CFAP5 AdvancedTaxation PDF

P
ICAP
Practice Kit
Certified Finance and Accounting Professional

Advanced Taxation
Note:
Updated for the Finance Act 2018
Third edition published by
The Institute of Chartered Accountants of Pakistan
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Clifton
Karachi – 75600 Pakistan
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this work could contain.
Practice Kit ii The Institute of Chartered Accountants of Pakistan

C
Advanced Taxation
Contents
Page
Index-Questions and Answers vii
Section A Questions 1
Section B Answers 65
Practice Kit iii The Institute of Chartered Accountants of Pakistan

Certified Finance and Accounting Professional- Advanced Taxation
Practice Kit iv The Institute of Chartered Accountants of Pakistan

S
Advanced Taxation
Syllabus objective
and learning outcomes
CERTIFIED FINANCE AND ACCOUNTING PROFESSIONAL
ADVANCED TAXATION
Objective
To develop capability to perform duties of a professional accountant or support tax consultant.
Learning Outcome
On the successful completion of this paper candidates will be able to:
1 develop expert knowledge of Income Tax, Sales Tax and Federal Excise Duty law in Pakistan
(excluding case laws)
Grid Weightage
Income tax laws 50-55
Sales tax laws 30-35
Federal excise laws 10-15
Professional values, ethics and attitude 5-10
Total 100
Syllabus
Contents Level
Ref
A Income tax laws
1 The Income Tax Ordinance, 2001 3
2 Notifications, Rules, General orders and Circulars issued under the Income Tax 3
Ordinance, 2001 excluding specific double taxation agreements
Practice Kit v The Institute of Chartered Accountants of Pakistan

Syllabus
Contents Level
Ref
B Sales tax laws
1 The Sales Tax Act, 1990 3
2 The Provincial Sales Tax 3
3 The Islamabad Capital Territory (Tax on Services) Ordinance, 2001 3
4 Notifications, Rules, General orders and Circulars issued under the Sales Tax 3
Act, 1990
C Federal excise laws
1 The Federal Excise Act, 2005 (Chapters I and II only) 2
2 Notifications, Rules, General orders and Circulars issued under the Federal 2
Excise Act, 2005 relevant to Chapters I and II only
D Professional values, ethics and attitude
1 Principle of fair tax legislation and tax administration 2
2 Ethics for tax payers and tax practitioners 3
3 Tax evasion and avoidance 3
Practice Kit vi The Institute of Chartered Accountants of Pakistan

I
Advanced Taxation
Index-Questions and Answers
Question Answer
page page
Chapter 1 –INDIVIDUAL
1 Mr. and Mrs.Adil 1 65
2 Mr. Khan 2 68
3 Mr.Yaqeen 3 70
4 Mr.Sohail 4 72
5 Mr.Iqbal 4 72
6 Mr.Saif 6 75
7 Mr.Pansari 7 77
8 MH Associates 8 78
Chapter 2 – Association of Persons and Company Taxation
9 Big Pharma 9 80
10 Rainbow Limited (RL) - Foreign Controller / thin capitalization 10 82
11 Mateen and Vaqas 11 83
12 Mega Limited (ML) 11 85
13 Rose Petal Limited - Construction 13 87
14 Saturn Limited - Foreign Branches / Tax Credit 13 88
15 Sun Limited (SL) - Group Relief 14 90
16 Pills (Pvt) Limited 15 92
17 Maroof Limited (ML) - Construction contracts 16 95
18 Big Limited (BL) - Set off and surrender of losses 17 96

19 Bharosa Limited (BL) 17 97
Practice Kit vii The Institute of Chartered Accountants of Pakistan

Question Answer
page page
20 Khawar Associates (KA) 19 100
21 Khalis Limited (KL) 20 102
22 ZJ Limited 21 105
23 Desi (Pvt) Limited - Thin Capitalization 23 107
24 Bismil Limited 23 108
25 Income from Business 25 110
26 RM Associates 25 111
27 Loyal (Pvt) Limited 26 112
Chapter 3 – Sales Tax
28 Olive Limited 28 115
29 Kamyab Engineering Limited (KEL) 28 117

30 Gadget Limited (GL) 29 119
31 Sunshine Limited (SL) 30 120
32 Ummeid Limited (UL) 31 122
33 Mazboot Furnishers (MF) 32 124

34 Tender Pops Limited (TPL) 34 126
35 Masawi Limited (ML) 34 127
36 Omega Limited (OL) 35 128

37 Harfun Limited (HL) 36 129
38 Razi Limited (RL) 37 131

39 Karma Limited 38 132
40 Pasdar Limited 39 134
41 Quick Fox Limited 41 135

Chapter 4 – Capital Gain
42 Mr. Parekh 43 137

43 Capital Gain 43 138
Chapter 5 – Other Areas Income Tax
44 Book Author 44 139

45 Foreign Source Income - Returning expatriate 44 139
46 Transfer of Assets 44 139
47 Employee Share Scheme 44 139
48 Bad debts, Recovery of bad debts 44 140
49 Herbal Trading (HT) - Disposal of business 45 141
Practice Kit viii The Institute of Chartered Accountants of Pakistan

Question Answer
page page
50 Withdrawal of approval to Non-Profit/foundations (IT Rules) 46 143
51 Residential Status 46 144
52 Beetle Limited (BL) 46 145
53 Skilled (Pvt.) Limited - Taxability of Joints Venture 47 146
54 Short term resident 47 146
55 Group Taxation 47 146
56 Tax avoidance scheme 47 147

57 Compulsory taxation under FTR 48 147
58 Selection of Audit 48 148
59 Khalq Limited (KL) - Government grant 48 148
60 Moon Limited (ML) - foreign payment 48 148

61 Mr.Pansari - dividend from exempt income 48 149
62 Gadget Limited (GL) - payment to non-resident 49 149
63 Opting out of PTR 49 149
64 Associates 49 150
65 Tax evasion and avoidance 49 150
66 Derivative Product, Wash Sales, Tax Swap Sales 49 151
67 Methods for Cost of stock in trade 49 151

68 Salary of foreign government employee 49 151
69 Exception to Pakistan source Royalty & FTS 50 151

70 Profit on debt 50 152
71 Tax admissible vs tax reliefs 50 153
72 Resale price method 50 153

73 Group Taxation and Pre commencement Expenditure 50 153
74 Sweet Limited (SL) - Advance Tax and default penalty 50 154
75 Depreciable Asset, Eligible Depreciable Asset 51 155
76 Speculation Business 51 155
77 Disposal of business by AOP to Wholly owned company 51 155
78 Mr. Hoshyar - Penalty 51 156
79 Advance Ruling 51 156
80 Rejection of reward to whistle-blower 52 157
81 Imputable Income, PMEX 52 157
82 Definite information 52 157
Practice Kit ix The Institute of Chartered Accountants of Pakistan

Question Answer
page page
83 Pakiza Limited 52 157
84 National Finance Commission 52 158
85 Pledge Call Transaction 53 159
86 Non-Revenue Objective 53 159
Chapter 6 –Other Areas – Sales Tax
87 Mr.Furqan - Returns, De-registration 54 160
88 Withholding agents 54 160

89 Qualification / Disqualification of Representative 54 161
90 Consideration in kind - supply 54 162
91 Stock acquired before registration 54 162
92 Inadmissible input tax 55 163

93 Recovery of tax arrears 55 163
94 Representative of non-resident 55 164
95 e-intermediary appointment, responsibilities, cancellation 56 164
96 Representatives and personal liability 56 165

97 Service of notice to non resident 56 166
98 Registration 56 166
99 Credit note 56 167

100 Time of supply, CREST, supply chain 57 167
101 Scope of special audit (ST-Rules) 57 167

102 Joint and several liability 57 168
103 Property not liable to attachment 57 168
104 Continuance of Proceeding (death) 57 169

105 Appointment of committee - disputes 57 169
106 Similar supply – open market price, special returns 57 170
107 Black Listing and Suspension of registration 57 170
108 Registration of Retailers-I 58 170
109 Registration of Retailers-II 58 171
110 Non- active taxpayer 58 171
111 Temporary Registration 58 171
112 Taxable provincial sales tax 58 172
113 Mr. Munaf - Refund 58 173
114 Fill in the Blanks 59 173
Practice Kit x The Institute of Chartered Accountants of Pakistan

Question Answer
page page
115 Tier-1 Retailers 59 173
116 Conditions under Sales Tax Rules, 2006 59 174
Chapter 7 –Other areas federal excise act.
117 Fill in the blanks 60 175

118 Applicable value and rate of duty, supply 60 175
119 Records 60 175
120 Non-fund banking services, Franchiser 60 176

121 Excess duty collected 60 176
122 Person liable to pay FED 60 176
123 Alternative Source 61 177
124 Duty drawback 61 177

125 Discontinued business enterprise, transfer of ownership 61 177
126 Due date and duty due 61 178
127 Default surcharge, KIBOR 61 178
Conveyance, distributor, recovery of duty, particular of

128 61 179
service invoice
129 Cottage industry 61 179
130 Construed manufacturer, sales tax mode 62 179
131 Closure of business 62 180
132 Franchise and Franchiser 62 180
133 Withdrawal of Registration suspension order 62 180
134 Consequences of wrong registration 62 181
135 Determination of value for duty 62 181
136 Circumstances and Procedure of De-registration 62 181
137 Cancellation of Registration 62 182
138 Exemptions from levy of duty 62 182
139 Sales Tax mode 63 182
140 Adjustment of excise duty 63 183
Practice Kit xi The Institute of Chartered Accountants of Pakistan

Practice Kit xii The Institute of Chartered Accountants of Pakistan

A
Advanced Taxation
SECTION
Questions
CHAPTER 01 – INDIVIDUAL
1 Mr. and Mrs.Adil

Mr. and Mrs.Adil are equal partners in Burq Enterprises (BE). The firm is engaged in the import and
supply of electric generators. It also provides project consultancy services to various corporate
customers. Following figures have been extracted from the accounting records of the firm for the tax
year 2019:
Rs.
Sales of imported generators 574,200
Receipts from consultancy services 55,000
Total revenue 629,200
Cost of sales (generators) (429,520)
Gross profit 199,680
Administrative and selling expenses (96,300)
Finance cost (9,000)
Profit before taxation 94,380
Following further information is also available from the records:

(i) The generator sales are inclusive of 17% sales tax.
(ii) Cost of sales includes customs duty of Rs. 50.0 million, sales tax Rs. 63.0 million and withholding
taxes paid at import stage @ 5% of the value of goods of Rs. 413.0 million.
(iii) Administrative and selling expenses are common in nature. These include salary of Rs. 500,000
paid to each partner every month and withholding taxes deducted @10% on receipts from
consultancy services.
(iv) Finance cost is related to commercial imports except interest of Rs. 1.20 million paid to Mrs. Adil
on her capital account.
(v) On January 01, 2019,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.
Practice Kit 1 The Institute of Chartered Accountants of Pakistan

(vi) On July 01, 2018,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
2016 was refunded.
(vii) Mr.Adil purchased 50,000 shares of Rs. 10 each, of an unlisted public company in July 2014 at
the rate of Rs. 150 per share. In August 2015, he received bonus shares, ranking pari passu, in
the ratio of 1 bonus share for every 5 shares held. In May 2019, 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 2019:
(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, 2019 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, 2016 at a fair market value of Rs. 2,000,000.
(c) On July 1, 2018 he was provided with an interest free loan of Rs. 2,500,000 which is repayable in
lump sum in December 2019. The prescribed benchmark rate is 10% per annum. On December
1, 2018 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, 2019. 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
Following further information is also available:
(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.

Questions
(iii) On March 1, 2019,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, 2019, 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 year‟s 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 2016, 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 2019 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 2019. The average rate of tax of Mr. Khan for the last three years was 14%.
Note: Show all exemptions, exclusions and disallowances where relevant.
3 Mr.Yaqeen
Mr.Yaqeen, a Pakistani citizen, returned to Pakistan on 30 June 2018 after residing for six years in
Norway.On 1 July 2018 he joined a private hospital KKUH and received following emoluments:
Rupees
Medical allowance (per month) 60,000
Leave fare assistance 240,000
On 1 January 2019, 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 2019:
Rupees
Medical allowance (per month) 80,000
Utilities allowance (per month) 100,000
On 1 January 2019, 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 2019, 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 2019, 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 2019 is as under:
(i) On 15 April 2019, 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 2019, 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 2019, he received annual rent of Rs. 600,000 from the tenant cultivating the land.
(iv) On 1 May 2019, 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 2019.
(v) On 15 June 2019, he received insurance claim of Rs. 600,000 against theft of a painting which
was stolen on 31 May 2019. The painting was purchased by him on 1 January 2018 for Rs.
350,000. He had paid insurance premium of Rs. 24,000 and also paid lawyer‟s fee of Rs.
50,000 who represented him in the settlement proceedings.
(vi) On 15 July 2018, Mr.Yaqeen received 20,000 shares in AB (Private) Limited (ABL), a company
incorporated under the Companies Act, 2017 as a dividend in specie. On 30 June 2019, 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 2019. 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 2018, 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 2019.
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 2019.
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 2019:
Rupees
Cost of living allowance (per month) 50,000
Milkallowance (per month) 10,000

Questions
In addition to the above emoluments, Mr.Iqbal was also provided the following:
(i) Special bonus equal to one month‟s basic salary paid on 5 June 2019.
(ii) A new company maintained car for his personal use. The car was purchased on1 March 2019 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 driver‟s 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 TL‟s parent company, Tameer Inc. which is listed on New
York Stock Exchange was granted to him in May 2018. Mr.Iqbal exercised the option on 5
January 2019 at a price of USD 1.5 per share. The market value of the shares at the close of
business on 5 January 2019 was USD 2.5 per share. He sold 3,000 shares on 30 June 2019 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 2019 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 2019. The market value of these shares at the close of business on 15 May 2019 was
Rs. 12.5 per share.
Mr.Iqbal received additional income from the following sources, for the tax year 2019:
(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 2017. 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, watchman‟s 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.Iqbal‟s salary during tax year 2019.
 On 1 July 2018, 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 2018, he purchased 50,000 shares in a listed company AB Limited at a price of
Rs. 20 each. On 1 January 2019, AB Limited announced 20% right shares to existing
shareholders at a price of Rs. 18 per share. On 25 January 2019, Mr.Iqbal subscribed the right
issue in full.
 During tax year 2018 his assessed taxable income was Rs. 3,000,000.

Required:
Under the Income Tax Ordinance, 2001 and Rules made there under, compute the taxable income and
income tax payable by or refundable to Mr.Iqbal for the tax year ended 30 June 2019.
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 2019, 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 2019.
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 2018 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 2019, 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 2019. 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 2019, RPL sold certain items of old stock to Mr.Saif for Rs. 5,000. The net
realizable value of the stock in RPL‟s books as on 30 June 2018 and 31 December 2018 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 Saif‟s salary amounted to Rs. 2,100,000.
(i) On 1 July 2018, 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 2019. 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,2018 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 ofRs.
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 2019 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 2018
as dividend in specie from Rahat (Pvt.) Limited. He holds 12,800 shares in Rahat (Pvt.) Limited
costing Rs. 35 each.
(iii) In August 2018,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 2018 whereas 25 persons joined
in January 2019 and 30 in March 2019.

Questions
Following items were included in club‟s profit and loss account for the tax year 2019:
 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
 Cost of a new non-removable fire protection screen installed to prevent fire in future
Rs. 200,000.
 Other miscellaneous expenses amounting to Rs. 120,000.
(iv) On 15 June 2019,Mr.Saif donated a plot of land to Pakistan Sports Board. He had purchased
this plot in tax year 2004 at a price of Rs. 300,000. However, at the time of donation, a broker
had given him an offer of Rs. 500,000 for the said plot.
Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made there under, compute the
taxable income and income tax payable by or refundable to Mr.Saif for the tax year 2019.
Note: Show all relevant exemptions, exclusions and disallowances.
7 Mr.Pansari
Mr.Pansari, a Pakistani citizen, is working as a company secretary in Sukoon Limited (SL), an un-listed
public company, engaged in the business of production and supply of olive oil. Following are the details
of his emoluments during the year ended 30 June 2019.
Rupees
Basic salary per month 450,000
Conveyance allowance per month 50,000
In addition to the above cash emoluments, Mr.Pansari was also provided with the following:
(i) A 2000cc company maintained car both for business and private use. The car was purchased
st
at the 1 day of tax year 2018 at a cost of Rs. 3,000,000. However, the current market value of
the car is Rs. 3,500,000.
(ii) A special payment of Rs. 75,000 in lieu of leave was made available to him.Mr.Pansari,
however, voluntarily waived his right to receive such payment.
(iii) Free provision of two cans of olive oil per month. The market value of each can was Rs. 500.
(iv) In July 2017, he was granted an employee stock option to purchase up to 15,000 shares in
SL‟s holding company, Trio Limited, situated in Bermuda, at an option price of USD 3 per
share. The shares were required to be purchased within eighteen months from the option date.
Mr.Pansari exercised the option in September 2018 to purchase 8,000 shares when the market
price of the shares was USD 5 per share. After two months of the acquisition, Mr.Pansari sold
6,000 shares at a price ofUSD 8.5 per share. (Assume the dollar rupee parity on the above
dates wasUSD 1 = PKR 102).


(i) Received a royalty of Rs. 2,000,000 from K Publishing on a book written on Wild Hunting.
Mr.Pansari completed the book in nineteen months and all the costs relating to its publication
were borne by the publisher. The applicable tax rates in tax years 2017 and 2018 were 16%
and 18% respectively.
(ii) Received a pension of Rs. 50,000 from his ex-employer.
(iii) Received a fee of Rs. 200,000 for attending a directors‟ meeting of SL‟s associated company
Nice (Pvt.) Limited held in July 2018.
(iv) There was a brought forward capital loss of Rs. 25,000. The loss was suffered by Mr.Pansari
on sale of shares in Ghareeb (Pvt.) Limited.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made there under, compute the
taxable income of Mr.Pansari for the tax year 2019.
8 MH Associates
For the purpose of this question, assume that the date today is 15 August 2018.
Masood and Ali Hassan established a consultancy firm, MH Associates (MHA), for providing
accounting and taxation services to SMEs in Punjab. They share profits and losses in the ratio of 60:40
respectively. During the year ended 30 June 2019 MHA earned profit before tax of Rs. 6,000,000
which included of an exempt income of Rs. 800,000. MHA‟s tax liability for the year amounted to Rs.
1,079,500. However, MHA paid Rs. 1,100,000 as advance tax against the tax liability.
Following further information is available about Masood for the year ended 30 June 2019:
(i) On 1 May 2018 Masood received 3,000 shares, by way of a gift from his father, in Lucky Inc., a
company registered on Toronto Stock Exchange. On 1 January 2016 his father had bought
these shares at a price of CAD 20 per share (equivalent to PKR 1,300 per share). The market
value of each share at the time of transfer to Masood was CAD 28 (equivalent to PKR 2,100
per share).
On 15 June 2019 Masood sold 2,500 shares in Lucky Inc. to an investor for CAD 32 per share
and paid a brokerage commission of CAD 0.2 per share to the stock broker. He also paid
income tax of CAD 1,500 to the tax authorities in Toronto. The exchange rate at the time of
above transaction was CAD 1 = PKR 90.
(ii) On 10 June 2019 Masood received royalty of Rs. 2,300,000 on publication of his book „Slum-
Dwellers‟ on children living in urban slums. It took him nineteen months to complete the book.
The entire cost of publication was borne by the publisher. Masood‟s average rates of tax for the
last two tax years were 17% and 19% respectively.
(iii) On 20 June 2019 Masood earned gross rent of Rs. 150,000 from a construction company for
using his fork lifter on their site. The company withheld tax of Rs. 12,000 from the payment.
Masood incurred Rs. 15,000 for repair of the fork lifter.
(iv) On 30 June 2019 Masood paid Rs. 50,000 in cash on account of Zakat to an approved NGO.
Required:
total income, taxable income and tax payable by or refundable to Masood for tax year 2019.

Questions
CHAPTER 02 – ASSOCIATION OF PERSONS AND COMPANY TAXATION
9 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 company‟s profit and loss account and the
related details for the period ending June 30, 2019 are as under:
Rs. in ‘000
Sales 96,000
Cost of sales (66,850)
Gross profit 29,150
Finance cost (3,100)
Other charges (including WWF of Rs. 0.350 million) (2,400)
Other income 4,100
Cost of sales includes: Rs. in ‘000

Accounting depreciation 3,200
Provision for slow moving stock 1,300
Demurrage paid to custom authorities 100
Royalty paid against manufacturing rights to a non-resident 1,200
Administrative and selling expenses include: Rs. in ‘000

Accounting depreciation 800
Damages paid to distributors on breach of contract 300
Provision for bad debts 1,100
Small items of office equipment charged off (Useful life is more than 1 year) 1,400
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.
Other income includes: Rs. in ‘000
Profit from Qatar branch 2,700
Loss from Oman branch (3,400)
Tax depreciation for the year was Rs. 6.00 million. There was also a carried forward tax loss of Rs.
6.10 million and an unadjusted foreign tax credit of Rs. 0.12 million from tax year 2018. Following
taxes were paid by the company during the year:

Rs. in ‘000
Deducted and paid by distributors 2,450
Paid on import of raw material 2,000
Taxes paid in Qatar 225
Unadjusted minimum tax for prior years 450
Required:
Compute the income tax liability of the company for the tax year 2019. Tax rate applicable to the
company is 29%.
10 Rainbow Limited (RL) - Foreign Controller / Thin Capitalization

Rainbow Limited (RL) is incorporated under the Companies Act, 2017 and is engaged in the
manufacturing of solar powered equipments. RL is 60% owned by a Dubai based company Burj Plc.
(BP), 10% by a German company ATX Gmbh and 30% by a Pakistani company Muqami Limited (ML).
BP in turn is 70% controlled by ATX Gmbh whereas the Pakistani company ML is 90% owned by a
French company FRS Limited.
On August 10, 2018, RL received a loan of US$ 4.2 million from BP to partly finance a major industrial
investment project at an interest rate of 12% per annum. Interest is to be paid quarterly in arrears by
th
the 6 day of the next quarter.
On September 15, 2018, RL received another loan of US$ 1.0 million from FRS Limited for the same
rd
project at an interest rate of 10% per annum. Interest is to be paid monthly in arrears by the 3 day of
each following month.
On May 15, 2019, RL received a third loan of US$ 3.8 million from ATX Gmbh at an interest rate of
th
8% per annum. Interest is to be paid quarterly in arrears by the 4 day of the next quarter.
The above loans are duly registered with the State Bank of Pakistan and the principal repayment in
each case would commence from the year 2020.
The following information is available in respect of RL at June 30, 2019.
Rs. in million
Assets 2,900
Liabilities 2,670
Net profit after taxation for the year 150
Interim dividend paid during the year 100
Assume that the dollar rupee parity during the year ended June 30, 2019 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, 2019.

