TAXATION

Suggested Answers
Intermediate Examination Spring 2014

Ans.1

(a)

Qamar
Tax year 20X4
Revised computation of taxable income and tax payable

Business income declared for the year before depreciation

Add: Inadmissible expenses
Electricity charges of residence of Qamar
Donation only eligible for tax credit.
Fine paid to Ministry of Environment
Unabsorbed depreciation
Revised business income for the year
Less: Brought forward business loss for the tax year 20X3
Business income after setting off against b/f business loss
Less : Tax depreciation for the year
: Unabsorbed depreciation brought forward
Unabsorbed depreciation carried forward to the next year
Add: Income from other sources
Interest income received from a commercial bank under FTR
Other
Taxable income

Rs. in 000
12,000
150
300
200
500

9,000
500

Unabsorbed depreciation carried forward to the next year

9,500
350
FTR
850
500

Computation of tax
Tax payable under normal tax regime (100,00010%)
Minimum tax is not applicable because the turnover of Qamar is less than 50
million in current year as well as previous years (assumed)
Total tax payable for the year
Tax credit on donation Rs.150,000* 2 %
Tax liability
Add: Tax under FTR on bank profit (500,000 10%)
Total tax liability
Tax withheld / deducted at source
- Bank profit (500,000 10%)
Balance payable

1,150
13,150
(4,000)
9,150

10
10
(3)
7
50
57
50

50
7
350

Average rate of tax = tax payable taxable income

= 10,000 500,000 = 2 %
*Since Mr. Qamar is an individual, therefore, the amount of donation
allowed is 30% (i.e. Rs. 500,000 0.3 = 150,000) of the taxable income for
the year or actual amount (i.e. Rs. 300,000) whichever is lower.

(b) Explanations:
(i) A deduction shall be allowed for any expenditure incurred by the person in the
year wholly and exclusively for the purposes of business. Therefore the
travelling of Qamar to Malaysia to attend the trade fair was entirely for business
purposes and the same is allowable to the firm.
(ii)

No deduction shall be allowed in computing the income of a person under the

head income from business for any personal expenditure incurred by the
person. Therefore, the electricity charges paid for the residence of Mr. Qamar is
not allowed.

(iii) It is an allowable expense in view of the fact that the same is not incurred for
any fine or penalty paid for the violation of any law, rules or regulations. The
said expenditure has been incurred for the purpose of business and in continuity
of the business relationship with the distributor.
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TAXATION
Suggested Answers
Intermediate Examination Spring 2014

(iv) Any amount paid on account of salary is allowed only when advance income
tax has been deducted and deposited as required under the provisions of the
Income Tax Ordinance, 2001.
Therefore, salary paid to Mr. Bari of Rs. 720,000 is an allowable expense
irrespective of the fact that Bari is the Qamars brother, as deduction on account
of advance income tax has been made.
(v)

No deduction in income is allowed on account of donation paid to non-profit

organization, however, a tax credit would be allowed against this payment.

(vi) Any fine paid for the violation of any law, rule or regulation is not admissible
expenses. Since it is incurred in breach of any law imposed by the Government
of Pakistan, the same is not an allowable expense.
(vii) When a deductions on account of depreciation is not fully set off against
income, the amount not set off shall be added to the deductions allowed in the
following tax year and so on until completely set off.
Ans.2

(a) (i)

A taxpayer can be represented by the following persons, as authorized

representatives:

(ii)

A relative of the taxpayer;

A current full-time employee of the taxpayer;
Any officer of a scheduled bank with which the tax payer maintains a
current account or has other regular dealings;
Any legal practitioner entitled to practice in any Civil Court in Pakistan;
Any accountant; or
Any income tax practitioner.

Following persons shall not be entitled to represent a taxpayer in a proceeding

against any Income Tax Authority:

A person removed or dismissed from service of the Income Tax

Department (ITD).
A person, who has resigned from his service in the ITD and was employed
in the ITD for two or more years, shall not be entitled to represent a
taxpayer before the expiry of two years from the date of his resignation.
A person who retired from ITD shall not be entitled to represent a
taxpayer up to one year, if he had made or approved any order of
assessment, refund or appeal within one year of the date of retirement.
An insolvent person.
A person who has been convicted of an offence in relation to any income
tax proceedings for such period as the Commissioner determines.

