrative and general expenses but then treated it as allowable by
apportioning it between trading business and speculation business.
 Capital loss was adjusted / set off against profit of trading business. The candidates failed to
recognise that capital loss cannot be adjusted against income under any other head.
Moreover, six years had already passed since the loss was booked and it could not be carried
forward either.
 Proper sequence of deduction was not followed in calculating taxable income / (loss) i.e.
brought forward losses were deducted before the deduction of administrative and general
expenses.

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Question 4

This question consisted of two parts. It was the most poorly attempted question as only 51% of
the candidates secured passing marks. Part wise comments are given below.

Question 4(a)

The performance in this part was extremely poor because of the following:

 Most of the students were not aware that the definition of the term dividend includes a
payment by a private limited company by way of advance or loan to a shareholder or a
payment for the individual benefit of a shareholder.
 In most of the cases, even those who were aware of the above rule did not realise that the
amount the officer intended to tax as dividend exceeded the accumulated profits of the
Company. Hence, only Rs. 12 million could have been treated as dividend.

Question 4(b)

This part of the question had two requirements. The first requirement was regarding power of the
commissioner to require return of income from certain person(s) for a period of less than twelve
months. The second requirement was regarding commissioner’s powers if a person fails to
furnish the return as required.

The performance remained average as most of the students were aware of the instances when
notice can be issued for return of less than one year but were not aware of the powers of the
Commissioner if a person fails to file the return as required.

Question 5

This question required calculation of taxable income under appropriate heads and tax liability of
a resident individual driving income from a fitness club. The performance remained below
average as only 34.4% of the candidates secured passing marks. The common errors were as
follows:

 Written down value was incorrectly calculated as most of the students seemed unaware of the
rule that for tax purposes, cost of passenger transport vehicle is restricted to Rs 2.5 million
and when the same vehicle is sold, the sale proceeds are reduced in the same ratio in which
the cost was restricted, for the purpose of computing tax gain/loss.
 Lease rental was not pro-rated between business and personal use. Some candidates
considered the lease rentals as inadmissible.
 Capital gains on listed securities was not computed correctly;
 Some students did not compute the tax correctly as applicable to individuals – who are not
salaried. Amount of lease rental paid was added as inadmissible expense. Some candidates
deducted the whole amount of lease rental as admissible expense without adjustment of 30%
use of vehicle for personal purposes.
 Loss on the disposal of Moon Limited was considered as inadmissible and added to
accounting profit instead of adjusting it against gain on disposal of shares of Planet Limited.
 Depreciation and financial charges on car acquired on finance lease were considered as
admissible.

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 A number of candidates did not realise that since shares of Sun (Private) Limited were
retained for more than one year, the taxable capital gains should be reduced by 25%.
 Tax rates applicable to salaried individuals were used instead of tax rates applicable to non-
salaried individuals.
 Total income was not computed head wise.

Question 6

This question on sales tax consisted of two parts and part (a) was further sub-divided into three
parts. The overall performance was below average as 43.2% of the candidates secured passing
marks. Part wise comments are given below:

Question 6(a)(i)

This sub-part required the candidates to briefly describe the temporary sales tax registration and
rights, obligations and responsibilities of a person holding temporary registration. The
performance remained below average as many candidates were totally unaware of the concept
i.e. temporary registration is obtained by a manufacturer who intends to import plant and
machinery to be installed by him. Other common mistakes were as follows:

 Many candidates were of the view that the person holding temporary registration is required
to import the machinery within 60 days of issuance of the temporary registration whereas the
requirement is to submit the list of machinery to be imported within those 60 days.
 The students were generally not aware that a person holding temporary registration can carry
forward the input tax paid by him.

Question 6(a)(ii)

This part was very well answered as most of the candidates were able to explain the features
distinguishing the ‘zero-rated’ and ‘exempt’ supply. However, several students were of the view
that only exported goods are zero-rated.

Question 6(a)(iii)

Students were required to explain the provisions related to excess / additional amount of sales tax
collected by a registered person. Performance remained below average as a number of candidates
were not aware of the provisions and resorted to guesswork and produced irrelevant answers. A
number of students did not read the question carefully and explained the provisions related to
excess payment of sales tax rather than excess amount collected.

Question 6(b)

In this part, the candidates were required to state any four basis of satisfaction, which allow the
Commissioner to suspend the registration if the registered person has issued fake invoices,
evaded tax or committed tax fraud. The response to this question was mixed. Some students were
able to state all the basis and secured full marks whereas an equal number was totally confused
and used guesswork. Many candidates were totally confused and repeated the points mentioned
in the question i.e. issuance of fake invoices, evasion of tax and committing tax fraud!

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Question 7

This question consisted of two parts. The overall performance was good as 66.8% of the
candidates secured passing marks. Part wise comments are given below:

Question 7(a)

This part required brief explanation of indirect taxes applicable in Pakistan. The performance
was good as most of the students identified the indirect taxes correctly. However, many students
gave incorrect answers also which included items such as withholding taxes, capacity tax, further
tax, etc. Moreover, the explanations of federal excise duty were mostly incorrect as the students
seemed unaware of the basis of chargeability.

Question 7(b)

This question required the candidates to state one objective of the tax laws in each given case.
Most of the candidates were well prepared and were able to secure high marks. However, a
number of errors were also witnessed as many students resorted to guesswork.

Question 8

This question requiring computation of sales tax payable was the best attempted question of the
paper as 83% of the candidates secured passing marks. This is a standard question and the
examiners have been emphasizing that there are only a limited number of variations which are
tested repeatedly and if the students could master them, they could secure high marks in this
question. It seems that finally the students gave due consideration to the advice and were able to
perform well.

However, apportionment of input tax and application of section 8B of the Sales Tax Act, 1990
whereby admissible credit is lower of input tax or 90% of output tax remained the weak areas
and most of the errors were observed in these calculations. Further, students also seemed
confused with regard to sales tax included in electricity bill and treatment of sales tax paid on
fixed asset.

THE END

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