Questions
11 Mateen and Vaqas

Mateen and Vaqas are planning to commence a business venture selling pesticides to the farmers.
They are however, not certain whether the business venture should be in the form of a partnership or
a limited liability company. They intend to make investment and share the profits in the following ratio:
 Mateen 60%
 Vaqas 40%
Further, in case of incorporation of a limited liability company they would distribute 60% of the after tax
profits as dividends.
Following are the expected results of their twelve months' operation:
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 2019 assuming that they have no other sources of income.
12 Mega Limited (ML)

Mega Limited (ML), an unlisted public company, owns an industrial undertaking which is engaged in the
manufacturing and supply of specialized machinery to power projects.
Following is the extract from the profit and loss account of ML for the period ended 30 June 2019:
Rs. in ‘000
Sales 1,100,000
Financial charges (110,000)
Other charges (27,500)
Other income 117,000

Additional information:
(i) In July 2018, 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 1 April 2019.
(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 2012, 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 2018 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 2019.
(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.

Questions
13 Rose Petal Limited - Construction

Rose Petal Limited (RPL) is engaged in the construction business for the past many years. In April
2016, Sind Provincial Government awarded a contract of Rs. 9.0 million to RPL for the construction of
10 primary schools in the districts of Khairpur and Badin over a period of three years. The company
expects to earn a profit of 25% of the contract value. The project was scheduled to start in July 2016
and be completed on 30 June 2019.
The amount received and costs incurred by RPL on the contract over the period of three years were as
under:
Receipts Costs
Tax Year
Rupees
2017 3,000,000 3,105,000

2018 3,000,000 2,632,500
2019 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.
14 Saturn Limited - Foreign Branches / Tax Credit

Saturn Limited (SL), an unlisted public company, is engaged in the manufacture and sale of Talc both
locally and in international markets. The company has two overseas branches located in Korea and
China. Following information has been extracted from company‟s records for the year ended 31 March
2019:
Pakistan Operation Overseas Branches

Local Export Korea China
---------------Amount in Rupees---------------
Sales 10,000,000 7,000,000 6,000,000 8,000,000

Profit before taxation 4,000,000 3,500,000 800,000 1,000,000
Taxes paid during the year 1,600,000 70,000 250,000 400,000
SL‟s net profit from local operation includes the following:

(i) Profit on debt amounting to Rs. 1,000,000 paid by SL to a Swiss bank against a short term loan
obtained to meet the working capital requirements of its China branch.
(ii) Rs. 100,000 written back on account of excess provision for bad debts, made last year.
A donation of Rs. 600,000 deposited to Prime Minister‟s Flood Relief Fund 2010 has been erroneously
excluded from the computation of income.
Required:
/ refundable for the tax year 2019. Give brief reasons for the treatment of the items excluded from
computation or for which no expense deduction is allowed.

15 Sun Limited (SL) - Group Relief

Sun Limited (SL), a listed company, owns 100% ordinary share capital of an unlisted public company
Venus Limited (VL). Both SL and VL are engaged in the manufacturing and supply of chemicals.
VL holds 85% ordinary share capital of Mars Limited (ML), who is engaged in the trading of packing
materials and sells its products to individual customers. Following information has been extracted
from the records of the above companies for the period ended 31 March 2019:
(i) SL VL ML
Rs. in ‘000
Sales 17,000 6,000 3,500
Profit/(loss) before taxation 3,700 (1,400) 1,300
(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 2017.
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 ML‟s 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 2017.
 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 2018
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 2018 were as follows:

Questions
SL VL ML
Rs. in ‘000
Business loss 200 500 50
Unabsorbed tax depreciation 250 500 100
Capital loss 750 250 200
(viii) Following taxes were deducted / paid during the year:
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 2019.
16 Pills (Pvt.) Limited

Pills (Pvt.) Limited (PPL) is engaged in the business of manufacturing wide range of pharmaceutical
products for both local and overseas markets. Following is an extract from PPL‟s profit and loss
account for the year ended 31 December 2018:
Rs. in ‘000
Sales 39,150
Gross profit 13,450
Other charges (2,000)
Other income 900
(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 company‟s local sales.
(iii) On 1 January 2018, 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 Swat, a project fully approved by the Federal
Government. The principal repayment is due to commence from July 2019. Mark-up on above
loan, included in financial charges, amounted to Rs. 1,020,000. PPL‟s equity at the beginning
of the year amounted to Rs. 4,000,000.

(iv) On 15 June 2018, 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.
(v) Administrative and selling expenses include the following:
 Rs. 800,000 paid against professional books purchased from a website of a company in
UK. No tax was withheld by PPL from such payment.
 Rs. 200,000 paid as donation to a hospital established under a private trust.
 Rs. 600,000 payable as rent to the landlord for PPL‟s parking area. Withholding tax has
not been deducted from this amount.
(vi) On 1 July 2018, PPL granted an interest free loan of Rs. 500,000 to one of its shareholders.
(vii) Financial charges include interest of Rs. 180,000 on account of machinery obtained on finance
lease. Total lease rentals paid during the year amounted to Rs. 500,000. At the end of the
lease term which expired on 31 August 2018, the machinery was transferred to PPL at a
residual value of Rs. 640,000. The market value of the machinery on the date of its transfer
amounted to Rs. 760,000.
(viii) Other income includes gain on sales of delivery van of Rs. 130,000. The van was acquired on
1 January 2017 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 2018 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:
for the tax year 2019. Give reasons for the treatment of items in (iii) and (vii) above. Also explain the
treatment of items not appearing in your computation.
17 Maroof Limited (ML) - Construction contracts

Maroof Limited (ML) is a resident company engaged in the business of construction for the past many
years. In July 2017, the company was awarded a contract for the construction of roads in district Badin
at a total contract price of Rs. 100,000,000. ML estimated to incur total cost of Rs. 60,000,000 on the
project.
Work on the project started in September 2017and was completed in November 2018. ML received
following amounts after deduction of 7% withholding tax:
Months Feb. 2018 May 2018 Sep. 2018 Dec. 2018

Amount received (Rs.) 12,622,000 15,760,000 35,000,000 30,118,000
The actual costs incurred by ML for the tax years 2018 and 2019 were Rs. 33,000,000 and Rs.
27,000,000 respectively.
Required:
Under the provisions of Income Tax Ordinance, 2001 calculate ML‟s taxable income and withholding
tax credit, if any, for the tax years 2018 and 2019.

Questions
18 Big Limited (BL) - Set off and surrender of losses

Big Limited (BL) was incorporated in Pakistan in 1992. It holds the entire share capital of several
locally incorporated companies including Zeta Limited (ZL). Following information has been extracted
from ZL‟s records for the year ended 30 September 2018:
Rs. in ‘000
Income from business 500
Capital gain 800
Income from other sources 100
Total income before tax 1,400
ZL is engaged in the business of manufacturing scaffoldings since its incorporation. Following further
information is available from ZL‟s records:
(i) The income from business includes deemed income in respect of a loan of Rs. 85,000 received
otherwise than by a crossed cheque.
(ii) Business losses brought forward from tax years 2017and 2018 amounted to Rs. 130,000 and
Rs. 200,000 respectively. ZL‟s tax assessment has been finalized up to tax year 2017.
(iii) Capital losses brought forward from assessment years 2012 and 2013 amounted to Rs. 50,000
and Rs. 65,000 respectively.
(iv) The amount of tax depreciation adjusted during the year against income from business
amounted to Rs. 490,000. Unabsorbed tax depreciation brought forward from previous
assessment years amounted to Rs. 135,000.
(v) A loss from speculation business brought forward from tax year 2017 amounted to Rs. 100,000.
(vi) One of BL‟s 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 2019 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 ZL’s income should be
followed.
19 Bharosa Limited (BL)

Bharosa Limited (BL) was incorporated on 1 July 2011 as an un-listed public company under the
Companies Act, 2017. The company is engaged in the business of manufacturing and distribution of
soap and toiletries. On 1 November 2017 BL was enlisted on Karachi and Lahore Stock Exchanges.
Following is an extract from BL‟s un-audited summarised profit and loss account for the year ended 30
September 2018:
Rupees
Sales 24,900,000

Rupees
Administrative and selling expenses (6,900,000)
Other income 1,500,000
(i) Sales include insurance compensation of Rs. 5,000,000 received from Big Insurance Limited
against the loss of one of BL‟s factory buildings which was destroyed by fire due to short
circuit. This building was constructed in July 2016 at a cost ofRs. 6,000,000. The accounting
and tax WDV of the building when it caught fire were Rs. 5,347,000 and Rs. 4,374,000
respectively. However, no depreciation on this building was charged in the books for the year.
BL reconstructed a similar building at a cost of Rs. 3,800,000. Construction of the new building
was completed in November 2017and BL installed used plant and machinery therein at a cost
of Rs. 1,500,000. The unit was given on lease to Mr.Marvi on 1 January 2018 at a monthly
lease rent of Rs. 150,000. The relevant depreciation at the rate of 5% and 10% on building and
plant and machinery respectively and property tax of Rs. 96,000 which was paid in respect of
the new building were properly recorded in BL‟s books as part of administrative expenses. The
amount of lease rent received from Mr.Marvi is included in sales.
(ii) Cost of sales includes the following:
 A compensation of Rs. 100,000 payable annually to a former employee, who was injured
and permanently disabled while on duty.
 A penalty of Rs. 25,000 on failure to deposit income tax withheld from the salaries of
factory staff.
 Accounting depreciation of Rs. 870,000.
(iii) Administrative and selling expenses include the following:
 Impairment loss of Rs. 200,000 on BL‟s investment in ABC (Pvt.) Limited. The loss
occurred due to considerable decrease in the breakup value of these shares as compared
to their book value.
 Legal fees of Rs. 50,000 and Rs. 125,000 which were paid in connection with the filing of
statements with Karachi and Lahore Stock Exchanges and increase in BL‟s authorized
capital respectively.
 Scientific research expenditure of Rs. 400,000 which was incurred in Cannes, France.
The research has helped BL in improving the quality of its products.
 Rs. 480,000 which was incurred in relation to an advertising campaign launched prior to
the introduction of a new product line in an effort to enhance public awareness.
 A donation of Rs. 300,000 was paid to a fund which is listed in the second schedule of the
Income Tax Ordinance, 2001 for the promotion of science and technology in Pakistan.
 Workers‟ Welfare Fund of Rs. 98,000 and accounting depreciation of Rs. 1,100,000.
(iv) Financial charges include a profit of Rs. 180,000 earned from saving accounts maintained with
banks.
(v) Other income includes sale proceeds of Rs. 700,000 from sale of shares in Nafa (Pvt.) Limited.
BL purchased these shares in June 2017 at a cost of Rs. 230,000.

Questions
(vi) The tax written down values of BL‟s assets on 1 October 2017 were:
Building (excluding the building destroyed by fire) Rs. 3,270,000

Plant and machinery Rs. 3,400,000 Motor vehicles Rs. 1,500,000
Furniture Rs. 2,380,000 Computers Rs. 1,100,000
(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:
taxable income and net tax payable by/refundable to BL for the tax year 2019.
20 Khawar Associates (KA)

Khawar Associates (KA) is engaged in the business of supplying stationery items to both, individuals
and corporate customers. Following is an extract from the summarised income statement for the year
ended 30 June 2019.
Rupees
Sales 2,348,000
Operating expenses (470,000)
Profit before tax 648,000

(i) The above sales include the following:
 An amount of Rs. 573,000 (net of tax) received from Mr.Iqbal. He is registered for sales tax
purposes. The rate of withholding tax is 4.5% of the gross receipts.
 Goods worth Rs. 825,000 sold to SP Limited (SPL). SPL deducted tax of Rs. 37,125 from
the payment against this sale.
 The rest of the sales were made to individual customers having turnover of less than fifty
million rupees.
(ii) Cost of sales includes Rs. 20,000 paid to SPL as a penalty for late delivery of goods.
(iii) Operating expenses include the following:
 Salaries of Rs. 50,000 paid to part time sales staff working exclusively on SPL‟s
assignment. The rest of the expenses were common to all the customers.
 A donation of Rs. 60,000 to an educational institution established by the Provincial
Government.
 Zakat of Rs. 10,000 under the Zakat and Ushr Ordinance, 1980.
(iv) KA also received a dividend of Rs. 36,000 (net of tax) from a private company.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made there under, compute KA‟s
taxable income for tax year 2019. Give reasons for the treatment of the amounts of donation and
dividend as mentioned above.

21 Khalis Limited (KL)

Khalis Limited (KL), a listed company, primarily engaged in the business of manufacturing, supply and
export of wide range of products. KL also renders services both locally and in international markets.
Following information has been extracted from KL‟s records for the year ended 31 December 2018:
Rs. in ‘000
Gross sales 350,500
Other income 25,850
Gross sales:
(i) 50.2% of the gross sales are related to goods exported to countries in Europe and USA. These
sales reflect the C&F price of the goods exported. 85% of the above export sales were realized
in current year. KL also realized Rs. 20,000,000 from last year‟s export sales. No separate
accounts were maintained by KL for the business of export of goods manufactured in Pakistan.
(ii) 3% of the gross sales comprise of receipt from an export house against provision of services of
dying and embroidery to them. However, the export house inadvertently failed to deduct
withholding tax from payments made to KL. These goods were subsequently exported to
Japan by the export house.
(iii) Rest of the sales are inclusive of 17% sales tax and were made to both corporate and
individual customers in the local market.
Cost of sales includes:
(i) Freight of Rs. 500,000 paid in respect of transportation of goods to above export house.
Administrative and selling expenses include the following:
(i) Ocean freight of Rs. 4,700,000, clearing and forwarding expenses of Rs. 485,000. No
withholding tax was deducted from these payments.
(ii) Provision for doubtful export rebate and duty drawback of Rs. 700,000 and Rs. 400,000
respectively.
(iii) Legal expenses of Rs. 1,000,000 in respect of a dispute over territorial rights.
(iv) Rs. 3,000,000 paid in respect of an unsuccessful marketing campaign.
(v) Rs. 800,000 incurred for acquiring a long-term business contract.
(vi) Rs. 2,000,000 contributed to a foreign pension fund.
(vii) Sales tax of Rs. 950,000 paid in respect of entertainment and courier charges relating to KL‟s
business. No input tax credit was allowed to KL in respect of such expenditures.
Financial charges include the following:
(i) Mark-up of Rs. 1,200,000 paid on a loan obtained from AB Bank Limited for the purpose of
advancing concessional loans to KL‟s staff in accordance with the terms of their employment.

Questions
(ii) Mark-up of Rs. 9,000,000 on short term borrowings obtained to finance the working capital
requirements of export sales.
(iii) Rs. 2,150,000 charged by banks for the collection of export proceeds.
Other income includes the following:
(i) Exchange gain of Rs. 2,000,000. This gain was related to export sales.
(ii) Export rebate of Rs. 3,900,000 and duty drawback of Rs. 1,600,000
(iii) Fees of Rs. 10,000,000 received under an agreement from enterprises in Bahrain in
consideration for the use of KL‟s design, patent and scientific knowledge. This amount was
directly transferred into KL‟s bank account in Pakistan. No direct expenditure was incurred in
relation to this income.
(iv) KL is also engaged as a commission agent by M Limited, a renowned communication company
in Pakistan. KL remitted Rs. 50,000,000 to its principal, M Limited, after retaining Rs. 4,300,000
on account of commission. However, M Limited mistakenly collected advance tax from KL only
on Rs. 3,600,000.
(v) Capital gain on sale of 30,000 shares in Blue Limited, a listed company in June, 2019, at a
price of Rs. 120 per share. KL purchased these shares in May 2015 at a cost of Rs. 35 per
share. No direct expenditure was incurred in respect of sale of these shares.
Tax paid by KL u/s 147 amounted to Rs. 3,450,000.
Required:
taxable income and net tax payable by or refundable to KL for the tax year 2019.
Note:  Ignore WWF, Minimum Tax and Alternative Corporate Tax.
 Show all relevant exemptions, exclusions, reclassification and disallowances.
22 ZJ Limited
ZJ Limited (ZJL) is an unlisted public company engaged in the business of manufacturing, supply and
export of pharmaceutical products. Following information has been extracted from ZJL‟s un-audited
financial statements for the year ended 30 September 2018.
Rs. in ‘000
Sales-net 218,500

Gross profit 60,920

Other income 29,280
Sales includes:
(i) Sale of polio vaccines of Rs. 30,000,000 to Red Cross mission in Somalia. The entire amount
was realized during the year.

(ii) Discounted sale of Rs. 3,600,000 to one of the NGO‟s operating welfare hospitals in KPK
province. A discount of 25% was allowed to the NGO on their purchases.
Cost of sales includes:
(i) Cost of opening and closing stock-in-trade of Rs. 25,690,000 and 29,200,000 respectively
comprising of raw and packing materials, work-in-process and finished goods. ZJL computes
the cost of stock-in-trade using marginal cost method. The values of opening and closing
stock-in-trade under absorption cost method were Rs. 28,460,000 and Rs. 32,350,000
respectively.
(ii) Accounting depreciation of Rs. 2,210,000.
Administrative and selling expenses include:
(i) Withholding tax of Rs. 600,000 i.e. 20% of purchase price, paid in August 2018 (borne
by ZJL) on the plot of land handed over to the winner of a lucky draw which was
organized under a sales promotion scheme. ZJL acquired this plot in January 2017at a
cost of Rs. 3,000,000. The market value of the plot at the time of lucky draw was Rs.
10,000,000.
(ii) Rs. 1,800,000 paid to improve the embodied features of production software.
(iii) Rs. 650,000 in respect of the cost of two ramps. The ramps were built to provide
access to persons with disabilities.
(iv) Accounting depreciation of Rs. 1,980,000.
Other income includes:
(i) Rs. 2,450,000 received from employees against sale of five vehicles. The market value and tax
written down value of these vehicles at the time of sale was Rs. 5,250,000 and Rs. 3,320,000
respectively. As per company‟s policy the vehicles are sold at their book values.
(ii) Net profit of Rs. 20,000,000 from ZJL‟s 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 2015, ZJL acquired 200,000 shares in ML at Rs. 50 per share constituting 55%
interest in ML. On 1 August 2018, 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 2018, 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 2018, 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.

Questions
(iv) The assessed losses brought forward from tax years 2017 and 2018 were as follows:
2018 2017
------- Rupees -------
Business loss 2,900,000 3,550,000
Unabsorbed tax depreciation 2,550,000 -
Required:
taxable income, net tax payable by or refundable to ZJL for tax year 2019 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.
23 Desi (Pvt.) Limited - Thin Capitalization

Desi (Pvt.) Limited (DPL), a resident company, is 70% owned by Mega Inc. USA(MI).On 15 March
2018, DPL received a loan of US$ 3.0 million (equivalent toPKR 315.0 million) from MI with interest at
the rate of 11% per annum. Interest is tobe paid half yearly in arrears. Repayments of the principal
would commence after 2018. The loan was received to finance a rural development project in Punjab
dulyapproved by the Federal Government in accordance with the Second Schedule.
On 1 June 2018, DPL received another loan of US$ 1.6 million (equivalent toPKR 168 million) from MI
with interest at the rate of 6% per annum. Interest on thisloan 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 2019.
On 31 August 2018, DPL wrote-off Rs. 1.0 million in respect of a debt owed by one of MI‟s associates
who was based in Australia. The outstanding debt balance in DPL‟s books at the end of 30 September
2018 was Rs. 4.0 million.
Following information has been extracted from DPL‟s records for the year ended 30 September 2018.
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 2019.
24 Bismil Limited
Bismil Limited (BL) is a listed company engaged in the business of manufacturing and supply of
multiple products across the country. Following information has been extracted from BL‟s records for
the year ended 31 December 2018.