(b) Two person 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.
A shareholder in a company and the company:
A shareholder in a company and the company is regarded as associates where the
shareholder, either alone or together with an associate or associates, controls either
directly or through one or more interposed persons
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TAXATION
Suggested Answers
Intermediate Examination Spring 2014

(i)
(ii)
(iii)
(c) (i)
(ii)
(iii)

Ans.3

fifty per cent or more of the voting power in the company;

fifty per cent or more of the rights to dividend; or
fifty per cent or more of the rights to capital;
The person should give to the Commissioner a notice in writing regarding the
discontinuance of business within fifteen days of the discontinuance.
He is also required to furnish a return of income as required by the
Commissioner by notice in writing or under the provision of the Income Tax
Ordinance.
He should also furnish a return of income for the period commencing on the
first day of the tax year in which the discontinuance occurred and ending on
the date of discontinuance and this period shall be treated as a separate tax
year for the purpose of this Ordinance.

BFPL will have to comply with the following provisions of ITO-2001 relating to claiming
the tax credit :
(i)
(ii)

It is an industrial undertaking set up in Pakistan before 1 July 2011.

The plant and machinery is purchased and installed at any time between 1July 2011
and 30 June 2016.
(iii) In order to avail 100 % tax credit of the tax payable attributable to the project, the
company would have to maintain separate accounts of the expansion project.
(iv) The investment in the plant must be made by 100% new equity raised through
issuance of new shares.
(v) The new shares should be issued against cash by the company. The new equity shall
not include any loan obtained from shareholders or directors.
(vi) The tax credit is available for a period of five years beginning from the date of
setting up or commencement of commercial production from the new plant or
expansion project, whichever is later.

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TAXATION
Suggested Answers
Intermediate Examination Spring 2014

Ans.4

Taxable income of Bashir

Income from property (Rs. 32,734 (W-1) 75%)
Income from other sources (Rs. 94,000 (W-1) 75%)
Taxable income of Jameel
Income from property (Rs. 32,734 (W-1) 25%)
Income from other sources (Rs. 94,000 (W-1) 25%)

Rupees
24,551
70,500
95,051
8,183
23,500
31,683

W-1: Computation of joint taxable income under appropriate head

Income from property:
Rent received by joint owners for 4 months (6,500,000412)
Less: Amount received on account of utilities, cleanliness & security
Rent chargeable to tax
Less: Deductions allowed
1/5 repair allowance
Insurance premium
Collection charges
Mark-up paid on money borrowed for extension of house
Income from property
Income from other sources
Amount received on account of utilities, cleanliness & security
Less: Actual expenses incurred

2,166,667
(744,000)
1,422,667
284,533
240,000
25,400
840,000
1,389,933
32,734
744,000
(650,000)
94,000

W-1: Computation of joint taxable income under appropriate head

Income from property:
Rent received by joint owners for 10 months (6,500,0001012)
Less: Amount received on account of utilities, cleanliness & security
Rent chargeable to tax
Less: Deductions allowed
1/5 repair allowance
Insurance premium
Collection charges
Mark-up paid on money borrowed for extension of house
Income from property
Income from other sources
Amount received on account of utilities, cleanliness & security
Less: Actual expenses incurred

5,416,667
(1,860,000)
3,556,667
711,333
240,000
25,400
840,000
1,816,733
1,739,934
1,860,000
(650,000)
1,210,000

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TAXATION
Suggested Answers
Intermediate Examination Spring 2014

Ans.5

(i)

For the purpose of minimum tax liability, turnover is defined as:

The gross receipts, exclusive of sales tax and federal excise duty or any trade
discounts shown on invoices or bills, derived from the sale of goods and also
excluding any income taken as deemed income and is assessed as final
discharge of the tax liability for which tax is already paid or payable.
The gross fees for the rendering of services, including commissions.
The gross receipts from the execution of contracts.
The companys share of the above stated amounts of an association of persons
of which the company is a member.

But does not include any amount covered by final discharge of tax liability for
which tax is separately paid or payable.
(ii)

Following persons are required to pay the minimum tax:

a resident company
an individual having turnover of fifty million rupees or above in the tax year
2009 or in any subsequent tax year
an association of persons having turnover of fifty million rupees or above in the
tax year 2007 or in any subsequent tax year

(iii) Where minimum tax exceeds the actual tax payable, the excess amount of tax paid
shall be carried forward for adjustment against normal tax liability of the subsequent
tax year.
However, the amount shall be carried forward and adjusted against tax liability for
five tax years immediately succeeding the tax year for which the amount was paid.
Ans.6

(a)

The foreign-source salary received by a resident individual shall be exempt if the

individual has paid foreign income tax in respect of the salary.
A resident individual shall be treated as having paid foreign income tax in respect of
foreign-source salary if tax has been withheld from the salary by the individuals
employer and paid to the revenue authority of the foreign country in which the
employment was exercised.