Rupees
Sales 160,000,000
Administrative and selling expenses (20,000,000)
Financial charges (5,000,000)
Sales include:
(i) An amount of Rs. 15,000,000 received net of withholding tax at the rate of 4% of the gross
value of sales against sale of electric motors to a person registered under the Sales Tax Act,
1990.
(ii) Sale of a product to an associated company for Rs. 250,000. The fair market value of the
product was Rs. 200,000.
Administrative and selling expenses include:
(i) Rs. 900,000 paid to Shams Associates in respect of financial due diligence of a company
which BL is planning to acquire.
(ii) An amount of Rs. 425,000 in respect of write off of an old machine which is no longer used by
BL in its business operations. The accounting and tax written down values of the machine
were the same. The machine is expected to fetch Rs. 5,000 if sold in the open market.
(iii) A penalty of Rs. 150,000 imposed by the Commissioner for short payment of tax in the year
2015.
(iv) An amount of Rs. 385,000 incurred on entertainment of CEO‟s guests at a hotel in Karachi.
(v) Rs. 125,000 incurred on account of industrial training of Murad, a Pakistani citizen working at
BL‟s competitors in connection with a scheme approved by the Federal Board of Revenue.
Murad is also the nephew of BL‟s CEO.
Financial charges include:
(i) Profit on debt of Rs. 3,230,000 paid to non-resident persons in China. BL had issued securities
in China for the purpose of raising loan to be used for its business in Pakistan. These
securities were approved by the Federal Board of Revenue. BL did not deduct withholding tax
from the payment.
(i) A monetary award of Rs. 1,000,000 granted by the President of Pakistan for best corporate
practices in the year 2016. Besides, an amount of Rs. 300,000 was conferred by the Governor
of Sindh for BL‟s contribution in rural development.
(ii) Rs. 500,000 on account of service charges charged and kept by BL out of tax withheld from
suppliers.
(iii) Rs. 120,000 received in respect of inter-corporate dividend from a subsidiary within the group.
BL owns 75% interest in the subsidiary. No withholding tax was deducted by the subsidiary.
(i) Tax paid by BL u/s 147 amounted to Rs. 5,300,000.
(ii) Assume that tax depreciation on all assets is the same as their accounting depreciation.

Questions
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under
the correct head of income the total income, taxable income and net tax payable by or refundable to
BL for the tax year 2019.
Note:
Your computation should commence with the profit before tax figure of Rs. 25,000 K. Ignore WWF,
WPPF, Minimum tax, Alternative Corporate Tax and default surcharge. Show all relevant exemptions,
exclusions and disallowances.
25 Income from Business

Under the provisions of the Income Tax Ordinance, 2001 compute the amount of deduction to be
allowed in computing „Income from business‟ in each of the following independent cases. Also give brief
reason(s) for treatment of items in (iii) and (iv) below:
(i) Alpine Pharmaceuticals Limited incurred advertisement and sales promotion expenses of Rs.
1,300,000 and exceeded its target of annual turnover of Rs. 20,000,000 by 10%.
(ii) Sigma (Pvt) Limited (SPL) incurred interest expense of Rs. 7.5 million on a debt of US$ 1.06
million (equivalent to PKR 113 million) obtained during the year from Big Inc., a company
incorporated in USA. SPL is 85% owned by Big Inc. The debt was obtained to finance a project
approved by the Federal Government and the repayment of the principal was to commence after
two years. At the end of the year, SPL had total assets of Rs. 350 million, total liabilities of Rs. 190
million and it earned a net profit after taxation of Rs. 120 million during the year.
(iii) Raja Limited purchased items of promotional give-aways from the website of a company in China
for Rs. 300,000. Raja Limited did not deduct withholding tax from the payment.
(iv) Neo Limited (NL) purchased raw materials of Rs. 700,000 during the year from Duo Limited (DL).
NL paid the amount by way of online transfer of funds from its business bank account to the bank
account of one of DL‟s directors without deducting withholding tax of Rs. 28,000.
26 RM Associates
For the purpose of this question, assume that the date today is 15 August 2018.
Rahat and Musa are partners in RM Associates (RMA), a firm engaged in the business of providing
consultancy and book keeping services to clients in Pakistan as well as abroad. Rahat and Musa share
profits and losses in the ratio of 4:5 respectively. Following is an extract from RMA‟s profit and loss
account for the year ended 30 June 2018:
Rupees
Net revenue 36,500,000
Less:
Salaries (19,780,000)
Rent (1,250,000)
Depreciation/amortization (accounting) (1,680,000)
Software expense (650,000)
Interest expense (135,000)
Other expenses (1,655,000)
Total expenses (25,150,000)
Income before tax for the year 11,350,000

(i) Net revenue includes the following:
 Retainership fee of Rs. 19,710,000 from corporate clients. Withholding tax at the rate of
7% of the gross receipt was deducted by such clients and the amount is included in other
expenses.
 An amount of Rs. 6,210,000 received under an agreement from a Doha based company,
Isra Middle East, for providing technical services in Doha. The amount was brought into
Pakistan in foreign exchange in compliance with the regulations of the State Bank. No tax
was deducted from the receipt either in Doha or in Pakistan by the bank.
 Rs. 10,580,000 on account of on-line accounting services provided to various clients in
Iran and Afghanistan. The amount was received in foreign exchange through normal
banking channel. Withholding tax at the rate of 1% of the gross receipts was deducted by
the collecting bank and the amount is included in other expenses.
(ii) Salaries include Rs. 290,000 and Rs. 355,000 respectively paid to Rahat and Musa per month.
(iii) The rent was paid in respect of office premises to Lalazar Limited. RMA did not deduct
withholding tax from the payment.
(iv) Software expense represents purchase of a software on 1 January 2019.
(v) Interest expense was in relation to a vehicle obtained on finance lease. Lease rentals paid
during the year amounted to Rs. 800,000. The lease term of the vehicle ended on 1 June 2019,
on which date RMA acquired the vehicle at a residual value of Rs. 950,000. The market value of
the vehicle at the date of its transfer to RMA was estimated at Rs. 1,150,000.
(vi) The tax written down values of RMA‟s assets on 1 July 2018 were as follows:
Assets Rupees
Furniture and fixtures 1,700,000
Computers and laptops 840,000
Accounting software (remaining life of 5 years) 5,000,000
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the taxable income and net tax
liability of RMA for the tax year 2019.
Note: show all relevant exemptions, exclusions and disallowances. Tax rates are given on the last
page.
27 Loyal (Pvt) Limited

For the purpose of this question, assume that the date today is 30 September 2019.
Loyal (Pvt) Limited (LPL) is engaged in various businesses across Pakistan. The company has a paid
up capital of Rs. 52 million. Following information has been extracted from
LPL‟s records for tax year 2019:
Rupees
Total turnover 54,520,000
Total expenses (47,895,000)
Accounting profit before tax 10,975,000

Questions
Total turnover include:
(i) Sale of Rs. 21,750,000 (inclusive of sales tax at the rate of 17%) to one of the customers in
Balakot. A special discount of 30% of the gross value of sales was offered to the customer in
defiance of normal business practices.
(ii) Sale of surgical gloves of Rs. 14,931,000 to a government hospital in China. LPL realized the
entire sale proceed during the year after deduction of 1% withholding tax by the authorised
dealer.
(iii) Rs. 2,000,000 for providing engineering services to Sami enterprises (SE) in Islamabad.
Withholding tax was deducted u/s 153 at the rate of 8%. LPL has not submitted any undertaking
under clause 94 of Part IV of the Second Schedule.
Total expenses include:
(i) Import of packing material of Rs. 900,000 for packing of surgical gloves sent to China. Tax paid
u/s 148 amounted to Rs. 49,500.
(ii) Accounting depreciation of Rs. 2,520,000.
(i) Prize of Rs. 300,000 on prize bond. Tax deducted u/s 156 amounted to Rs. 45,000.
(ii) Dividend of Rs. 25,000 received from a corporate agricultural enterprise from its agricultural
income as specified in Second Schedule to the Income Tax Ordinance, 2001. Withholding tax
was not deducted at the time of payment.
(iii) Share of profit of Rs. 3,900,000 from an associate, recognized under equity method of
accounting.
(iv) Income tax refund of Rs. 125,000 related to tax year 2017.
Other information (not included above):
(i) Share of profit of an AOP amounting to Rs. 875,000. LPL holds 40% interest in the AOP. The
gross turnover of the AOP during tax year 2019 amounted to Rs. 18,600,000
(ii) Total tax depreciation amounts to Rs. 4,800,000.
(iii) Assessed tax loss brought forward from tax year 2017 amounts to Rs. 475,000.
Required:
amount of tax payable by LPL for tax year 2019. State the amount of tax to be carried forward, if any.
Note:
Show all relevant exemptions, exclusions and disallowances. Tax rates are given on the last page.

CHAPTER 03 – SALES TAX
28 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 2019
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
Following information is also available:

(i) In order to meet the high consumer demand, OL purchased new machinery forRs. 1,200,000.
The machinery was put to use during the same month. A motor vehicle of Rs. 1,500,000 was
also acquired for the sales department.
(ii) Sales tax of Rs. 20,000 was paid under the Punjab Provincial Sales Tax Ordinance on services
provided by clearing agents for imports.
(iii) Rs. 650,000 was paid against advertisement services in the province of Punjab.
(iv) Sales tax of Rs. 60,000 was deducted from payments to suppliers of packing material.
Sales tax (other than services) is payable at the rate of 17%. All the above amounts are exclusive of
sales tax, wherever applicable.
Required:
In view of the provisions of Sales Tax Act, 1990, and applicable provincial law, compute the following
for the tax period May 2019. Show computation wherever necessary.
(a) Sales tax liability and net sales tax payable with return.
29 Kamyab Engineering Limited (KEL)

Kamyab Engineering Limited (KEL) is registered under the Sales Tax Act, 1990. The company is
engaged in the manufacture and supply of appliances. Following information has been extracted from
the records of KEL for the month of November 2018.

Questions
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
Commercial imports 12,500
Following additional information is also available:
(i) Supplies from commercial imports include appliances of Rs. 2,040,000 which were sold on
instalment basis to an industrial consumer at a mark-up of 2%.
(ii) Imported appliances worth Rs. 100,000 were provided to the company‟s managing director for
use at his residence.
(iii) Sales tax of Rs. 60,000, Rs. 21,000 and Rs. 26,000 was paid in cash on account of electricity,
gas and mobile phone bills respectively.
(iv) Sales tax of Rs. 85,000 was paid by the company on purchase of uniforms for its line staff.
(v) An amount of Rs. 200,000 on account of purchases made from a registered supplier is
outstanding since March 2017. The related input tax was accounted for in the relevant tax period.
(vi) A penalty of Rs. 50,000 and additional tax of Rs. 25,000 was levied on KEL under the Income
Tax Ordinance, 2001 which was unpaid as of November 30, 2018.
Sales tax is payable at the rate of 17%. All the above figures are exclusive of sales tax, wherever
applicable.
Required:
(a) Sales tax payable / refundable.
(b) Input tax credit to be carried forward, if any.
30 Gadget Limited (GL)

Gadget Limited (GL) is registered at the Large Taxpayer Unit (LTU) of Inland Revenue Department,
Islamabad. It is engaged in the manufacture and supply of electrical appliances. Following information
has been extracted from GL‟s records for the month of May 2019.
Rs. in ‘000
Purchases:
Steel sheets, copper wire, aluminum and allied raw materials 2,500
Lubricants, spare parts and stores (include cash purchases of Rs. 900,000) 5,400
Gift items for customers - carpets, fancy watches etc. 700

Rs. in ‘000
Supplies:
Electric switch-gears and electric motors to diplomatic mission in Islamabad 1,900
Air coolers to customers based in Lahore, Islamabad and Faisalabad 7,000
Electric air coolers to customers in Spain and Zanzibar 3,800

(i) Technical fee of Rs. 1,400,000 was paid to Mr. Michael in Finland for the grant of right, under a
contract, to use the latest Humidifier Process for the production of air coolers.
(ii) Rs. 700,000 was paid against bill board advertisement to Z Inc. which is registered with LTU.
(iii) Motors and switches of Rs. 650,000 were supplied for consumption on board a container ship
with gross tonnage of 150 LDT. The ship was proceeding to the port of Antwerp.
(iv) Printed stationery of Rs. 500,000 was purchased from registered suppliers for the maintenance
of factory records. These suppliers are however not registered with LTU.
(v) Rs. 500,000 was paid to bank on account of L/C opening charges and Rs. 100,000 on account
of safe custody fees.
(vi) Sub-standard supplies of Rs. 900,000 were returned to vendors. Proper debit/credit notes were
raised in this regard.
All payments for the purchase of goods and services have been made through crossed cheque or
crossed pay order/credit card except as otherwise indicated. Sales tax (other than service) is payable
at the rate of 17%. All the above figures are exclusive of sales tax wherever applicable. The goods
manufactured by GL are not subject to duty under the Federal Excise Act, 2005.
Required:
In the light of the provisions of Sales Tax Act, 1990 and ICT Sales Tax on services, compute the
following for filing the sales tax return for the tax period May 2019.
(a) Sales tax payable/refundable.
31 Sunshine Limited (SL)

Sunshine Limited (SL), a registered person under the Sales Tax Act, 1990 is engaged in the
production and supply of three products Alpha, Beta and Gama. Beta is a by-product of Alpha and is
governed under the third schedule. It is sold in the market at a retail price of Rs. 25 per unit.
Following information is available from SL‟s records for the month of November 2018:
Purchases: Rs. in ‘000

Raw material used in the production of Alpha 10,000
Raw material used in the production of Gama 15,000
Supplies:
Local taxable supplies of Alpha to registered persons 15,000
Local taxable supplies of Alpha to un-registered persons 3,000
Local supplies of Gama to registered persons 18,000
Export of Gama to Turkey 7,000
Local taxable supplies of Beta to wholesalers (250,000 units @ Rs. 20 each) 5,000
Supply of 25,000 units of Beta to Export Processing Zone for further processing 625

Questions
(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 2018 was Rs. 1,000,000.
(iii) SL provided 50,000 units of Beta to its employees free of charge.
(iv) In November 2018, 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 2019. 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
2018.
(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 there under, calculate the sales
tax payable/refundable/carried forward, if any, for the tax period November 2018.
32 Ummeid Limited (UL)

Ummeid Limited (UL) is registered under the Sales Tax Act, 1990. The company is engaged in the
manufacture and sale of a range of fibre glass products. Following information has been extracted
from UL‟s records for the month of May 2019.
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
(i) Raw materials purchased from a registered supplier in April 2019 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 2019 return.

(ii) On scrutiny of the company‟s previous sales tax returns, the internal auditor has pointed out
that input tax on raw materials of Rs. 200,000 purchased in October 2018 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 2019. Give brief reasons for the treatment
of:
 Goods destroyed by fire;
 The input tax not claimed in the return for the month of October 2018; and
 Additional sales tax collected from the customer.
33 Mazboot Furnishers (MF)

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
2018and the certificate of registration was issued on 7 November 2018.
Following information has been extracted from MF‟s records for the month of November 2018:
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)

Questions
Rupees
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
(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:
 15 August Rs. 50,000 (import)
 10 September Rs. 25,000 (local)
 4 October Rs. 50,000 (local)

(iii) Rent was payable to Dir Furnishers, a local vendor.
(iv) Insurance expense includes Rs. 25,000 paid against fire and theft insurance whereas Rs. 5,000
relates to staff‟s 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 2017.
(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 2018.
(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.

34 Tender Pops Limited (TPL)

Tender Pops Limited (TPL) is registered under the Sales Tax Act, 1990. The company is engaged in
the business of manufacture and supply of consumer goods. Following information has been extracted
from TPL‟s records for the month of May 2019:
Rupees
Purchases:
Raw material from local registered suppliers 20,000,000
Local items governed under third schedule (75,000 @ Rs. 150 each) 11,250,000
Packing material from a local cottage industry 2,000,000
Supplies:
Taxable supplies to registered persons 19,000,000
Taxable supplies to un-registered persons 8,000,000
Local third schedule items to wholesalers (55,000 @ Rs. 180 each) 9,900,000
Taxable supplies against international tender for Afghan refugees. 3,000,000

(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.
(iv) Sales tax paid on electricity bill was Rs. 25,000.
(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 2019.
35 Masawi Limited (ML)
Masawi Limited (ML) is engaged in the business of production and supply of packaged fruit and
vegetable juices. ML is incorporated under the Companies Act, 2017 and is duly registered with the
Inland Revenue Department for sales tax purposes. Following data has been extracted from ML‟s
records for the month of November 2018:

Questions
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 duty free shops 1,020,000
Export to Qatar 680,000

(i) Raw materials purchased from un-registered suppliers include preservatives purchased from FJ
Limited at a discounted price of Rs. 380,000. ML received a normal discount of 5% on this
purchase.
(ii) Juices worth Rs. 100,000 were provided to the workers at the company‟s workshop free of cost.
(iii) Rs. 500,000 was paid to an advertising agency through banking channels for providing
advertising services on television in Punjab.
(iv) ML had no outstanding liability against purchases at the end of November 2018.
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 ML are not subject to federal excise duty.
Required:
Under the provisions of Sales Tax Act, 1990 and Rules made there under, calculate the amount of
sales tax payable by or refundable to ML for the tax period November 2018.
36 Omega Limited (OL)

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 2019.
Following information has been extracted from OL‟s records for the month of May 2019:
(i) Taxable purchases of Rs. 100,000 were made from an unregistered supplier.
(ii) Invoices issued by OL‟s 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) OL‟s 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 aircraft‟s 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 buyer‟s premises the
goods are still lying at OL‟s 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.
(vii) OL‟s 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 2019. 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 2019.
(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 there
under, compute the sales tax payable by or refundable to OL for filing the sales tax return for the tax
period May 2019.
37 Harfun Limited (HL)

Harfun Limited (HL) is registered as a manufacturer cum commercial importer with the Inland
Revenue Department for sales tax purposes. Besides carrying on various trading businesses across
the country, HL is primarily engaged in the business of production and supply of syrups and squashes
covered under third schedule of the Sales Tax Act, 1990. Following data has been extracted from HL‟s
records for the month of November 2018.
(i) Taxable purchases of raw material of Rs. 8,750,000 were made from registered AOP.
(ii) Packing materials of Rs. 450,000 were purchased from registered distributors.
(iii) Rs. 158,000 was paid to a local beverage company for providing mineral water at HL‟s annual
dinner arranged for the entertainment of its customers and employees.
(iv) Preservatives of Rs. 589,000 were purchased from a cottage industry.
(v) Mango and banana worth Rs. 1,500,000 were purchased from local registered person for
further processing.
(vi) 3,000 boxes of Lemon and Mango squashes were imported from Malaysia at the price of Rs.
550 per box. The value determined by custom authorities under section 25 of the Customs Act,
1969 amounted to Rs. 680 per box. The retail price however was fixed at Rs. 625 per box. HL
sold 2,800 boxes of squashes to BM Limited.

Questions
(vii) For the purpose of generating steam for one of its production processes, HL purchased fuel
wood from registered wholesalers for Rs. 1,050,000.
(viii) HL also purchased a fiscal electronic cash register and office equipments from a corporate
supplier at a price of Rs. 650,000 and Rs. 375,000 respectively. These items were purchased
on 60 days credit.
(ix) A mixing machine was acquired by HL on finance lease. The total lease rentals to be paid to
the lessor are Rs. 3,000,000. The fair value of the machine at the inception of the lease
amounted to Rs. 2,500,000. HL has the option to purchase the machine at the end of the lease
term (in three years‟ time) and the directors estimate that it is more likely that this option to
purchase will be exercised.
(x) Delivery trucks worth Rs. 2,340,000 were purchased for timely distribution of goods to
customers.
(xi) Cool day light energy saver lamps were sold to AF Engineering for Rs. 500,000.
(xii) Locally produced squashes worth Rs. 13,800,000 were sold to corporate distributors.
All the above figures are exclusive of sales tax, wherever applicable. 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 there under, compute the
amount of sales tax payable by or refundable to HL for the tax period November 2018.
38 Razi Limited (RL)

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 RL‟s records for the month of May 2019:
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

(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 2019.
(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 2019 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 2019, 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:
amount of sales tax payable by or refundable to RL for the tax period May 2019. Also compute the
amount of withholding tax, if any.
39 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 KL‟s records for November 2018.
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

Questions
(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 2018.
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 infant use put up for retail sales, specified in Sixth Schedule
(iii) Taxable supplies to registered persons include the following:
 A forward transaction on Pakistan Mercantile Exchange Limited for the supply of goods
worth Rs. 600,000 to a large trading house in Karachi.
 Supply of Confectionery, chocolates and candies worth Rs. 2,500,000 to a retail outlet in
Islamabad. These goods are designated as specified goods under Chapter XIII of the
Sales Tax Special Procedure Rules, 2007.
(iv) Taxable supplies to un-registered persons include goods worth Rs. 5,500,000 which were
supplied to various cottage industries in Multan. The rest of the goods were supplied to the end
consumers.
(v) On 25 September 2018, KL received Rs. 2,250,000 from Trading Corporation of Pakistan
(TCP) against grant of a tender for the supply of 50 metric tons of sugar. On 5 November 2018,
TCP removed 30 metric tons of sugar from KL‟s premises for the purpose of export to Oman.
The remaining 20 metric tons of sugar were removed on 20 November2018 and were supplied
to wholesalers in the local market.
(vi) KL delivered fertilizers, covered under Third Schedule, to Small Bank Limited under a
Murabaha financing arrangement at a price of Rs. 1,584,000. The amount was receivable in
equal monthly instalments over a period of one year. The retail price of the fertilizer in the
market at the time of delivery was Rs. 1,320,000.
(vii) KL supplied 400 kg of a special brand of tea, covered under Third Schedule, to FM Enterprises
at a wholesale price of Rs. 500 per kg. In October 2018 KL had purchased 600 kg of this
particular brand of tea from a local registered supplier, ST Limited (STL), at a price of Rs. 450
per kg. This tea is sold in the market at a retail price of Rs. 700 per kg. STL declared this brand
in their return for November 2018.
(viii) All the above products, unless otherwise specified, are NOT covered under Third Schedule of
the Sales Tax Act, 1990.
All the above figures are exclusive of excise duty and sales tax, wherever applicable. Sales tax
is payable at the rate of 17% whereas excise duty, if any, is payable at the rate of 8%.
Required:
In the light of the provisions of the Sales Tax Act, 1990, Federal Excise Act, 2005 and Rules made
there under, compute the amount of sales tax payable by or refundable to KL for filing the sales tax-
cum-federal excise return for the tax period November 2018. Also compute the amount of withholding
tax, if any.
40 Pasdar Limited
Pasdar Limited (PL) is engaged in the business of production, import and trading of variety of
products and is registered with the Inland Revenue Department for sales tax purposes.
Following information has been extracted from PL‟s records for the month of May 2019:

Rupees
Purchases:
Raw material:
from local registered suppliers 5,560,000
from cottage industries 1,500,000
Import – finished goods 5,000,000
Supplies:
taxable supplies to registered persons 6,000,000
taxable supplies to un-registered persons 1,760,000
(i) Raw material purchased from local registered suppliers includes packing material worth Rs.
850,000 purchased for textile products.
(ii) The imports include tyres of Rs. 800,000 which were used in PL‟s delivery vans. Tyres are
designated as specified goods under Chapter XIII of the Sales Tax Special Procedure Rules,
2007.
(iii) Annexure C of the sales tax return for March 2019 shows that a sales tax invoice of Rs. 480,000
had not been claimed by the buyer. Upon scrutiny it was disclosed that goods were actually sold
to an un-registered person however due to inadvertence the invoice was entered in the name of
a registered person.
(iv) On 15 May 2019, PL received an invoice of Rs. 3,000,000 from Najib Brothers (NB), a
specialized workshop for industrial machinery in Islamabad. NB provided overhauling services to
PL and charged sales tax at the rate of 5% under the Islamabad Capital Territory (Tax on
Services) Ordinance, 2001.
(v) On 20 May 2019, PL acquired the ownership of a taxable activity of Glaze Enterprises (GE), as
an ongoing concern for Rs. 10,500,000. GE issued a sales tax invoice in the name of PL and
received the entire amount of sale proceeds from PL.
(vi) PL paid Sindh Sales Tax of Rs. 50,000, Punjab Sales Tax of Rs. 65,000 and Federal Excise
Duty of Rs. 45,000 in respect of franchise fees to a non-resident franchisor.
(vii) Taxable supplies to registered persons include the following:
 Supply of Electric Irons worth Rs. 500,000 to a distributor in Hyderabad. Electric Irons are
designated as specified goods under Chapter XIII of the Sales Tax Special Procedure
Rules, 2007. The Irons were purchased from a commercial importer in March 2019.
 Supply of goods worth Rs. 2,700,000 to the Local Government. PL had imported these
goods from China in April 2019 at Rs. 2,200,000 and had paid 3% value addition tax at the
time of import.
 Rest of the goods were supplied to various dealers in Sindh and Punjab.
(viii) Taxable supplies to un-registered persons include second hand worn clothing of Rs. 200,000
which was supplied to a retail outlet in Okara. Second hand worn clothing falls under PCT
heading 6309.0000 and is covered under Serial No. 3 TableII of SRO 1125(I)/2011 and
accordingly chargeable to sales tax at the rate of 5%.
(ix) On 25 May 2019, one of PL‟s finished goods warehouse was destroyed by fire and all the goods
stored were burnt to ashes. The goods were insured and PL received Rs. 2,750,000 from the
insurance company in settlement of its claim. PL had claimed input tax of Rs. 325,000 on these
goods in the April 2019 return.

Questions
(x) PL distributed gift vouchers worth Rs. 450,000 among its customers. The vouchers were to be
redeemed at any time between July to September 2018.
(xi) As part of a settlement deal with AB Bank Limited, PL agreed to set off its hypothecated stock of
Rs. 750,000 against an overdue loan of Rs. 950,000. The open market price of the goods was
estimated at Rs. 1,100,000.
(xii) PL received a notice from the Deputy Commissioner of Inland Revenue demanding sales tax on
promotional give-aways worth Rs. 235,000 which were distributed in March 2019. The tax
department however accepted PL‟s contention that the non-payment of sales tax was due to
misconstruction on part of the company.
(xiii) PL‟s Wholesale-cum-Retail Outlet received Rs. 2,350,000 in cash against supply of lubricants to
a registered person. The lubricants were purchased from a manufacturer in April 2019 who had
charged sales tax and extra tax on such supplies.
(xiv) All the above figures are exclusive of sales tax, wherever applicable. Sales tax is payable at the
rate of 17%.
Required:
In the light of the provisions of the Sales Tax Act, 1990, Federal Excise Act, 2005 and Rules made
there under, compute the amount of sales tax payable by or refundable to PL for the tax period May
2019. Also compute withholding tax, wherever applicable.
41 Quick Fox Limited

Quick Fox Limited (QFL) is a multinational company and is registered as a manufacturer,
importer, wholesaler and retailer with the Regional Tax Office of Inland Revenue Department in
Karachi. Following information has been extracted from QFL‟s records for the month of
November 2018:
Rupees
Purchases from registered suppliers 3,900,000
Purchases from un-registered suppliers 1,058,000
Advance from customers 117,000
Imports 852,000
Other income 215,000
(i) Purchases from registered suppliers include the following:
 lubricating oil worth Rs. 380,000 purchased from an oil marketing company for in-house
consumption. Lubricating oil is designated as specified goods under Chapter XIII of the
Sales Tax Special Procedure Rules, 2007.
 raw material of Rs. 390,000 and Rs. 225,000 purchased from SL on 6 November 2018 and
20 November 2018 respectively. On 15 November 2018 the Commissioner suspended
SL‟s registration for claiming fraudulent refunds.

 goods covered under Third Schedule, worth Rs. 285,000 purchased from Nayab
Associates (NA). QFL, upon instructions from NA, directly deposited cash amounting to Rs.
285,000 into its bank account.
(ii) Purchases from un-registered suppliers consist of the following:
 packing material of Rs. 358,000 which was purchased from a supplier who was liable to be
registered with sales tax authorities.
 edible fruits, covered under Sixth Schedule, of Rs. 700,000.
(iii) Taxable supplies to registered persons include the following:
 goods worth Rs. 435,000 supplied to a manufacturer for onward sale to an exporter holding
concessions under DTRE scheme.
 tyres worth Rs. 660,000. These tyres were purchased from a local manufacturer, which
was a cottage industry, in October 2018. The tyres are designated as specified goods
under Chapter XIII of the Sales Tax Special Procedure Rules, 2007.
(iv) Taxable supplies to un-registered persons consist of the following:
 sale of 150 bicycles, covered under Fifth Schedule, to un-registered dealers in Multan for
Rs. 900,000. The bicycles were purchased in August 2018.
 sale of goods worth Rs. 310,000 to end consumers.
(v) Imports comprise of air conditioners worth Rs. 852,000. These were imported by QFL‟s
wholesale-cum-retail division for sale through its own outlets. Air conditioners are designated as
specified goods under Chapter XIII of the Sales Tax Special Procedure Rules, 2007.
(vi) Other income includes gain on disposal of a truck of Rs. 105,000. The truck was sold to an
active tax payer for Rs. 1,205,000. No sales tax was recorded on this transaction.
(i) In August 2018, QFL‟s car rental division imported wheel alignment machine for in-house use.
3% value addition tax of Rs. 18,000 was not paid at import stage.
(ii) In July 2018 QFL sold certain taxable goods worth Rs. 535,000 to an un-registered wholesaler
at a wholesale price of Rs. 50 per pack and collected further tax at the rate of 2% of the value of
supplies. In November 2018, the internal auditor pointed out that these goods were covered
under Third Schedule. The retail price of these goods at the time of sale was Rs. 65 per pack.
(iii) In May 2018 QFL inadvertently collected sales tax of Rs. 45,000 from a customer as against the
applicable tax of Rs. 54,015. QFL had applied to the Commissioner IR for the revision of the
return however, no reply has so far been received in this regard.
All the above figures are exclusive of sales tax, except where it is implied otherwise.
Sales tax is payable at the rate of 17%.
Required:
amount of sales tax payable by or refundable to QFL and input tax to be carried forward, if any, for the
tax period November 2018. Also compute withholding tax, wherever applicable.
Note: Show all relevant exemptions, exclusions and disallowances. Ignore default surcharge.

Questions
CHAPTER 04 – CAPITAL GAIN
42 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 shares Rate No. of shares Rate
31-03-2018 1,400 20 - -
15-09-2018 700 22 - -
01-04-2019 900 18 - -
01-05-2019 - - 600 17
07-05-2019 - - 800 19
21-05-2019 - - 700 18
31-05-2019 500 23 400 25
31-05-2019 - - 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.
43 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 2018 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 2019 at Rs. 40 per share and
deposited them into CDC account. On the same date i.e. 1 January 2019, PL declared 25%
bonus shares with 1 April 2019 as the date of entitlement. On 31 March 2019, the market value
of these shares was Rs. 50 each. On 15 April 2019 Bari disposed of 50 shares in PL at Rs. 40
each. The bonus shares were credited to Bari‟s account on 15 May 2019. He sold the remaining
shares including bonus shares on 18 May 2019 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.

CHAPTER 05 – OTHER AREAS - INCOME TAX

44 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 2019 on account of royalty.
45 Foreign Source Income - Returning expatriate

In the light of the provisions of Income Tax Ordinance, 2001, briefly explain the taxability of income in
the following situation.
Mr. Bari, a Pakistani national, was working as a clearing agent in Taiwan for the past six years. He
came back to Pakistan in July 2017and joined a clearing house of his brother Ikram. In March 2019 he
received Rs. 1.0 million as his share of commission from the discontinued business in Taiwan.
46 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.
47 Employee Share Scheme

Mr. Hayat, chief engineer in Mega Limited, had received 6000 shares of the company in July 2016,
under an employee share scheme. Mr. Hayat had the option to transfer the shares in tax year 2018 or
thereafter. The market value of shares at the time of issue was Rs. 12 per share. In 2018 the share
attained a market value of Rs. 20; however, Mr. Hayat sold the shares in May 2019 when the share
price was Rs. 35 per share.
Required:
(i) With reference to above, briefly explain the relevant provisions of the Income Tax Ordinance,
2001 relating to employee share scheme.
(ii) Compute the amount to be included in the taxable income of Mr. Hayat for each tax year.
48 Bad debts, Recovery of bad debts

(a) In the light of the provisions of Income Tax Ordinance, 2001, describe the conditions which
need to be satisfied before a person can claim deduction for a bad debt.
(b) Barn Limited (BL) wrote off a debt amounting to Rs. 500,000 in June 2016. 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 2016. In tax year 2019, 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

Questions
49 Herbal Trading (HT) - Disposal of business

Herbal Trading (HT) is a sole proprietorship business owned by Mr. Adnan. The business is engaged
in the manufacturing and supply of Herbal Medicines for the past many years. On May 01, 2019, Mr.
Adnan decided to transfer his proprietary business, including all the assets and liabilities, to a private
limited company Medicare (Pvt.) Limited (MPL). Following is an extract from the balance sheet of HT
immediately before the disposal of business to MPL.
Balance Sheet as at April 30, 2019
Capital and Liabilities Rupees Assets Rupees

Owner‟s Capital 9,000,000 Fixed Assets (WDV) 5,400,000
Accumulated Profit 1,500,000 Patents (WDV) 2,000,000
10,500,000 Stock in Trade 4,600,000
Short Term Loan 500,000 Debtors 3,000,000
Trade Creditors 7,000,000 Cash and Bank Balances 3,000,000
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, 2019 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, 2019 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 HT‟s patents and
fixed assets as at April 30, 2019:
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) MPL‟s cost of acquisition of assets.
(iii) Mr. Adnan‟s cost in respect of the shares received by him as consideration.
50 Withdrawal of approval to Non-Profit/foundations (IT Rules)

The income of an approved non-profit organization, subject to certain conditions, is exempt from tax
under the provisions of Income Tax Ordinance, 2001. Rahat Foundation, an approved NGO, operating
in GilgitBaltistan has recently received a notice from the Commissioner of Income Tax, requiring it to
justify as to why its approval should not be withdrawn under the relevant provisions of the Income Tax
Rules, 2002.
Required:
Advise the management of Rahat Foundation about the circumstances under which the Commissioner
of Income Tax may withdraw the approval granted to the Foundation.
51 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, 2019 under the given
circumstances.
(i) Mr.Mubeen came to Pakistan for the first time on a special assignment from his company on
April 01, 2018 and left the country on September 30, 2018.
(ii) Mr.Rana, who had never travelled abroad in his life, got a job in Canada. He went to Canada on
December 29, 2018 to assume his responsibilities as a CFO. In June, 2019 his company sent
him to India on a training workshop. On June 30, 2019on 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, 2018 to June 30, 2019.
(iv) Mr. Francis, a sugar dealer in Brazil, came to Pakistan on July 31, 2018. 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, 2019. Assume that the Commissioner has granted him permission to use calendar
year as a special tax year.
52 Beetle Limited (BL)

Beetle Limited (BL), an industrial undertaking, is engaged in the manufacture and supply of pesticides.
The company manufactures its products from the raw material imported from Malaysia. BL also
imports certain pesticides from Dubai, which are supplied to the local distributors without any further
processing.
After scrutiny of the tax return filed by BL for the tax year 2019, the Commissioner has issued a notice
under section 122(5A) in which he has raised the following issues:
(i) Tax collected on the import of certain plant and machinery installed at BL‟s factory has been
claimed as an adjustment in the return. The Commissioner is of the view that such tax should
instead be treated as a final tax.

Questions
(ii) While computing the taxable income, BL has not apportioned the “Cost of goods manufactured”
between its income from sale of manufactured products and income from sale of commercial
imports. The Commissioner wants such costs to be apportioned between the two revenue
streams.
(iii) The audited financial statements show a gain of Rs. 50 million on the disposal of an immovable
property comprising office in a commercial building. This property was purchased by the
company for Rs. 90 million and was sold for Rs. 120 million. Its tax written down value at the
time of disposal was Rs. 70 million. The gain has not been offered to tax by BL. The
Commissioner wants to add the amount of Rs. 50 million to the company‟s taxable income.
(iv) The financial statements also disclose an outstanding liability on account of royalty of Rs. 250
million. This amount payable to BL Dubai Plc. is outstanding for the last four years, pending
approval from the State Bank of Pakistan. The expense was claimed by BL in the tax year 2015.
The Commissioner wants to add back the amount to the taxable income of BL.
(v) Bad debts written off during the year include an amount of Rs. 10 million which was provided to
a distributor as a loan who has now been declared insolvent. The Commissioner wants to add
this amount to the taxable income of BL.
Required:
Under the provisions of Income Tax Ordinance, 2001 explain, giving reasons, as to whether or not the
Commissioner‟s contention with regard to each of the above situation is valid.
53 Skilled (Pvt.) Limited - Taxability of Joints Venture

Skilled (Pvt.) Limited (SPL) wants to form a joint venture with Expert Consultants (Pvt.) Limited
(ECPL) for providing disaster management services to corporate clients.
Required:
Under the provisions of Income Tax Ordinance2001, advise the CEO of the two companies about the
tax treatment of the following:
(i) Income / loss derived by the joint venture; and
(ii) Share of venturer‟s profit / loss from such venture.
54 Short term resident

Who may be regarded as short-term resident individual under the Income Tax Ordinance, 2001?
Discuss the provisions relating to the taxability of foreign source income of such individuals.
55 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.
56 Tax avoidance scheme

In the light of the provisions of Income Tax Ordinance, 2001 explain the term “Tax avoidance
scheme”. Under what circumstances the Commissioner may exercise his powers to re-characterize or
disregard a transaction?

57 Compulsory taxation under FTR

A foreign company, for the purpose of executing construction contracts, intends to establish a branch
office in Pakistan.
Required:
Under the provisions of Income Tax Ordinance, 2001 advise the company on the following:
(i) Circumstances under which taxes withheld from the payments made to a non-resident person
would be construed as final tax under the presumptive tax regime.
(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
58 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 2018. Also state whether a person can again be selected for
audit in tax year 2019 if nothing was found during its audit in the tax year 2018.
59 Khalq Limited (KL) - Government grant

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 2018. 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, 2019. 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 2019. Discuss
the tax treatment under the provisions of Income Tax Ordinance, 2001.
60 Moon Limited (ML) - Foreign payments

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 2019 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 2019 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.
61 Mr.Pansari - Dividend from exempt income

Mr.Pansari, a resident taxpayer, is operating a departmental store in Lahore. He received a dividend
of Rs. 45,000 from Rasila Farms Limited (RFL) for the year ended 31 March 2019. The amount
received was credited to his capital account. Mr.Pansari is of the view that since RFL derives its entire
income from agriculture, which is exempt from tax, the dividend of Rs. 45,000 being paid from an
exempt income is also not chargeable to tax.Discuss the tax treatment under the provisions of Income
Tax Ordinance, 2001.

Questions
62 Gadget Limited (GL) - Payment to non-resident

Gadget Limited (GL) is a public company engaged in the manufacture and sale of electrical
appliances. During tax year 2019, 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. GL‟s 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.
63 Opting out of PTR

Under the provisions of Income Tax Ordinance, 2001:
Identify the persons and the conditions subject to which such persons paying taxes under
Presumptive Tax Regime may opt for Normal Tax Regime.
64 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 of Persons
 A shareholder in a company and the company
65 Tax evasion and avoidance

State the meaning of the terms “Tax evasion” and “Tax avoidance” giving example of the situation
when each can occur.
66 Derivative Product, wash sales, tax swap sales

Under the provisions of Income Tax Rules, 2002 briefly describe the following:
(i) Derivative Products
(ii) Wash Sales
(iii) Tax Swap Sales
67 Methods for cost of stock in trade

Under the provisions of Income Tax Ordinance, 2001 briefly describe the method(s) under which a
person accounting for income under the head “Income from Business” may compute the cost of stock-
in-trade.
68 Salary of foreign government employee

In the light of the provisions of Income Tax Ordinance, 2001 narrate the circumstances under which
salary received by an employee of a foreign government shall be exempt from tax.

69 Exceptions to Pakistan source Royalty & FTS

Explain the following in relation to Income Tax Ordinance, 2001:
(i) Exceptions to the rule that „a tax shall be imposed at a specified rate on every non-resident
person who receives any Pakistan source royalty or fee for technical services‟.
(ii) The term „prescribed person‟ with reference to deduction of tax from rent of immovable
property.
(iii) Significance of the circulars issued by the Board.
70 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.
71 Tax admissible vs tax reliefs

Briefly explain the difference between tax admissible expenses and tax reliefs as provided in the
Income Tax Ordinance, 2001.
72 Resale price method

For the purpose of computing income of a person from a transaction with an associate, certain steps
are applied by the Commissioner in determining the arm‟s length result. Briefly describe those steps
under the „resale price method‟ as provided in the Income Tax Rules, 2002.
73 Group Taxation and Pre commencement Expenditure

Under the provisions of Income Tax Ordinance, 2001 briefly explain the following:
(i) Group taxation
(ii) Pre-commencement expenditure
74 Sweet Limited (SL) - Advance Tax and default penalty

Sweet Limited (SL) is an unlisted public company engaged in the business of manufacture and sale of
sugar. SL‟s income year ends on 30 September each year. In tax year 2019, following taxes were
deducted/paid by SL:
Rupees
Advance tax paid under section 147 20,500,000
Paid on import of machinery 2,250,000
Deducted by banks on profit on debt 250,000
SL filed its return of income for the tax year 2019 on the due date for filing of return with a gross tax
liability of Rs. 32,500,000.
Required:
In view of the provisions of the Income Tax Ordinance, 2001 explain whether the advance tax paid
quarterly by SL under section 147 could result in any further tax liability to the company, if yes,
compute the amount of such additional tax liability.

Questions
75 Depreciable Asset, Eligible Depreciable Asset

Under the provisions of the Income Tax Ordinance, 2001 briefly discuss the following:
“Depreciable asset” and “Eligible depreciable asset”.
76 Speculation Business
In tax year 2019,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.
Required:
How the above said Loss may be adjusted in accordance with the provisions of Income Tax
Ordinance, 2001.
77 Disposal of business by AOP to wholly owned company

Mirza Trading Enterprise (MTE) is a resident AOP engaged in the business of manufacturing and
supply of office furniture. On 31 May 2019, all the partners in MTE decided to form a limited liability
company in the name and style of Taqdeer (Pvt.) Limited (TPL) and dispose of all the assets of the
business to TPL.
Required:
Being a tax consultant of MTE, advise the partners about the conditions which must be satisfied in
order to avoid any gain or loss arising on disposal of MTE‟s business to TPL under the provisions of
the Income Tax Ordinance, 2001.
78 Mr.Hoshyar - Penalty
Mr. Hoshyar, a non-salaried individual, filed his return of income for tax year 2019 on 27 November
2019 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.
79 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 andwithin what time it is
required to be issued.
80 Rejection of reward to whistle-blower

Under the provisions of the Income Tax Ordinance, 2001 state the following:
Conditions in which a claim for reward by the „Whistle-blower‟ may be rejected.

81 Imputable Income, PMEX

Under the provisions of the Income Tax Ordinance, 2001 state the meaning of:
(i) Imputable income.
(ii) Pakistan Mercantile Exchange
82 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?
83 Pakiza Limited
(a) Pakiza Limited (PL), an unlisted public company, was engaged in the business of producing
dairy products in Punjab. On 1 January 20X7, PL established a new factory in Badin where
the Federal Government has allowed one-year tax exemption to all new businesses. PL
imported plant and machinery for its new factory at a cost of Rs. 8,200,000 from Japan. PL
received a Provincial grant of Rs. 1,000,000 for installing the machinery in Badin whereas
the actual expenditure on installation amounted to Rs. 700,000. Transportation cost of Rs.
200,000 was paid for bringing the machinery to the factory. During installation, one of the
parts was damaged which had to be replaced at a cost of Rs. 45,000. PL also paid a
premium of Rs. 50,000 for insuring the machinery against fire and theft. A cost of Rs.
5,000,000 was incurred towards construction of building and Rs. 1,200,000 for the
acquisition of furniture and fittings. The factory was completed by the end of June 20X7 and
commercial production started on 1 July 20X7.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute tax depreciation which PL may
claim as deduction in computing its taxable income for the year ended 30 June 20X9.
Note: Depreciation rates are given on the last page.
(b) Under the provisions of the Income Tax Ordinance, 2001 who may be appointed by the
Federal Government as a judicial and accountant member of the Appellate Tribunal?
(c) Under the provisions of the Income Tax Rules, 2002 what would be considered as the date
of acquisition in each of the following cases?
(i) Acquisition of a security on account of a nomination under section 80 of the Companies
Act, 2017 under bequest.
(ii) Borrowed security.
84 National Finance Commission

(a) Under the provisions of Article 160 of the Constitution of Pakistan, briefly describe how
National Finance Commission is constituted and who may be the member(s) of such
Commission.
(b) It is the duty of the National Finance Commission to make recommendations to the
President with regard to matters relating to finance. List any three such recommendations.

Questions
85 Pledge Call Transaction

(a) What do you understand by „Pledge call transaction‟? Briefly describe the tax treatment of a
pledge call transaction under the Income Tax Rules, 2002.
(b) In determining the income of a person from a transaction with an associate the
Commissioner shall apply arm‟s length standard. Under the provisions of the Income Tax
Rules, 2002 list the methods which the Commissioner may apply for the purposes of
determining an arm‟s length result.
86 Non-Revenue Objectives
„Apart from financing government‟s operational expenditures, taxation also assists in achieving non-
revenue objectives of social and economic development in a country.‟ List any five non-revenue
objectives of taxation.

CHAPTER 06 – OTHER AREAS -SALES TAX
87 Mr.Furqan - Returns, De-registration

Mr.Furqan intended to commence a manufacturing business and obtained the sales tax registration in
November 2018. Due to unavoidable circumstances, he could not start his business as stipulated. No
sales tax returns were filed since he did not carry on any taxable activity. In April 2019, he received a
notice from the department of Inland Revenue directing him to furnish the return by May 15, 2019.
Required:
Advise Mr.Furqan as regards the following:
(i) Whether he is required to file the sales tax return and the consequences, if any, for non-filing of
such return under the Sales Tax Act, 1990.
(ii) Various reasons on account of which he may be liable for de-registration from sales tax. Also
state briefly, the procedure for de-registration as enumerated under the Sales Tax Rules, 2006.
88 Withholding agents
a. List the persons specified as “Withholding agents” for the purpose of collection of sales tax under
the Sales Tax Special Procedure (Withholding) Rules, 2007.
b. Under the provisions of the Sales Tax Withholding Rules, 2007 state the persons who may be
regarded as withholding agents.
89 Qualification / Disqualification of Representative

Hip Hop (Private) Ltd (HHPL), a registered tax payer, has received a notice from the department of
Inland Revenue requiring it to show cause in respect of discrepancies in the monthly sales tax return.
The management wants to appoint a representative to persuade their case before the adjudicating
authority. Under the provisions of Sales Tax Rules, 2006 advise the management about the
qualification and disqualifications of the person to act as the authorized representative of HHPL.
90 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.
91 Stock acquired before registration

Ms.Hina started her business on January 12, 2019 at a Kiosk, located at Karachi Airport. She sells an
exclusive blend of coffee imported from Kenya and packed dates purchased from a company in
Khairpur. Ms.Hina though not registered with Inland Revenue Department, paid sales tax on all
taxable purchases.

Questions
In order to increase the efficiency and profit margin of her business, she decided to get herself
registered with the sales tax authorities enabling her to reclaim the input tax on her purchases. She
made an application for voluntary registration under the Sales Tax Act, 1990 on April 25, 2019 and
was registered with effect from May 2, 2019. Following was the position of her unsold stock of coffee
and dates at April 25, 2019:
S. No. Description Date of purchase Sales Tax paid (Rs.)

(i) 25 kg of coffee imported January 15, 2019 23,750
(ii) 125 packets of dates purchased February 2, 2019 12,325
(iii) 42 kg of coffee imported February 25, 2019 39,900
(iv) 458 packets of dates purchased March 28, 2019 41,325
Required:
In the light of the provisions of Sales Tax Act, 1990.
(a) Explain whether and under what circumstances Ms. Hina could reclaim the amount of tax paid
on the unsold stock acquired before registration.
(b) Calculate the amount of input tax, if any, which she can reclaim with her sales tax return for the
month of May 2019.
92 Inadmissible input tax

Under the provisions of Sales Tax Act, 1990 and Rules made there under, certain restrictions have
been placed on the adjustment of input tax. Explain those provisions in respect of each of the
following situations.
(i) X Limited is registered with Inland Revenue Department. It purchased copper wires for Rs. 24
million on credit, for the manufacture of electric fans. The payment was made after 210 days of
the issuance of tax invoice by way of a crossed pay order drawn on the business bank account
of the company.
(ii) Mr. Baba is working with Y Limited as director procurement. He paid Rs. 698,456 on behalf of
the company for the purchase of lubricants using his own credit card.
(iii) Z Limited acquired new machinery for its manufacturing department at a price of Rs. 150
million. Sales tax paid at the time of purchase amounted to Rs. 25.5 million.
(iv) Mr. Haq is registered as a wholesaler under the Sales Tax Act, 1990. He paid sales tax of Rs.
88,750 including extra tax of Rs. 3,750 on the purchase of certain specified electric appliances
from a manufacturer in Lahore.
93 Recovery of tax arrears

Describe the powers of an officer of Inland Revenue with regard to the recovery of arrears of tax as
enumerated under the Sales Tax Act, 1990.
94 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.

95 E-intermediary appointment, responsibilities, cancellation

Mr.Abid is a recently qualified chartered accountant. He wants to establish a sales tax practice and
intends to become an e-intermediary for the purpose of electronically filing the returns and other
prescribed documents on behalf of his clients. Under the provisions of Sales Tax Rules, 2006 advise
Mr.Abid on the following:
Required:
(a) Procedure for appointment as e-intermediary
(b) Responsibilities of an e-intermediary
(c) Cancellation of appointment as an e-intermediary
96 Representatives and personal liability

Who may be regarded as the representative of the following under the provisions of Sales Tax Act,
1990?
(i) Individual with legal disability
(ii) Association of persons
(iii) Federal Government
Also identify the circumstances when such representative becomes personally liable for the payment
of any tax due by the above registered persons.
97 Service of notice to non-resident

In view of the provisions of Sales Tax Act, 1990 when does a notice served by the commissioner on a
non-resident individual is treated as properly served?
98 Registration
Under the provisions of Sales Tax Act, 1990 and Rules made there under, 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 2019 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 isRs.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.
99 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 AL‟s customers, who had
bought 50 kg of a special blend of tea on 4 December 2018. Finance manager issued the credit note
on 5 June 2019.
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 2019.

Questions
100 Time of supply, CREST, supply chain

Describe the following with reference to the Sales Tax Act, 1990:
(i) Time of supply (ii) CREST (iii) Supply chain
101 Scope of special audit (ST-Rules)

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.
102 Joint and several liability

Describe the following concepts as envisaged under the Sales Tax Act, 1990:
(i) Joint and several liability of registered persons in supply chain
(ii) Change in the rate of tax
103 Property not liable to attachment

Under the provisions of Sales Tax Rules, 2006, on receipt of the demand note from the referring
authority, a recovery officer shall serve upon the defaulter a notice attaching his moveable and
immovable property.
List any five particulars which are not liable to attachment and sale in execution of such notice.
104 Continuance of Proceeding (death)

After providing a reasonable opportunity of showing cause and of being heard,Mr.Khayanatwas
declared a defaulter by the Officer Inland Revenue under the Sales Tax Act, 1990. However, at the
time of issuance of a demand note to the Recovery Officer, Mr.Khayanat died.
Required:
In view of the Sales Tax Rules, 2006 explain the status of the proceedings againstMr.Khayanat under
the above circumstances and provisions relating to the payment of the dues as stated in the demand
note.
105 Appointment of committee - disputes

Under the provisions of the Sales Tax Act, 1990 identify the disputes in relation to which a registered
person may apply to the Board for the appointment of a committee for the resolution of a dispute
which is under litigation in any Court or an Appellate authority. Explain the composition of such
committee and state the time frame within which such committee may be constituted by the Board.
106 Similar supply – open market price, special returns

Explain the following under the provisions of the Sales Tax Act, 1990:
(i) Similar supply in relation to the open market price of goods
(ii) Special returns

107 Black Listing and suspension of registration

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.
108 Registration of Retailers-I

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.
109 Registration of Retailers-II

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
inabove question.
110 Non- active taxpayer

Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, whomay be regarded as
a „Non-active taxpayer‟? State the consequences which aregistered person may face on removal of his
name from the list of active taxpayers.
111 Temporary registration

Explain the circumstances in which a temporary registration may be allowed to a person under the
Sales Tax Rules, 2006.
112 Provincial Sales Tax

(a) Under the provisions of any of the Provincial Sales Tax on Services Acts, briefly describe the
meaning of „Taxable Service‟.
(b) Under the provisions of any one of the Provincial Sales Tax on Services Acts, describe the
application of the principle of origin and reverse charge.
(c) Under the provisions of any of the Provincial Sales Tax on Services Acts, describe:
(i) the activity(ies) which have specifically been excluded from the ambit of „Economic
activity‟.
(ii) the term „Person‟.
113 Mr. Munaf - Refund

On 15 September 2018 Mr. Munaf, a registered supplier, filed an application to the Inland Revenue
Department for the refund of Rs. 75,000 on account of zero rated local supplies. However, Munaf was
required to pay a penalty of Rs. 15,000 to the income tax department at KIBOR (the rate of KIBOR is
10%).
Under the provisions of the Sales Tax Act, 1990 compute the amount of refund in the above
circumstances. (Assuming that the date of refund is 1 December 2018)

Questions
114 Fill in the blanks

In the light of the provisions of the Sales Tax Act, 1990 and Rules made there under, fill in the
following blanks with the appropriate answers:
(i) With regard to refund of input tax, where there is reason to believe that a person has
claimed input tax credit or refund which was not admissible to him, the proceedings
against him shall be completed within ___________. For the purpose of enquiry or audit
or investigation regarding admissibility of the refund claim, the above period may be
extended up to ___________ by an officer not below the rank of ___________ and the
___________ may, for reasons to be recorded in writing, extend the aforesaid period
which shall in no case exceed ___________.
(ii) In case of transfer of ownership of a taxable activity to a non-registered person, the
possession of taxable goods by the registered person shall be deemed to be
___________. If the tax payable by such registered person remains unpaid, the amount
of unpaid tax shall be ______________ of the business and shall be payable by the
_____________ of the business.
(iii) Jami, a registered exporter, purchased taxable goods worth Rs. 500,000 from Asif
Enterprises (AE), an un-registered supplier who is liable to be registered under Chapter I
of the Sales Tax Rules, 2006. Jami shall deduct sales tax of Rs. ____________ from the
payment due to AE under the Sales Tax Special Procedure (Withholding) Rules, 2007.
115 Tier-1 Retailers

What do you understand by the term „Tier-1 retailers‟? State the provisions relating to payment of
sales tax by such retailers under the Sales Tax Act, 1990.
116 Conditions Under Sales Tax Rules, 2006

Under the provisions of the Sales Tax Rules, 2006 briefly describe the following:
(a) Persons not entitled to represent a taxpayer before the Appellate Tribunal.
(b) The circumstances in which the Board may cancel the registration of the user authorized to
use the computerized system.

CHAPTER 07 – OTHER AREAS FEDERAL EXCISE ACT.

In the light of the provisions of Federal Excise Act, 2005, fill in the following blanks with the
appropriate answers.
(i) Every person who for any reason whatever has collected any duty in excess of the duty
actually payable and the incidence of which has been passed on to the consumer, shall pay
the amount so collected to ____________ .
(ii) ____________ means Azad Jammu and Kashmir, Northern Areas and such other territories or
areas to which the Federal Excise Act does not apply.
(iii) ____________ includes an undertaking, firm or company, whether incorporated or not, an
association of persons and an individual.
(iv) ____________ means a person appointed by a manufacturer in or for a specified area to
purchase goods from him for sale to a wholesale dealer in that area.
118 Applicable value and rate of duty, supply

Explain the following with reference to the provisions of Federal Excise Act, 2005.
(i) Applicable value and rate of duty
(ii) Supply
119 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.
120 Non-fund banking services, franchiser

Explain the following under the provisions of Federal Excise Act/Rules, 2005.
(i) Non-fund banking services
(ii) Franchiser
121 Excess duty collected

Explain the provisions of Federal Excise Act, 2005 with regard to the following:
(a) Excess duty collected from the customer.
(b) Duty on services provided free of charge.
122 Person liable to pay FED

Explain the following in the light of the provisions of Federal Excise Act, 2005.
The persons who are liable to pay Federal Excise Duty.

Questions
123 Alternative Source

The alternative sources on which duty may be levied and collected by the Board, in lieu of levying and
collecting duties on goods and services.
124 Duty drawback

The circumstances under which duty drawback may be allowed to a taxpayer. Also state the relevant
authority who may grant such drawback.
125 Discontinued business enterprise, transfer of ownership

Briefly describe the provisions of Federal Excise Act, 2005 with respect to the liability for payment of
excise duty in case of following:
(i) Discontinued business enterprise.
(ii) Transfer of ownership of a business to another person as an ongoing concern
126 Due date and duty due

Under the provisions of Federal Excise Act, 2005 and Rules made thereunder, explain:
(i) “Due date” and “Duty due”
(ii) “Establishment” and “Person”
(iii) How and under what circumstances a collector may suspend a person‟s registration.
127 Default surcharge, KIBOR

(i) Under the provisions of Federal Excise Act, 2005 describe the circumstances under which a
person is liable to pay default surcharge. What would be the period of default under the above
circumstances?
128 Conveyance, distributor, recovery of duty, particular of service invoice

Under the provisions of Federal Excise Act, 2005 explain the following:
(i) Conveyance
(ii) Distributor
(iii) Mode of recovery of duty in case of short payment
(iv) Particulars to be stated on the invoice issued at the time of providing services
129 Cottage industry

Explain the circumstances under which a cottage industry is required to be registered under the
Federal Excise Act, 2005. Also state the condition under which the provisions of Sales Tax Act, 1990
would not be applicable to such cottage industry.

130 Construed manufacturer, sales tax mode

Under the provisions of Federal Excise Act, 2005 describe the following:
(i) The person(s) who are construed to be included in the word „Manufacturer‟.
(ii) The concept of „Sales tax mode‟.
131 Closure of business

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.
132 Franchise and Franchiser

Under the provisions of the Federal Excise Act, 2005 define and explain Franchise and Franchiser
133 Withdrawal of registration suspension order

How and under what circumstances a collector may withdraw the order for suspension of a person‟s
registration.
134 Consequences of wrong registration

The consequences of wrong registration due to inadvertence or misconstruction.
135 Determination of value for duty

Explain the provisions of Federal Excise Act, 2005 with regard to the determinationof the value and
chargeability of excise duty on the basis of retail price of goods.
136 Circumstances and Procedure of De-registration

Under the provisions of the Federal Excise Rules, 2005 explain the circumstances in which a person,
who is also registered for sales tax purposes, may be de-registered.
Also, briefly state the procedure of de-registration.
137 Cancellation of Registration

Describe the provisions of the Federal Excise Rules, 2005 related to cancellation of registration of a
person who is not registered for sales tax purposes and has ceased to provide or render excisable
services.
138 Exemptions from Levy of duty

Identify and state the authority who may and the circumstances under which any goods or class of
goods or any services or class of services may be exempted from the levy of whole or any part of the
excise duty under the Federal Excise Act, 2005.

Questions
139 Sales tax mode

Under the provisions of the Federal Excise Act, 2005 briefly describe the concept of „Sales tax
mode‟. Also describe the relevant provision which specifies the type of goods and services on which
excise duty is liable to be charged in sales tax mode. (Note: List of goods and services and the
manner of payment is not required.)
140 Adjustment of excise Duty

Under the provisions of the Federal Excise Act, 2005 and Rules made thereunder, explain
Circumstances under which adjustment of excise duty on input goods may be admissible for
determining net liability of duty in respect of any goods manufactured


SECTION
Advanced Taxation
Answers
CHAPTER 01 – INDIVIDUAL
1 Mr. and Mrs.Adil
BURQ ENTERPRISES
Personal status: Association of Persons
Residential status: Resident
Tax Year: 2019
Computation of taxable income and tax liability
Imports Consultancy
(MT) Services
Rupees in ‘000’
Net Sales of generators (574,200 / 1.17) 490,769 -
Receipt from consultancy services - 55,000
Cost of sales (W-1) (345,870) -
Gross profit 144,899 55,000
Administrative and selling expenses (allocated on (W-2)
the basis of sales ratio) (70,859) ( 7,941)
Finance cost-Specific to imports (W-3) (7,800) 0
Other Income(allocated on the basis ofsales ratio) (W-4) 450 50
Net Income 66,690 47,109
Scheme of taxation NTR
Tax liability (W-5) 29,872 5,500

Less: Tax deducted at source (20,650) (5,500)
Net tax payable 9,222 0

W-1: Cost of sales Rs. in ‘000’

Cost of sales of generators 429,520
Less: Inadmissible expenses
Sales tax paid at import stage (63,000)
Withholding tax paid on commercial imports (413.0 m x 5%) ( 20,650)
345,870
W-2: Administrative and selling expenses

As per profit and loss account 96,300
Withholding tax suffered on receipts from consultancy @ 10% (5,500)
Salaries paid to Mr. and Mrs. Adil (500,000 x 2 x 12) (12,000)
78,800
W-3:Finance cost
As per profit and loss account 9,000
Interest paid on capital to Mrs. Adil (allowed separately to AoP in ratio of (1,200)
sales)
7,800
W-4: Other Income

Application of Business Asset to personal use is treated as disposal. BURQ ENTERPRISE will
have to calculate gain as:
Fair market value of the equipment at the time of disposal 1,500
Less: WDV of the equipment at the time of disposal (1,000)
Gain on disposal of asset 500
W-5: Tax deductible on services is treated as Minimum Tax. Hence BURQ Rupees
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:
UptoRs. 6,000,000 880,000
Balance (113,799,000-6,000,000) x 30% 32,339,700
33,219,700
Higher of minimum tax on commercial imports Or Tax under NTR

Minimum tax on commercial imports = 5% of commercial imports 20,650
OR
Proportionate tax on commercial imports in the sales ratio
Tax under NTR / Total turnover x Commercial imports sales
33,220 / 545,769 x 490,769 = 29,872
Higher of minimum tax on income from Services Or Tax under NTR

Answers
Minimum tax on income from services 10% of Rs.55,000 5,500

OR
Proportionate tax on Services rendered in the sales ratio
Tax under NTR / Total turnover x Services turnover
33,220 / 545,769 x 55,000 = 3,348
MR. ADIL
Personal status: Individual
Tax Year: 2019
Income year ending: June 30, 2019
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 [Separate Block of Income]
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 adjusted only 120,000
against capital gain 15,100,675
There is no tax liability under normal tax regime as there is no income other than AOP share.
and gross rent is Less than Rs.200,000 and treated as separate block of income
W-6: Partner Divisible income Rupees

Mr. Adil Mrs. Adil Total
Salary Paid and return on capital (Mrs. Adil) 6,000,000 7,200,000 13,200,000
Balance Taxable Income (47,109,000 – 13,200,000) 16,954,500 16,954,500 33,909,000
Less: Proportionate tax (7,853,825) (7,853,825) (15,707,650)
15,100,675 16,300,675 31,401,350
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.Divisible profits will be taken after tax profit of AOP.

W-7: Loss on sale of bonus shares

Cost of original shares (50,000 x Rs. 150 each) 7,500,000
Total number of original shares 50,000

Bonus issue in the ratio of 1:5 10,000
Total number of shares(Including bonus shares) 60,000
Cost per share (7,500,000+ 1,500,000)/60,000 150

Number of bonus shares sold (10,000 x 80%) 8,000
Consideration received for bonus shares (Rs.135 x 8,000) 1,080,000

Cost of bonus shares sold (8,000 x Rs.150) 1,200,000
Loss on disposal of shares (120,000)
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

Computation of Taxable income and Tax thereon
Tax Year 2019
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 945
(45% of basic salary or fair market rent 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 [N-1]
Unapproved gratuity 1,925
(2.0 million – 75K exempt under clause 13 of Part I of Second Schedule) [Note]
Car purchased (1.5 million – 1.0 million) [Sec. 13(11)] 500
Total Salary Income (A) 6,570

Answers
Rs. in ‘000
Income from property
Rent from Mr. Riaz for the Shop – March to June (137,500 × 4) 550
Non-adjustable security deposit (500,000 x 1/10) [Sec. 16(1)] 50
Refundable security deposit – not taxable (Rs. 600,000) -
Rent from bank for the residential portion –April to June 2019(100,000 × 3) 300
Income from Property as separate Block of Income (SBI) 900
Capital Gain
Sale of share of a listed company (SBI) 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)
7,070
Less: Donation paid to an un-approved trust (inadmissible deduction) -
Taxable income 7,070
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 7,070
Less: Capital gain (Separate Block Income) (500)
Salary Income (excluding redundancy payment) (A) 6,570
(a) Tax on Rs. 6,570 [Rs. 300+ 15%x (6,570-4,800)] 565.5
(b) On redundancy payment at the average rate of tax (4,000 x 14%) 560
(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)
(c) On capital gain 500 x 7.5% (holding between 2-4 years) 37.5
(d) On rent chargeable to tax 900 [Rs. 20 + 10% x (900 - 600)] 50
Total tax liability 1,213
Less: Tax deducted at source from:
Salary income (1,837)
Property income (197.5)
Balance tax refundable (821.5)

3 Mr. Yaqeen

Computation of income tax liabilityFor the tax year 2019
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
th
Less: 1/4 of gain is exempt due to sale after one year (44)
Net gain on disposal of painting 132
Sale of shares in ABL under NTR (W-2) 50
182
Taxable income for the year 11,922
Computation of net tax liability:

Tax on taxable income [@ 15% on 7,122 +300] 1,368.3
15% on dividend in specie (20,000 x 25 x 15%) U/s 236S 75
2,973.60
W-1 Gain on disposal of painting:

Loss of a capital asset is treated as a disposal of an asset and the date on which it is lost is considered
as its date of disposal. The insurance claim received by Mr. Yaqeen, is assumed to be equal to the fair
market value on the date of disposal and is taken as the consideration received.