(b)

Foreign loss is a loss which arises when the total deductible expenditure exceeds the
total foreign source income for a tax year chargeable to tax under a head of income.
Rules relating to set off and carry forward of foreign losses are as follows:

Foreign loss shall be carried forward to the following tax year and set off
against the foreign source income chargeable to tax under that head in that
year, and so on.

No foreign loss shall be carried forward to more than six tax years immediately
succeeding the tax year for which the loss was computed.

Where a taxpayer has a foreign loss carried forward for more than one tax
year, the loss for the earliest year shall be set off first.

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TAXATION
Suggested Answers
Intermediate Examination Spring 2014

Ans.7

The following types of payments made by a private company may be treated as

dividend under the ITO 2001, to the extent to which the company possess accumulated
profits:
payment by way of advance; or

loan to a shareholder, or

any payment for the individual benefit of any shareholder

However, the above provisions does not include any advance or loan made to a
shareholder in the ordinary course of the business, where lending of money is a
substantial part of the business of the company.

Ans.8
Turnover covered under normal tax regime (NTR)
Turnover for the first three quarter
Turnover for the fourth quarter

Turnover for
Tax year 20X3
Rs. in million
625.00
450.00
175.00

Ratio for calculating advance tax liability (13600)

0.02166

Advance tax liability (175 0.02166)

Less: Taxes deducted fourth quarter (4.0 1.0 )
Balance tax payable Fourth quarter

Ans.9

3.78
3.00
0.78

Mr. Zaheer
Computation of Sales Tax Payable/Refundable
For the tax period February 2014
Taxable value
Sales tax credit (Input Tax)
Local purchases:
From registered suppliers (Rs.23.0 m Rs.2.5m)
From un-registered suppliers
Material against which tax credit was not claimed
Input tax attributable to both taxable and exempt goods
Less: Inadmissible / un-adjustable input tax (W-1)
Input tax for the month
(+) previous month credit brought forward
Accumulated credit
Sales tax debit (output tax)
Domestic supplies of manufactured goods:
to registered person
to unregistered persons (at 17% + 1%)
Exempt goods
Export to Malaysia
Output tax for the month
Less: Sales return
Debit for the month
Admissible credit (90% of 2,556 or 3,195 whichever is lower)
Sales tax payable
Input tax credit to be carried forward (3,195 2,300)
Refund claim (input consumed in export) (W-1)

Rs. in 000
Sales tax

20,500
9,000
1,500

3,485
255
3,740
(1,745)
1,995
1,200
3,195

12,000
4,000
3,000
11,000

2,040
720
-

1,200

2,760
(204)
2,556
(2,300)
256
895
1,371
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TAXATION
Suggested Answers
Intermediate Examination Spring 2014

W-1: Apportionment of input tax

Total residual input tax
Total sales
Allocation of residual input tax to exempt and zero rate supplies
Exempt supplies (3,000 30,000 3,740)
Zero rated supplies (11,000 30,000 3,740)
Inadmissible / non-adjustable input tax

Ans.10 (a)

374
1371
1,745

Where a registered person has issued a tax invoice in respect of a supply made by
him and as a result of
(i)
(ii)
(iii)
(iv)

(b)

Rs. in 000
3,740
30,000

Cancellation of supply or
Return of goods or
Change in the nature of supply or
Change in the value of supply.

A registered person, subject to the approval of the Commissioner Inland Revenue

having jurisdiction, may file a revised return within one hundred and twenty days
of the filing of return

Ans.11 According to the Sales Tax Act,1990 Taxable activity includes:

(i)
(ii)
(iii)
(iv)

An activity carried on in the form of a business, trade or manufacture;

An activity that involves the supply of goods, the rendering or providing of services,
or both to another person;
a one-off adventure or concern in the nature of a trade; and
Anything done or undertaken during the commencement or termination of the
economic activity.

But does not include the following activity:

(i)
(ii)
(iii)

The activities of an employee providing services in that capacity to an employer;

An activity carried on by an individual as a private recreational pursuit or hobby;
An activity carried on by a person other than an individual which, if carried on by
an individual, would fall within (ii) above.
(THE END)

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