Answers
The gain is calculated as follows: Rs. ‘000

Consideration received 600
Less: Cost of acquisition:
Purchase price (350)
Insurance premium (24)
Lawyers‘ fees (50)
(424)
176
W-2 Gain on sale of shares in ABL:

Any dividend in specie derived in the form of shares in a company is taxable as dividend income due to
nd
omission of clause (103B) Part I of 2 Schedule from Tax year 2014 & onwards.
Calculation of dividend income and tax thereon in Tax year 2018 Rs. ‘000’
Dividend income (20,000 x 25) 500
Tax @ 15% U/s 236S 75
Computation of capital gain in Tax year 2019:
Consideration received 425
Less: Cost of the dividend in specie [500/20*15] (375)
Capital gain 50
Explanation about items not included in the computation of taxable income:
(i) An option to purchase shares under an employee scheme granted to an employee is not
chargeable to tax unless such a right or option is exercised. [Section 14]
(ii) The perquisites received by an employee in the form of free or subsidised medical treatment
provided by a hospital or clinic is exempt from tax. For the purpose of calculating the
perquisites, an ex-employee is included in the definition of employee. [Clause 53A of Part I of
nd
2 Schedule]
(iii) Any foreign source income, in a tax year, of a citizen of Pakistan who was not a resident in any
of the four tax years preceding the tax year in which he became a resident shall be exempt
from tax in the tax year in which he became resident and in the following tax year. Therefore,
salary arrears received by Mr. Yaqeen from his ex-employer in Norway is exempt from tax in
the tax year 2019. [Section 51]
(iv) Rental income from agricultural land received by an owner of such land is treated as
agricultural income and is exempt from tax. Therefore, the amount of Rs. 600,000 received by
Mr. Yaqeen is an exempt income. [Section 41]
(v) Subject to certain conditions and limitations, a loan utilized for the construction of a new house
or the acquisition of a house is entitled to be deducted from total income (deductible
allowance). However, the loan obtained by Mr. Yaqeen was for the purpose of renovation of his
existing residential house, therefore, it is not eligible for deductible allowance. [Section 60C]

4 Mr. Sohail
Personal Status: Individual

Residential Status: Resident
Computation of taxable income
For the tax year 2019
Income from property: [SBI] Rupees
Rent received from Mr. Baqir for 9 months (1,200,000 x 9 /12) 900,000
Less: Amount for the services of two guards for 9 months (15,000 x 9) (135,000)
Rent chargeable to tax (RCT) 765,000

Income from other sources:
Received against the provision of services of two security guards (15,000 x 9) 135,000
Less: Admissible deductions
Salary paid to each guard @ Rs. 4,000 per month for 9 months (72,000)
Taxable income from other sources 63,000
5 Mr. Iqbal

Computation of income tax liability
Income from Salary: Rupees
Basic Salary (300,000 × 12) 3,600,000
Cost of living allowance (50,000 × 12) 600,000
Milk allowance (10,000 × 12) 120,000
Special bonus 300,000
Perquisite representing car W-1 60,164
Benefit on purchase of car ( 600,000 – 250,000) 350,000
Reimbursement of driver‘s salary to Mr. Iqbal (Section 13(5)) 36,000
Perquisite representing accommodation W-2 1,620,000
Share option scheme - acquisition ($2.5-$1.5 × Rs. 100 × 4,000) (Section
14(2)) 400,000
Shares issued as a reward – (Section 14(3)) Note-2 -
Total income under the head salary 7,086,164 A
Income from property: [SBI] No deduction allowed for Individual

Rent received 800,000

Answers
Capital Gain: Rupees

Sale of 3,000 shares in Tameer Inc. (3,000 × $3 × Rs. 100) 900,000
Less: Cost of acquisition of shares ( $1.0 + $1.5 × Rs. 100 × 3,000) (750,000)
Net gain on disposal of shares (covered u/s 37 & not u/s 37A as the company
is not a public company) 150,000 B
Income from business:

Brokerage fee received 200,000
Less: Expenses:
Telephone and travelling (30,000)
Service fees to brother (voluntary payment-gift) (10,000)
160,000 C

Compensation against delayed tax refund 25,000
25,000 D
Total income (A+ B + C+ D ) 7,421,164

Less: Zakat paid (25,000)
Taxable income 7,396,164

Tax on Rs. 4,800,000 300,000
Tax @ 15% on the amount exceeding Rs. 4,800,000 (7,396,164– 4,800,000) 389,424
Total gross tax payable under NTR 689,424
Less: Tax credit

 Investment in life insurance [500,000 × 689,424 ÷ 7,396,164] (Note-3 u/s
62) (46,607)
 Contribution to an approved pension fund [900,000 ×689,424 ÷
7,396,164] lower of u/s 63: Rs. 1,600,000 actual or Rs.1,479,200 (20%
of taxable income) or Rs. 1,500,000 , 30% of preceding year total (83,8
taxable income Rs. 900,000 (Rs. 3,000,000 x 30%) [N-4] 92)
(130,499)
Net tax payable under NTR 558,925
Add: tax payable under FTR (Bank profit 150,000 x 10%) 15,000
Tax payable under FTR of Rs. 800,000 - Income from property
20,000 + 10% (Rs.800,000 - 600,000) 40,000
Total tax payable 613,925
Less: Taxes withheld at source
 from salary (1,200,000)
 by bank (15,000)
Net tax refundable (601,075)

Note:
(1) As the earlier car was provided to Mr. Iqbal for business use, no personal benefit was derived
by him; hence, no amount is taxable as a perquisite.
(2) Where the issuance of shares is subject to a restriction on the sale or transfer of the allotted
shares, no amount is chargeable to tax to the employee until the earlier of:
 The time the restriction is removed; or
 The time the employee actually disposes of the shares.
Since neither of these events occurred before 30 June 2019 no amount is taxable as salary of
Mr. Iqbal for the tax year 2019.
(3) According to Section 62(1) of the Income Tax Ordinance, 2001 a resident person who has
invested in new shares or sukuksoffered to the public by a listed company and has also paid
life insurance premium on a policy to the life insurance company shall be entitled for a tax
credit, only on any one type of investment. Since the amount paid by Mr. Iqbal in respect of life
insurance premium is more than the amount invested by him in right shares, he would be
entitled for a tax credit on insurance premium paid in life insurance policy on the lower:
a) Rs. 500,000
b) 20% of Rs. 7,396,000 or
c) Rs. 2,000,000
(4) It is assumed that he joined the above pension fund before the age of 40.
W-1 Perquisite representing car:
The perquisite shall be computed as below:
FMV of the car 1,800,000
10% of the FMV (1,800,000 × 10%) 180,000
Restricted to the number of days it was used in the tax year (122÷365)
[No. of months can also be used] 60,164
W-2 Perquisite representing accommodation:
Annual basic salary 3,600,000
Value of perquisite 45% of the basic salary (3,600,000 × 45%)

FMR is assumed to be the amount that would have been paid in NO
accommodation case. 1,620,000
Annual FMR (85,000 x 12) 1,020,000
Since 45% of the basic salary is higher than FMR, hence the same shall be added in the salary income
of the employee.

Answers
6 Mr.Saif
Basic Salary (600,000×12) 7,200,000
Guaranteed bonus (relates to tax year 2020) -
Air ticket reimbursed 120,000
Perquisite representing carW-1 75,000
(Rs. 100,000 spent by RPL on maintenance is exempt in the hands of Mr.
Saif)
Perquisite representing accommodationW-2 3,240,000
Old stock purchased from RPL (Rs. 14,000 – Rs. 5,000) 9,000
Total income under the head salary 10,644,000
Income from property:
Rent of plot of land (25,000 × 10) 250,000
Amount not adjustable against the rent -
(Nothing is to be included in the chargeable income as this provision of law is attracted where the
owner of building and not land receives such amount and No deductions are allowed to individual as
well.)
Capital Gain:
Consideration received on sale of 1,200 shares in Mio Ltd.(1,200 × Rs. 50) 60,000
Less: Cost of acquisition 1,200 x 35 (42,000)
Incidental expenses (0.5% × 60,000) (300)
Net gain on disposal of securities 17,700
Since more than 50% of the shares in Mio Limited are held by China Government, the company is
treated as a public company for capital gain purposes and treated as separate block of income.
Income from business:
Admission fee received (75 × 25,000) 1,875,000
Membership fee received {(20 × 11 + 25 × 6 + 30 × 4) x Rs. 5,000} 2,450,000
Less: Admissible expenses:
Salaries paid:  Mr. Saif(inadmissible being the owner of the club) -
 Son (45,000 × 11) (495,000)
Fines (inadmissible) -
Cost of repair of electrical wiring (85,000)
Depreciation:  Fitness W-3 machines (996,875)
 Fire W-3 screen (72,500)
Other misc. expenses (120,000)
2,555,625


Rent received from letting out the first floor of the bungalow (75,000 × 6) 450,000
Less: Premium paid ( Rs. 50,000 – Rs. 25,000) (25,000)
LCD T.V (70,000 * 25%) (17,500)
LCD T.V (52,500 * 15%) (7,875)
399,625
Total income 13,616,950

Less: Separate block income - capital gain (17,700)
Less: Donation of plot to Pakistan Sports Board (lower of Actual or 30% of
nd
taxable income) 2 Schedule Clause 61 (500,000)

Tax on Rs. 4,800,000 300,000
Tax @ 15% on the amount exceeding Rs. 4,800,000 (i.e. on8,299,250) 1,244,887
Tax payable under NTR 1,544,887

Add: Tax payable under separate block of income (15% ×17,700) 2,655
Tax payable on income from property under separate block of income
5% × (Rs. 250,000 – 200,000) 2,500
Total gross tax payable 1,550,042

Less: Taxes withheld at source
 from salary (2,100,000 + 13,000 deducted on his salary by his own

business) (2,113,000)
 on air tickets (10,000)
 on import stage (150,000)
Net tax refundable (722,958)

Notes
Items not included in computation:
(a) Bonus in July 2019: Salary is taxable on receipt basis hence it will be taxed in Tax year 2019.
(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 2019 will not be allowed as income from other
source as it is taxable on receipt basis.
(d) LCD TV: Only depreciation @ 15% is allowed. Whereas, initial allowance is disallowed in
computing income under the head income from other sources except in case of lease of building
together with plant and machinery.
N-1
nd
Donation to Pakistan Sports Board: In case of donation to institution mentioned in 2 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 ―income from property‖ cannot be adjusted against income under other
heads as the same is now fully covered under separate block of income.

Answers
W-1 Perquisite representing car:

FMV of the car at the commencement of lease term 1,500,000
5% of the FMV (1,500,000 × 5%) 75,000
W-2 Perquisite representing accommodation:
Annual basic salary 7,200,000
Value of perquisite 45% of the basic salary (7,200,000 × 45%) 3,240,000
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. It is assumed that FMR is the amount that would have been paid in case NO
accommodation is provided by employer.
W-3 Depreciation:
Fire Fitness
Screen 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- 2019 127,500 1,753,125
Total depreciation (Initial + Normal) 72,500 996,875
7 Mr.Pansari
Computation of Taxable Income and Income Tax Liability
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 under NTR Rupees

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
Total taxable income 12,186,000
Notes:
(1) In the absence of information, it has been assumed that conveyance allowance has not been for
the discharge of official performance, therefore the conveyance allowance shall be included in the
taxable salary income of the employee.
(2) Current market value of company owned car is not relevant for the computation of conveyance for
business and private use. [Rule 5 of Income Tax Rules, 2002]
(3) Any perquisite or benefits for which the employer does not have to bear any marginal cost, as
notified by the Board are exempted from employees‘ income. As the Board has not notified any
SRO in this connection, hence the given benefit is fully taxable in the hands of the employee as
the same is not within the ambit of clause (53A) of Part-I of 2nd Schedule to the Income Tax
Ordinance, 2001.
(4) Any pension received by citizen of Pakistan from an ex-employer other than where the person
continues to work for the employer is exempted from person‘s income under clause 8 of Part-I of
the 2nd Schedule to the Income Tax Ordinance, 2001.
(5) Director meeting fee received is covered in the definition of salary under section 12 (1)(a) read with
section 2(22) of the Income Tax Ordinance, 2001. Further the salary income is taxable on receipt
basis.
(6) As the royalty is not within the provisions of the section 89, the same will be taxable entirely in the
year received under income from other sources.
(7) It is assumed that brought forward loss on sales of Ghareeb (Pvt.) Ltd shares is adjusted within the
following six tax years. [Section 59]
8 MH Associates
Masood
Computation of Income Tax Liability
For tax Year 2019
Income from Business: Rupees
Share of profit from AOP for rate purpose only (Net profit before tax – exempt income 2,472,300
– tax liability for the year ) x 60%
Hence(6,000,000 – 800,000 – 1,079,500 )× 60%)
Capital gains:
Foreign source income:
Gain on sale of shares of Lucky Inc.(W-1) 1,428,750
Other source income:

Royalty from book Note 2,300,000
Rent of fork lifter – FTR 150,000
Less: Repair expenses -
2,450,000

Answers
Total income (including share of profit from AOP) 4,351,050

Less: Rental income – FTR (150,000)
Income taxable at normal rates (including share from AOP) 4,201,050
Less: Zakat paid to approved NGO (not paid under Zakat and Ushr Ord.) -
Less: Share of profit from AOP (2,472,300)
Taxable income – NTR 1,728,750
Computation of rate of tax:

On Rs. 4,201,050 [Rs. 60,000 + 10% (Rs. 4,201,050 – 2,400,000)] 240,105
Average rate of tax (240,105 / 4,201,050) 5.72%

Tax liability
On industrial plant rental income – Rs.150,000 × 10% 15,000
On balance income – Rs.1,728,750 x 5.72% 98,885
Tax credit shall be allowed for the lower of foreign tax liability in respect of sale of
shares or Pakistan tax in respect of foreign source income, calculated by applying the
“average rate of Pakistan income tax” to the net foreign source income for the year.
Foreign tax credit (1,500 × 90) 135,000
Pakistan tax on foreign source income (1,428,750 × 5.72%) 81,725
The lower of the above two shall be allowed as tax credit (81,725)
Less: Tax credit on payment of Zakat (donation)–not allowed paid in cash 0
Less: Tax paid at source u/s 236Q (12,000)
Excess tax paid by MHA (1,100,000 – 1,079,500)- inadmissible -
Net tax payable for the year 20,160
Note:
Since the time taken by Masood to complete the book was less than 24 months, the entire amount of
royalty will be taxable in the current year.
W-1: Computation of Capital gain on disposal of shares:
Consideration for shares (2,500 × 32 × 90) 7,200,000
Less: Cost of the shares (2,500 × 2100) (5,250,000)
Commission paid to broker (0.2 × 2,500 × 90) (45,000)
Gain on disposal of shares 1,905,000
Exempt amount – 25% of the gain u/s 37 (476,250)
Taxable gain 1,428,750

CHAPTER 02 – ASSOCIATION OF PERSONS AND COMPANY TAXATION
9 Big Pharma
Personal Status: Company
For the tax year 2019 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 equipment charged off 1,400
Unrealized exchange loss 1,350
Interest on foreign debt [u/s 152(3) no approval from CIR 1,300
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 forward for 700
adjustment against foreign source income of the following
tax year, if any.)
11,500
28,650
Tax depreciation (assumed inclusive of office 6,000
equipment given in question)
Bad debts written off (W–1) 300
(6,300)
Less: brought forward tax loss (assumed it is only business (6,100)
loss without any unabsorbed depreciation loss)
WWF (W–2) (350)
Net taxable income 15,900

Answers
Tax @ 29% 4,611

Higher of [MTL u/s 113 or 29% on taxable income or 17%
of accounting profit) 1,200 or 4,611 Or (Rs. 17,150 x 17%)=
2,915.50
WWF 350
4,961
Less: Tax credit/deduction at source:
Foreign Tax Credit: Lower of: (225)
Taxes paid in Qatar & Tax payable on Pakistan Rate
(since 2,700 x 29%=783 therefore paid is lower)
Minimum tax (C/F from prior years) (450)
Deducted and paid by distributors (2,450)
Paid on import of raw material (2,000)
Unadjusted foreign tax credit (allowed for same year -
only)
(5,125)
Net Tax (refundable) (164)
Rs. in ‘000
W-1: Computation of bad debts written off:
Opening balance of provision for bad debt account 2,500
Add: provision during the year 1,100
3,600
Less: Closing balance of provision for bad debt A/c (3,100)
Debts written off during the year 500
Less: Loan to Oman branch written off[W1(a)] 200
Bad debt written off allowed for tax purpose 300
W-1a Since the loan to Oman branch had not been offered to tax as business income previously,
the same could not be claimed as admissible deduction even if it was written off.
W-2 WWF
WWF is payable @ 2% of accounting profit before charging WWF or taxable income
whichever is higher.
Rs. in 000
Accounting profit (Rs. 17,150 + 350) 17,500
2% of accounting profit i.e. Rs. 350,000 is higher than 2% of taxable income i.e. 325,000.

10 Rainbow Limited (RL) - Foreign Controller / thin capitalization

(a) Foreign controller:
Foreign controller means a non-resident person who holds 50% or more of the underlying
ownership in a resident company (Foreign-controlled resident company) either alone or together
with an associate or associates.
The direct and indirect holding of the three lenders are calculated below:
Direct holding of BP = 60% i.e. more than 50%
Indirect holding of BP (through ATX) = 10%
Direct holding of ATX = 10%
Indirect holding of ATX (through BP) = 60%
Total holding of ATX along with associate = 70% i.e. more than 50%
Indirect holding of FRS – 90% x 30% = 27% i.e. less than 50%
Therefore BP and ATX would be classified as foreign controller whereas FRS Limited is not a
foreign controller in relation to thin capitalization rules.
(b) Aggregate outstanding balance of loans received by RL from foreign controllers as at June
30,2019:
Amount
in million
Received from:
BP $ 4.2
ATX Gmbh $ 3.8
$ 8.0
@ Rs. 85 ($ 8.0 million x 85) Rs. 680.0
Rs.
Total equity at the beginning of the year: in million
Net assets as at June 30, 2019 (2,900 – 2,670) 230
Less: After tax profit for the year (150)
80
Add: Interim dividend paid during the year 100
Equity at the beginning of the year 180
Foreign debt from BP

$ 4.2 million x 85 (on 30.06.2019) 357
Foreign debt from ATX
$ 3.8 million x 85 (on 30.06.2019) 323
680
Rs. in million

Answers
Calculation of foreign equity share:

Effective share of BP and ATX in the equity of RL (0.7 x 180 million) 126
Maximum allowable debt for BP and ATX is 126 × 3 million = 378
Interest relating to the above amount would be allowed as deductible profit.
Computation of allowable profit on debt
Profit on debt paid/accrued for BP (10-08-2018 to 14-05-2019)
Total interest expenses (357 million × 12% ×278/366) 32,539,672
Profit on debt paid/accrued for BP and ATX

(15-05-2019 to 30-06-2019):
BP part of loan: 357/680 X 378 million x 47/366 x 12% 3,058,082
Profit on debt paid/accrued for BP and ATX Gmbh

(15-05-2019 to 30-06-2019):
ATX part of loan: 323/680 X 378 million x 47/ 366 x 8% 1,844,557
Profit on debt paid/accrued for FRS in tax year 2019:

85,000,000 x 10% x 290/366 (fully deductible) 6,734,973
44,177,284
Therefore total profit on debt allowable for tax purposes under the provisions of Income Tax
Ordinance, 2001 is Rs. 44,157,660.
Note:It is assumed that interest income of foreign controllers is not taxable at normal corporate
tax rates.
11 Mateen and Vaqas

Personal Status: AOP
Advice
A to Mateen and Vaqas
Computation of tax impact on different structures
(i) Partnership Rupees

Add: Inadmissible expenses:
Salaries:
Mateen 1,100,000
Vaqas 970,000
Accounting depreciation 975,000
4,140,000
Tax depreciation (1,462,500)

Computation of tax payable by partnership: Rupees

Total taxable income 2,677,500
Tax on Rs. 2,677,500 [160,000 + 15% (2,677,500 - 2,400,000] 201,625
(A)
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)
Taxable income as per (i) above 2,677,500
Less: Salaries:
Mateen (1,100,000)
Vaqas (970,000)
Adjusted taxable income 607,500
Tax @ 29% 176,175
Profit after tax 431,325
Calculation of Dividend:
Less: Tax (as calculated above) (176,175)
Dividend on Rs. 918,825 @ 60% (551,295)
Profit retained after dividend 367,530
Total tax payable by the business:

On company profits [Higher of 1.25% of turnover, Alternate corporate 176,175
tax or NTR]
Tax payable on dividend:
Mateen (551,295 x 60% =330,777x15%) 49,617
Vaqas (551,295x 40% = 220,518x15%) 33,078
Total tax payable in case of a company (B) 262,870
(iii) Small Company

Taxable income as per (i) above 2,677,500
Less: Salaries:
Mateen (1,100,000)
Vaqas (970,000)
Adjusted taxable income 607,500
Tax @ 24% (1,095,000 x 17% OR 24% of 607,500) ( 186,150)

Answers
Calculation of Dividend:
Less: Tax (as calculated above) (186,150)
Dividend on Rs. 908,850 @ 60% (545,310)
Profit retained after dividend 363,540
Total tax payable by the business:
On company profits (1.25% of sales or ACT 1,095,000 x 17%) 186,150
Tax payable on dividend:
Mateen (545,310 x 60% =327,186 x 15%) 49,078
Vaqas (545,310 x 40% =218,124 x 15%) 32,719
Total tax payable in case of a company (C) 271,947
Based on the above information it would be better for Mateen and Vaqas to operate as an AOP
category, if possible, being lowest tax impact (Rs.201,625).
12 Mega Limited (ML)

(a) MEGA LIMITED
Rs. in ‘000
Income from Business:
Add/(Less): Inadmissible expenses/ (income):
Accounting depreciation on new plant and machinery 5,200
Penalty paid to custom authorities 500
Industrial software 4,800
Electricity expenses paid in cash -
Donation paid to a university 13,000
Profit received from UAE Govt. against consultancy services (27,000)
Royalty received from Singapore (50,000)
Foreign tax paid on royalty 10,000
(43,500)
109,000

Rs. in ‘000
Initial allowance on new plant and machinery [25% x 52 million] ( 13,000)
Normal depreciation on new plant and machinery ( 5,850)
[15% x (52 – 13) million]
Tax amortization of industrial software(4.8/3x3/12) (400)
Actual No. of days may also be used [4.8/3*91/365]
( 19,250)
Taxable income for the period 89,750
Less: B/f tax loss of Rs. 31.3 million
-
[Inadmissible as it relates to a period beyond six years]
Unabsorbed tax depreciation (11,000)
Unabsorbed amortization of pre-commencement expenditure (7,700)
Tax on Rs. 71.050 million @ 29% or higher of 1.25% of 1,100,000 or
17% of [Rs. 152,500 (less exempt & covered under FTR) – 50,000 – 20,604
27,000]
Less: Tax credit
on donation Rs. 13 million or 20% of taxable income
whichever is lower [71.050 million x 20% = 14.210 million] (3,900)
x 30% x 13,000
for investment in plant and machinery @ 10% (5,200)
Foreign tax paid on royalty received from Singapore [since the royalty
income is exempt from tax, no credit would be allowed] [U/C 131 Part-I of -
Second Schedule]
Higher of A & B 11,504 (A)
Alternative Corporate Tax:
Accounting Income 152,500
Less: Exempt + Royalty (50,000 + 27,000) (77,000)
Services outside Pakistan (not excluded in section 113C) 75,500
17% of 75,500 12,835
Tax credit for investment in plant and machinery @ 10% of (5,200)
52 million
7,635(B)
Add: Tax payable on services rendered outside Pakistan [@ 4% (being 3,600
nd
50% of 8% (U/C 3 of Part-II of 2 Schedule) of gross receipt of Rs. 90
million]
Total tax payable 15,104

Answers
Less: Tax deduction at source:

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 and paid by banks on profit on debt (250)
(6,865)
Net tax liability 8,239
Note:
 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.
 Nothing would be deducted from payments to non-resident against import of plant and machinery
on the presumption that the company has obtained exemption certificate from the concerned
Commissioner Inland Revenue. [S-152(7)]
(b) Incidence of further tax liability: [S-147& 205]
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 2019. Therefore, ML is exposed to
the levy of default surcharge under section 205(1B).
13 Rose Petal Limited - Construction

Taxable income:
Tax Year Rupees
2017 (2,250,000 x 46%) 1,035,000

2018 (2,250,000 x 39%) 877,500
2019 (2,250,000 x 15%) 337,500

Working:
Taxable Income (estimated profit) x (percentage of contract completed) Rupees
Estimated Profit (Total contract price – Total costs) (9,000,000 – 6,750,000) 2,250,000
Contract costs incurred

Percentage of contract completed =
Total contract costs
Tax Year
3,105,000
2017 46%
6,750,000
2,632,500
2018 39%
6,750,000
1,012,500
2019 15%
6,750,000
Note:
1. 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]
2. 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]
3.
In this question as the total revenue and total cost of project has remained the same in all the
tax years of the project so percentage of completion in each tax year has been used. If the
total revenue and costs will not remain the same after the end of first tax year then after the
first year instead of applying each year stage of completion percentage the stage of
completion percentage till the end of all tax years shall be computed and applied on total
revenue and total costs and finally all the already recognized revenue and costs in the
preceding tax years shall be deducted in order to compute revenue and cost for each tax
year.
14 Saturn Limited - Foreign Branches / Tax Credit

Computation of taxable income and income tax liability
Amount in Rupees
Pakistan source income Foreign source income Total
Local Export
Korea China
(NTR) (FTR)
Profit before taxation 4,000,000 3,500,000 800,000 1,000,000 9,300,000
Add/(Less):Inadmissible
expenses / (income):
Profit on debt
[Note-(i)] 1,000,000 - - (1,000,000) -

Answers
Amount in Rupees
Pakistan source income Foreign source income Total
Local Export
Korea China
(NTR) (FTR)
Excess provision written
back admissible as
straight deduction
[Note-(ii)] (100,000) - - - (100,000)
Taxable income for the -
period 4,900,000 800,000 - 5,700,000
Less: Donation
(PM Fund)
[Note-(iii)] (600,000) (600,000)
Taxable income 4,300,000 800,000 - 5,100,000
Tax rate 1% of the
29% export 29% 29%
proceeds
Tax liability 1,247,000 70,000 232,000 - 1,549,000
Less: Foreign tax credit (232,000) (232,000)
(lesser of foreign tax paid
or Pakistan tax payable
on such income)
[Note-(iv)]
- - - 1,317,000
Less: Taxes paid during
the year (1,600,000) (70,000) - - (1,670,000)
Net tax payable /
(refundable) (353,000) - - - (353,000)
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 Minister‘s Relief Fund is exempt from tax and is allowed as a direct
nd
deduction from taxable income. [Clause 61 of Part I of 2 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. 240,000 and NIL
respectively, the tax credit allowed would be restricted to Rs. 240,000 and NIL.Further, the
excess amount of Rs. 10,000 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]
(v) It is assumed that SL has opted for FTR for Exports u/s 154, and further assumed that sales of
Rs.7.0 million is equal to export proceeds subject to tax deduction @ 1%.

15 Sun Limited (SL) - Group Relief


SL VL ML
Income from Business: Rupees in ‘000
Profit / (loss) before taxation 3,700 (1,400) 1300
Add: / (Less): Inadmissible expenses/(income)
Accounting depreciation for the year 760 660 100
Scientific research incurred in Belgium 1,000 - -
Employee loan written off - 80 -
Sales promotion expenses - 600 -
Capital (gain) / loss on sale of shares - 500 (400)
Gain on sale of machinery – non recognition rule

[U/S79] (100) - -
Profit on debt assessable separately (150) - (300)
Total business income / (loss) before tax 5,210 440 700
Less: B/f assessed business loss (200) (500) (50)
5,010 (60) 650
Less: Tax depreciation W-1 (1,140) (990) (679)
Amortization of sales promotion expenses (600,000/3) - (200) -
Unabsorbed tax depreciation (250) (500) (100)
Total business income / loss for the year(A) 3,620 (1,750) ( 129)
Capital Gain:
Gain on sale of shares in private company - - 400

th
Less: 1/4 of gain is exempt due to sale after one
year - - (100)
Less: B/f capital loss - - (200)
(B) - - 100
Income from Other Sources:
Profit on debt assessable separately (C) 150 - 300
Total income for the year

(A) + (B) + (C) 3,770 (1,750) 271
Total taxable income before availing group relief 3,770 (1,750) 271

Answers
Less: Group Relief Scheme:
B/f assessed business loss not to be surrendered - 500 -
Loss surrendered by VL in favour of SL (1,250) 1,250 -
Taxable income for the year 2,520 0 271
Business loss carried forward to next tax year Nil (500) Nil
Unabsorbed depreciation carried forward to next tax

year Nil Nil Nil
Capital loss carried forward to next tax year

(250,000+500,000) (750) (750) Nil
Tax regime NTR NTR NTR
Tax on taxable income [@29% or 1.25% of turnover

whichever is higher or 17% ACT on accounting profit
before tax] [N-1] 730.8 60 221
Advance tax paid u/s 147,148 and 153 (789) (275) (30)
Motor vehicle tax paid under u/s 234 (adjustable) - - (40)
Net tax payable / (refundable) (58.2) (215) 151
N-1
1.25% MTL U/S 113 212.50 75 43.75
17% ACTU/S 113C 629 - 221
29% NTR 730.8 - 78.3
Notes:
N-1: Since normal liability under transport business is more than 2% minimum tax u/s 153 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
SL 645 495 1,140
VL 660 330 990
ML 544 135 679

Opening Addition / Depreciation

Assets Total Rate
WDV (Deletion) for the year
Plant & machinery SL 4,500 (200) 4,300 15% 645
Plant & machinery VL 4,200 200 4,400 15% 660
Delivery truck ML
ML
Addition 1,500
Initial allowance @ 25% 375
Depreciation @ 15% 169 544
Good transport vehicle plying for hire is eligible depreciable asset, hence initial allowance @ 25% to
be calculated.
16 Pills (Pvt) Limited

Tax year 2019
(Rupees in ‘000)
Basis of Allocation Exports Local Total
Sales as per profit and loss account [20:80] 7,830 31,320 39,150
Add: Foreign withholding tax deducted 1,170 - 1,170
Less: Sales tax @ 17% [31,320 × 17/117] - (4,551) (4,551)
Sales (adjusted for tax purposes) 9,000 26,769 35,769
Sales ratio 25% 75% 100%
Cost of sales (common expense
Sales 6,425 19,275 25,700
Accounting depreciation (360) (1,080) (1,440)
Add: Admissible expenses
Tax depreciation:Leased Machinery [640x15%] 24 72 96
Professional books [IA+Dep] 73 217 290
All other assets [1,440/2,250 ×1,800] 288 864 1,152
25 73 98
Tax adjusted cost of goods sold 6,450 19,348 25,798
Gross profit 2,550 7,421 9,971
Administrative and selling expenses Actual 5,350 5,350
Professional books- Capital expenditure (800) (800)
Donation to a private hospital (Note iv) (200) (200)
Accounting depreciation (810) (810)
Total inadmissible expenses (1,810) (1,810)

Answers
(Rupees in ‘000 )
Exports Local Total
Add: Admissible expenses
Tax depreciation on other assets [810/2,250x1,800] 648 648
Tax adjusted administrative & selling expenses 4,188 4,188
Finance cost Actual 1,500 1,500
Less: Interest to non-resident in excess of 3:1 (Reason
note 1) (156) (156)
Less: Interest expenses on finance lease (Reason note 2) (180) (180)
Add: Lease rentals (Reason note 2) 500 500
Tax adjusted finance cost 1,664 1,664
Other charges Actual 2,000 2,000
Less: Shares under group scheme (1,758) (1,758)
Tax adjusted other charges 242 242
Net income 1,347 3,897
Add: Other income 900

Less: Accounting gain on sale of delivery van (5%) (130)
Add: Tax gain on sale of delivery van 85
Taxable income 2,550 2,202
Scheme of taxation FTR NTR
Rate of tax 1% 29%
Gross tax liability : Alternative Corporate Tax
Minimum tax liability 27,000 x 1.25% = 338 whichever is
higher (Note vi) 78.3 639
Add: Tax payable on deemed dividend @ 15% (Note iii)
Less: Taxes paid u/s 154 and sec. 147 (78.3) (400)
Tax payable with return - 239
Explanation of items not included in the computation:
(i) Rent payable Rs. 600,000:
Withholding tax is deducted at the time of payment of rent and not on the basis of accrual.
Since the above amount was payable on 31 December 2019, therefore it can be claimed as
admissible deduction.
(ii) Shares under group scheme provided by Capsule plc. is not an expense of PPL hence the
same will not be allowed.
(iii) Interest free loan to a shareholder Rs. 500,000:
A loan made by a private company to a shareholder to the extent of accumulated profits which,
in substance, is a distribution is treated as dividend. Company is only required to deduct
advance tax @15%. Liability of shareholder cannot be added in company liability. Hence there
shall not be any addition in liability.

(iv) Donation of Rs. 200,000: A donation is not business expenditure. However, donations to
institutions, approved by the Commissioner and FBR are eligible for tax reliefs. Since the
hospital to which donation was made is not run by the Federal or Provincial or a Local
Government, it cannot be claimed as admissible deduction and no tax credit would be allowed
against the same.
(v) Foreign withholding tax of Rs. 1,170,000: [U/S 103]
(vi) Taxes paid in Indonesia and Singapore against export sales are not eligible to be claimed in
Pakistan because tax credit for tax paid outside Pakistan is not allowed in case of FTR.
No Alternative Corporate Tax has been computed as it is on lower side as compared to tax
under NTR.
Reasons for the treatment of items in note (iii) and (vii).
1) Thin capitalization:
A foreign-controlled resident company whose foreign debt to foreign equity ratio, at any time
during a tax year, is in excess of 3:1, will not be allowed to claim as deduction the amount of
interest on that part of its foreign debt which is in excess of 3:1 ratio.
Since PPL is a foreign-controlled resident company, it cannot claim interest paid by it to its
foreign controller, Capsule plc., on that part of its foreign debt of Rs. 8,500,000 which is in
excess of 3:1 ratio.
Disallowed interest in excess of debt to equity ratio of 3:1
Rs. in ‘000
Amount of foreign debt 8,500
PPL‘s equity at the beginning of the year 4,000
Share of Capsule plc. in the equity of PPL (0.6x 4 million) 2,400
Debt allowable as per thin capitalization rule

2,400 x3 7,200
Total amount of interest expense on foreign debt (8,500 x12%) 1,020

Less: Deductible interest expense on allowable foreign debt (7,200 x12%) (864)
Amount of inadmissible interest expense 156
2) Leased Machinery:
In case of a finance lease the interest charged to the accounts of Rs. 180,000 is an
inadmissible deduction.
However, the lease rentals of Rs. 500,000 are an admissible deduction.
After the transfer of machinery to PPL at residual value of Rs. 640,000, tax depreciation would
be admissible on it.
For the purpose of calculating tax depreciation, the residual value of the machinery (and not its
market value) shall be treated as its tax written down value (WDV). As residual value is the
consideration that was paid by PPL.
The depreciation is allowed for the full year, even if the machinery is used for a single day.
The machinery would not be eligible for initial allowance as it was already in use of PPL.
Rs. in ‘000
Tax depreciation at the rate of 15% on Rs. 640,000 96

Answers
17 Maroof Limited (ML) - Construction contracts

Assuming Maroof Limited is a listed company, its income U/S 153(2)(c) would be assessed
under normal tax regime under the percentage of completion method U/S 36 as follows:
Maroof Limited (ML) – Long term Contract
Taxable income
Tax year 2018 Rupees
Estimated Profit × percentage of completion [40,000,000×55%] 22,000,000
Withholding tax credit available
Income received: February 2018 12,622,000
May 2018 15,760,000
28,382,000
Withholding tax paid (28,382,000 ×7 ÷ 93) 2,136,280
Tax year 2019 Rupees
Taxable Profit 18,000,000
Estimated Profit × percentage of completion [40,000,000×45%]
Withholding tax credit available
Income received: September 2019 35,000,000
December 2019 30,118,000
65,118,000
Withholding tax paid (65,118,000 × 7 ÷ 93) 4,901,354
Working:
Taxable income = (estimated profit) × (percentage of contract completed)
Estimated profit = (total contract price total costs)
(100,000,000  60,000,000) = 40,000,000
30 June 2018 [33,000,000 ÷ 60,000,000] 55%

30 June 2019[27,000,000 ÷ 60,000,000] 45%
(Note-1):
In case, if Maroof Limited is an unlisted/ (Pvt.) company, its income would be assessed under final tax
regime and its gross receipts would be treated as taxable income.In that‘s scenario, ML have the
option to opt out of FTR if he @7% will constitute final discharge of its tax liability. [Section 153]
(Note-2):
If the person opts to file return of total income along with accounts and documents as may be
prescribed subject to the condition that minimum tax liability under NTR shall not be less than 7% of
nd
contract receipts. [clause 56D part IV of 2 Schedule]

(Note-3):
In this question as the total revenue and total cost of project has remain the same in all the tax years
of the project so percentage of completion ineach tax year has been used. If the total revenue and
costs will not remain the same after the end of first tax year then after the first year instead of applying
each year stage of completion percentage the stage of completion percentage till the end of all tax
years shall be computed and applied on total revenue and total costs and finally all the already
recognized revenue and costs in the preceding tax years shall be deducted in order to compute
revenue and cost for each tax year.
18 Big Limited (BL) - Set off and surrender of losses
Zeta Limited
Rs. in ‘000
Profit / (loss) before taxation 500
Add: Tax depreciation for the year 490
Less: Deemed income (85)
Total business income / (loss) before tax 905

Less: B/f assessed business loss - tax year 2017 (130)
Less: B/f un-assessed business loss – tax year 2018 -
775
Less: Group Relief Scheme:

Assessed losses 250
Less: B/f assessed business loss not to be surrendered (25)
B/f assessed capital loss not to be surrendered (45)
Loss including dep. surrendered by subsidiary in favour of ZL (180)
595
Less: Tax depreciation – current year (490)
Unabsorbed tax depreciation – brought forward (135)
Total business income / loss for the year (30)
Capital Gain:
Gain for the year 800
Less: B/f capital loss – tax year 2012 -
Less: B/f capital loss – tax year 2013 (65)
735

Answers
Rs. in ‘000
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 2018 cannot
be set-off against the business income of 2019. [Section 56]
(2) Capital loss brought forward from tax year 2012 cannot be set off against capital gains of tax
year 2019 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 2017 can only be set-off against income from
speculation business chargeable to tax in tax year 2019. Since in tax year 2019, 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. 2017. [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]
19 Bharosa Limited (BL)

Computation
. of Taxable Income and Income Tax Liability
1
Add: / (Less): Inadmissible expenses / (income)
Insurance compensation received against factory building (5,000,000)
Accounting loss on disposal of building due to fire (5,347,000 –
5,000,000) 347,000
Tax Gain on disposal of building due to fire (5,000,000-4,374,000) 626,000
Lease rent (150,000 × 9) [covered in income from other sources] (1,350,000)

Rupees
Property tax paid in respect of new building 96,000
Compensation to former employee -
Penalty for failure to pay withholding tax 25,000
Accounting depreciation charged to cost of sales (for the year) 870,000
Impairment loss on investment (unrealized) 200,000
Legal fees paid for filing of statements with KSE and LSE -
Legal fees in relation to increase in authorised capital -
Scientific research incurred in Canes 400,000
Advertising expenses in relation to a new product 480,000
Donation to an approved fund 300,000
WWF 98,000
Accounting depreciation charged to Adm. expenses (for the year) 1,100,000
Profit on debt (Bank profit)- (covered under the head income from other
sources) (180,000)
Sale proceeds from sale of shares (700,000)
Total business income / (loss) before depreciation/amortization (2,114,000)
Less: Tax depreciationW-1 (1,749,000)
Amortization of advertising expenses (480,000/10) (48,000)
(1,797,000)
Total business income for the year-A 317,000
Capital Gain: under NTR
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
Profit on debt (Bank profit) 180,000
Income from lease of manufacturing unit
Gross lease rentals (150,000 × 9) 1,350,000

Answers
Less:
Property tax (96,000)
Tax dep. on building (3,800,000 × 10%) No IA as Reconstruction (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 lower of: [1,228,279 × 20%] Or Rs.300,000 (245,656)
Income before WWF 1,252,844
Less: WWF (needs computation)W-2 (24,565)
Taxable income for the year 1,228,279

Tax on taxable income [@29% or 1.25% of turnover or 17% of Accounting
Profit whichever is higher]
Tax on the basis of turnover is: (24,900,000-5,000,000-1,350,000) × 1.25%
= Rs. 231,875)
In view of the accounting loss for the year ACT cannot be calculated
 tax on taxable income @ 29% is higher 356,201
Tax credit @ 20% of tax payable for enlistment on SE (356,201 x
20%) (71,240)
284,961
Add: WWF 24,565
Advance tax paid u/s 147 and 151 (260,000+18,000) (278,000)
Balance tax payable 31,526
W-1: Tax depreciation for the year Rupees

Depreciation
Assets Opening WDV Rate
for the year
Building 3,270,000 10% 327,000
Plant and machinery 3,400,000 15% 510,000
Motor vehicles 1,500,000 15% 225,000
Furniture 2,380,000 15% 357,000
Computers 1,100,000 30% 330,000
11,650,000 1,749,000

W-2: WWF
WWF is payable @ 2% of accounting profit before charging WWF or taxable income whichever
is higher.
Rupees
Taxable income (before WWF) 1,252.844
Accounting profit 4,802,000

Add: WWF 98,000
Less: Insurance compensation (5,000,000)
Less: Proceed from sale of shares (700,000)
Less: Accounting loss on disposal of building (5,000,000 – (347,000)
5,347,000)
Add: Accounting gain on sale of shares in Nafa (700,000- 230,000) 470,000
Accounting loss for the year (677,000)
 2% of taxable income i.e. (1,228,279× 2%) is higher 24,565
20 Khawar Associates (KA)
Personal Status: AOP

The income chargeable to tax under the head income from business is computed as under:
Add/(Less): Inadmissible expenses/(income):
Amount received from Mr. Iqbal - FTR (573,000)
Amount received from SP Limited - FTR (825,000)
Penalty paid to SP Limited – FTR 20,000
Salary paid to staff working on SPL‘s assignment - FTR 50,000
Donation paid to an educational institution N-1 60,000
Zakat paid under Zakat and Ushr Ordinance, 1980 10,000
(1,258,000)
(610,000)

Answers
Add: Rupees
Common expenses attributable to income subject to final taxW-1 936,000
Totalincome 326,000
Less: Zakat paid (10,000)
Taxable income- NTR 316,000
Working notes: W-1 [U/S 67 read with Rule 13]

Computation of common expenditure attributable to income under final tax regime:
The common expenditure amounting to Rs. 1,560,000 incurred in deriving income from all the
customers is allocated in proportion to the gross amount received from each category of customers to
the total gross receipts from all customers.
Total cost of sales 1,230,000

Total operating expenses 470,000
1,700,000
Less: Expenses related to income under final tax regime
Penalty paid to SPL for late delivery of goods (20,000)
Salary paid to staff working on SPL assignment (50,000)
Less: Inadmissible expenses:
Donation paid to educational institution (60,000)
Zakat paid (10,000)
Common expenses 1,560,000

Gross receipts from sale:
Amount received from Mr. Iqbal (net of tax) 573,000

Add: Tax deducted at source u/s 153(1)(a) @ 4.5% of gross value 27,000
600,000
Amount received from SPL 825,000
Amount received from other individuals 950,000
Total gross sales 2,375,000
Common expenses attributable to income under final tax regime:
(1,425,000 /2,375,000 × 1,560,000) 936,000
Notes:
N-1 Donation paid to educational institution:
The donation of Rs. 60,000 paid to an educational institution established by the Provincial
Government is entitled to a tax credit. Since the taxable income of KA is below the basic threshold of
Rs. 400,000, no tax credit shall be allowed to KA.
The tax deducted as a final tax shall not be reduced by any tax credit under the Income Tax
Ordinance, 2001, unless otherwise specified.

N-2 Dividend Income:

Dividend received by KA is taxed at the rate of 15% on the gross amount of the dividend irrespective
of the status of the company paying the dividend. Rs. 6,171 being the amount of tax deducted at
source (15% of Rs. 41,143) is the final tax and the amount of dividend income is not chargeable to tax
under any head of income while computing KA‘s taxable income.
21 Khalis Limited (KL)
Computation of taxable income and income tax liability
Rupees ‘000
Export Comm-
Local sale Export Total
House ission
Scheme of taxation: NTR FTR FTR FTR
Gross sales: As per P&L

[46.8%:50.2%:3%] 164,034 175,951 10,515 - 350,500
Less: Ocean freight [fob

value of export] - (4,700) - - (4,700)
Sales tax @17%

(17/117×164,034) (23,834) - - - (23,834)
Commission from M Limited - - - 4,300 4,300
Sales (adjusted for tax

purposes) 140,200 171,251 10,515 4,300 326,266
Sales ratio excluding

commission 43.54% 53.19% 3.27% - 100%
Less: Cost of sales:

(W-1)
Freight - - (500) - (500)
Common expenditure [allocated

on sales ratio] (106,608) (130,236) (8,007) - (244,850)
Gross profit 33,592 41,015 2,008 4,300 80,916
G.P ratio [Rule 13(3)(b)] 41.52% 50.69% 2.48% 5.31% 100%
Administrative and selling

expenses: (W-2)
Allocation of common expenses

[G.P ratio] (25,333) (30,929) (1,513) (3,240) (61,015)
Cost of acquiring a contract

[800/10] (80) - - - (80)

Answers
Rupees ‘000
Export Comm-
Local sale Export Total
House ission
NTR FTR FTR FTR
Financial charges:
(W-3)
Mark-up on finance obtained for
export - (9,000) - - (9,000)
Bank charges related to export
sales - (2,150) - - (2,150)
Allocation of common expenses
[G.P ratio] (1,812) (2,213) (108) (232) (4,365)
Add: Other income
(W-4) 1,500 - - - 1,500
Add: Exchange gain - 2,000 - - 2,000
Export rebate - 3,900 - - 3,900
Duty drawback - 1,600 - - 1,600
Taxable income 7,867 4,224 387 828 13,306
Tax rate 29% 1% 1% 12%
Tax for the year (N-3) 2,281.43 1,695.58 105.15 516 4,598.158
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) for
tax year (1,168.57) 105.15 84 (979.42)
CGT on shares (W- 4A) -
Total tax refundable (979.42)
*)175,951 x 85% = 149,558 + 20,000 = 169,558)
Note: Fee received from Bahrain and capital gain on sale of shares in Blue Limited isexempt from
tax and since no direct expenditure was incurred in earning such income, no expenditure would be
allowed against such income.
Working notes: Rupees ‘000
Cost of sales: W-1 245,350
Less: Freight directly allocated to export house sale (500)
Common cost of sales 244,850

Rupees ‘000
Administrative and selling expenses: W-2 70,100
Clearing and forwarding expenses (485)
Legal expenses -
Advertising expenses–unsuccessful marketing campaign -
Cost of acquiring a business contract-Intangible (800)
Contribution to foreign pension fund (assumed unapproved by SECP) (2,000)
Sales tax on entertainment and courier charges -
Provision for doubtful export rebate [provision inadmissible] (700)
Provision for doubtful duty drawback [provision inadmissible] (400)
Less: Reclassification/allocation of direct expenses:
Ocean freight (4,700)
Common administrative and selling expenses 61,015
Financial charges: W-3 15,515

Mark-up on loan obtained from AB Bank Limited -
Less: Reclassification/allocation of direct expenses:
Mark-up on short term borrowing for export sales (9,000)
Bank charges – export sales (2,150)
Common financial charges 4,365
Other income: W-4 25,850

Less: Reclassification/allocation of direct income:
Exchange gain - export sales (2,000)
Export rebate (3,900)
Duty drawback (1,600)
Commission from M Limited (4,300)
Less: Exempt / separate block of income:
Fees received from Bahrain (10,000)
Capital gain on sales of shares in Blue Limited (2,550)
[(30,000 shares xRs. 120 – (30,000 shares xRs. 35)=Rs. 2,550]
1,500
W-4A Since the shares in Blue Limited were held by KL for a period of more than 4 -
years, gain on sale of these shares would be charged to tax @ 0% [Rs. 2,550x0%]

Answers
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.
22 ZJ Limited

Computation of Taxable Income and Income Tax Liability
Income from Business: Rs. in ‘000
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 [25,690–28,460] (2,770)
Adjustment of closing stock-absorption cost method[32,350–29,200] 3,150
Accounting depreciation (cost of sales) 2,210
Withholding tax collected on a plot of land 600
Exp. to increase software features–intangible 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 2016 & 2017 [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 (1,800÷10) (180)
Unabsorbed depreciation from tax year 2017 (2,550)
Total business income for the year A 13,620

Rs. in ‘000
Capital Gain:
Gain on disposal of plot (10,000–3,000)[Separate block of income] 7,000
Gain on sale of securities in ML [(85–50 × 100,000) +(78–50 × 100,000)]U/R 13P(d)
related to negotiated deal transactions 6,300
Separate block of income
B 13,300
Share of profit from AOP C 1,250
Total income for the year(A+B+C) 28,170
Less: Separate block of income:
Gain on disposal of plot of land-immovable property (7,000)
Gain on sale of securities in ML (6,300)
Taxable income for the year 14,870
Computation of net tax liability
Tax regime [as opt out of PTR] NTR
Tax on taxable income [14,870 @ 29%](i) 4,312
Minimum tax [199,000 × 1.25%] (ii)W-1 2,488
Minimum tax u/s 154: [30,000 x 1%](iii)
(Proportionate tax under NTR is already higher than minimum tax. Therefore no
impact on tax liability) 300
Minimum tax u/s 148 (packing material) (iv)
(Assuming proportionate tax on sale of packing material is higher than minimum tax) 1,200
Alternative corporate tax [22,300×17%] (v)W-2 3,791
Tax charged would be higher of (i), (ii), (iii) (iv) or (v) above 4,312
Tax on Plot [7,000 × 5%] holding period up to 3 years 350
Tax on sale of securities [6,300 × 7.5%]holding period > 24 months < 4 years 473
Gross tax payable 5,135
90% of gross tax payable for the year [5,135 × 90%] 4,622
Less: Taxes paid u/s 147, 148, 153 and 154 [1,000+1,200+1,050+300] (3,550)
Amount of shortfall during 2019 1,072
st
Period of default from 1 July 2018 to 31st January 2019 (assuming paid with return
on 31 January 2019) = 215 days
Amount of default surcharge @12% [1,072 × 01/07/2018 to 31/01/2019 12% × 215
÷ 366] 76
Tax liability including default surcharge 4,698
Advance tax paid u/s 147 (1,000)
Advance tax paid u/s 148 (1,200)
Tax deducted u/s 153 (1,050)

Answers
Tax @1 deducted on export proceeds u/s 154 [30,000,000 × 1%] (300)

Net tax payable with return 1,148
Add: short amount of tax deducted on plot [(10,000,000 – 3,000,000) × 20%] -
Withholding tax was to be deducted on the fair market value of plot @20% i.e.
Rs. 2,000 K (assuming due date of 1 September 2018) 1,400
Default surcharge on late payment of WHT (assuming paid with return on 31
January 2019 i.e. 153 days late) [1,400 × 12% × 153 ÷ 366] 70
Short WHT and default surcharge payment 1,470
Since tax on taxable income is more than minimum tax and ACT therefore, no
amount of tax would be carried forward
W-1: Computation of turnover for the purpose of minimum tax u/s 113
Turnover as per un-audited financial statements- net 218,500
Add: ZJL‘s share in AOP‘s gross sales [30,000 × 35%] 10,500
Less:Export sales – minimum tax separately calculated (30,000)
Adjusted turnover 199,000
W-2: Computation of accounting profit for ACT
Accounting profit-unadjusted 46,500
Less: Sale proceeds of vehicles sold to employees (2,450)
Less: Income from associates (20,000)
Less: Sales promotion expenses – plot of land (Rs. 600,000 already in (3,000)
administrative exp.)
Add: Share of profit from AOP 1,250
Accounting profit for the year 22,300
23 Desi (Pvt.) Limited - Thin Capitalization

Calculation of deductible amount of interest on debt:
Outstanding balance of loans received by DPL from foreign controller (MI) as at 30 September 2018:
Rs. in million
Total equity at the beginning of the year:
Net assets as at 30 September 2018 (3,500 – 2,870) 630
280
Less: Amount credited during the year to asset revaluation reserve (150)
Foreign equity-effective share of MI (0.7 × 130 million) 91

Less: debt owed by a non-resident foreign associate of MI (5)

nd
Foreign Debt attracting the provisions of thin capitalization: (interest exempt from tax-2
Schedule Clause 72(i))
Loan received on 15 March 2018 315
Foreign debt where thin capitalization is not applicable: (as interest expense is not exempt or
charged at a lower rate of tax)
Loan received on 1 June 2018 168
Thin capitalization ratio = Foreign debt ÷ (Foreign equity * 3)
Thin capitalization ratio for DPL = 315 million ÷ [86 million x 3] = 1.2209
Rupees
Interest paid/accrued for DPL in tax year 2019:
Debt where thin capitalisation rule is applicable (315 million × 11% × 200÷365) 18,986,301
Interest paid/accrued for DPL in tax year 2019:

Debt where thin capitalisation rule is not applicable(168 million × 6% × 122÷365) 3,369,205
Deductible profit on debt for the tax year 2019:

For DPL loan = 18,986,301÷1.2209 15,551,070
Profit on debt paid/accrued for DPL in tax year 2019:
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.
24 Bismil Limited
Bismil Limited (BL)

Computation of Total Income, Taxable Income and Income Tax Liability
Add/(Less): Inadmissible expenses/(income)
Withholding tax on sale of electric motors (15,000,000/0.96 x 4%) 625,000
Sales tax on sale of electric motors (15,000,000/0.96 x 17/117) (2,270,299)
Sale of a product to an associated company (50,000)
Fee paid on account of financial due diligence – capital exp. 900,000
Loss on disposal of machine 5,000
Penalty on short payment of tax 150,000
Entertainment expenses – not related to business 385,000

Answers
Training expenses – Pakistani citizen 125,000

Profit on debt -
Monetary award by President- Exempt (1,000,000)
Monetary award by Sindh Governor – taxable as income from other sources (300,000)
Service charges on tax withhold from suppliers (500,000)
Dividend received from a subsidiary – Taxable under the head of income from
other sources (120,000)
Total business income for the year A 22,949,701
Exempt income:
Monetary award by President – Exempt B 1,000,000
Income from other source

Gross value of dividend 120,000
Monetary award by Sindh Governor – taxable 300,000
C 420,000
Total income for the year (A+B+C) 24,369,701
Less: Exempt income/FTR income
Monetary award by President – Exempt (1,000,000)
(1,000,000)
Taxable income for the year under NTR 23,369,701

Tax on taxable income [23,369,701 @ 29%] 6,777,213
Advance tax paid u/s 147 (5,300,000)

Advance tax paid u/s 153(1) (adjustable tax) (625,000)
(5,925,000)
852,213
Add: Service charges payable to the Federal Government 500,000
Net tax payable 1,352,213

*Note:
1.As in the given case one of the pre-condition for exemption of dividend income has not been met i.
e. the group should be 100% owned.
2.Further dividend income for a corporate sector being as recipient in taxable under NTR by virtue
of exclusion of dividend income from section 8 of the Income Tax Ordinance, 2001.
25 Income from Business
(a) (i) Alpine Pharmaceuticals Limited would be allowed maximum 10% of the turnover as
deductible expenditure. Therefore, in this case it would be allowed to deduct Rs.
1,300,000 in computing income from business that is less than the limit of Rs.
2,140,000 specified u/s 21 (o) of the Income Tax Ordinance, 2001. (20,000,000 ×
107% x 10%)
(ii) Thin capitalization:

Calculation of deductible amount of interest on debt:
Rs. in million
Total equity at the beginning of the year:
Net assets at the year-end (350 – 190) 160
Foreign equity- share of Big Inc. (0.85 × 40 million) 34
nd
Foreign debt eligible for thin capitalization: (interest exempt from tax-2
Sch.Cl.72)
Thin capitalization ratio = Foreign debt ÷ Foreign equity ÷ 3
Thin capitalization ratio for SPL = 113 million ÷ 34 million ÷ 3 = 1.10784
Deductible interest for the tax year:

On Big Inc. loan = 7,500,000 ÷ 1.10784 Rs. 6,769,931
Therefore, total interest on debt allowable for tax purposes under the provisions of
Income Tax Ordinance, 2001 is Rs. 6,769,931.
(iii) Withholding tax is required to be deducted from Pakistan source income. In this case
income of the China based company is not Pakistan source as the items were
purchased from their website in China (it does not matter whether payment was
transferred from Pakistan) . Therefore, the entire amount of Rs. 300,000 will be
deductible.
(iv) In order to claim the purchase of raw material of Rs. 700,000 as deductible, NL was
required to deduct withholding tax of Rs. 28,000 from the payment made to DL.NL‘s
failure to withhold tax from the payment has resulted in disallowance of 20% of the
amount of purchase of raw materials.

Answers
However, since the payment against purchase of raw material under single account
head, in aggregate, exceeded the basic threshold of Rs. 50,000, NL was required to
pay the amount through banking channel by way of either crossed banking instrument
or online transfer of funds or through credit card showing transfer of funds from NL‘s
business bank account to DL‘s business bank account. Contrary to this, NL made
online transfer of payment from their business bank account into DL‘s director‘s
personal bank account. In view of above, the entire amount of Rs. 700,000 would be
disallowed.
26 RM Associates
RM Associates (RMA)
Computation of taxable income and net tax liability
Tax year 2019
Rupees
Fee for
Retainership
technical *Other fees Total
fee
services
Scheme of taxation: NTR/min. tax Exempt Exempt
Net revenue 19,710,000 6,210,000 10,580,000 36,500,000
Sales ratio 54% 17% 29% 100%
Less: common expenses (W-1) (8,608,263) (2,710,010) (4,622,960) (15,941,233)
Total income 11,101,737 3,499,990 5,957,040 20,558,767
Taxable income 11,101,737 - - 11,101,737
Tax on first Rs. 6,000,000 1,319,500

Tax on balance [(Rs. 11,101,737 – 6,000,000) × 30%] 1,530,521
2,850,021
Less: Paid u/s 154 (105,800)
Paid u/s 153 (Rs. 19,710,000 x 10%) (1,971,000)
Total tax payable for tax year 773,221
Test of minimum tax on retainership income:

Retainership income 19,710,000
Total tax on retainership income 2,850,021

Withholding tax deducted from gross retainer ship fee 1,971,000
Since the normal tax under NTR is higher than the withholding tax deducted from gross receipt,
normal tax would be payable. However, the withholding tax can be claimed as tax credit.

W-1: Determination of common expenses Rupees

Total expenses 25,150,000
Salaries paid to partners [(290,000 × 12)+(355,000 × 12)] (7,740,000)
Rent of premises -
Accounting depreciation / amortization (1,680,000)
Software expense – to be capitalized (650,000)
Interest on finance lease (135,000)
Withholding tax on retainership fee - included in other charges (1,379,700)
Withholding tax on on-line services - included in other charges (105,800)
Add: Admissible expenses:
Tax depreciation on assets:
Leased vehicle (950,000 × 15%) * 142,500
Furniture and fixture (1,700,000 × 15%) 255,000
Computers and laptops (840,000 × 30%) 252,000
Tax amortization–software(5,000,000÷5+650,000÷10x181/365) 1,032,233
Lease rentals 800,000
Common expenses 15,941,233
*Explanation:
An amount of Rs. 10,580,000 received from clients in Iran and Afghanistan on account of provision of
on-line services falls within the ambit of export of ‘IT enabled services’ under clause 133 of Part I of
the Second Schedule to the Ordinance. It is therefore, exempt from tax. Consequently, withholding
tax at the rate of 1% deducted from export proceeds is refundable.
*Depreciation has been claimed on the basis that the amount of security deposited atthe inception of
lease against residual value of leased vehicle has not been claimed as lease rentals.
27 Loyal (Pvt) Limited
Loyal (Pvt) Limited (LPL)

Computation of Income Tax Liability
Other Engineerin
Export sales
sales/services g services Total
Scheme of taxation: NTR MTR FTR
Total turnover 37,589,000 2,000,000 14,931,000 54,520,000
Less: sales tax on Balakot sales (4,250,000) - - (4,250,000)
[21,750,000/(1-(30%-17%)×17%]
33,339,000 2,000,000 14,931,000 50,270,000

Answers
Other Engineerin
Export sales
NTR MTR FTR
Sales ratio 66.32% 3.98% 29.70% 100%
Less: Expenses:
Total expenses 47,895,000
Add/(Less):
Packing material-
direct (900,000) (900,000) (900,000)
Accounting
depreciation (2,520,000)
Tax depreciation 4,800,000
Common expenses 49,275,000 (32,679,117) (1,960,414) (14,635,469) (49,275,000)
Add: Other income:

Prize on prize bond-
FTR 300,000 - - - -
Dividend – exempt 25,000 - - - -
Associate profit- not
taxable 3,900,000 - - - -
Income tax refund-
not taxable 125,000 - - - -
Share of profit from
AOP 875,000 875,000 - - 875,000
Total income 1,534,883 39,586 (604,469) 970,000
Less: assessed loss b/f from 2017 (475,000) - - (475,000)
Taxable income (NTR) 1,059,883 39,586 (604,469) 495,000

Tax regime NTR
Tax on taxable income [1,059,883@ 29%] 307,366
Tax on engineering services under NTR [39,586 @ 29%] 11,480
Tax withheld on engineering services @ 8% 160,000 160,000
(Since tax withheld on engineering services is more than tax under normal tax regime
therefore, withholding tax would be payable as minimum tax)
(i) 467,366
Minimum tax – Turnover (50,279,000 × 1.25%) W-1 628,488

– Engineering services (already included in turnover) -
– Import of packing material 49,500
(ii) 677,988

Other Engineerin
Export sales
NTR MTR FTR
Alternative corporate tax (ACT) [ 3,177,309 × 17%] (iii) W-2 540,143
Tax charged would be higher of (i), (ii) or (iii) above 677,988
Tax on export sale to China- FTR [14,931,000 × 1%] u/s 154(1) 149,310
Tax on prize on prize bond – FTR u/s 156 45,000
Gross tax payable 872,298
Tax @1 deducted on export proceeds u/s 154 [14,931,000 × 1%] u/s 154(1) (149,310)
Tax deducted u/s 153 – minimum tax (160,000)
Advance tax paid u/s 148 – Minimum tax (49,500)
Advance tax u/s 156 – FTR (45,000)
Net tax payable 468,488
Tax to be carried forward:

The excess of minimum tax over tax under NTR shall be carried forward for
adjustment against tax liability for 5 tax years. (677,988 – 467,366) 210,622
W-1: Computation of turnover for the purpose of minimum tax u/s 113(3)
Rupees
Total turnover as per information provided 54,520,000
Add/(Less): Discount on sale in Balakot [21,750,000/(1–(30%–17%) × 30%] 7,500,000
Sales tax on sale in Balakot [21,750,000/(1–(30%–17%) × 17%] (4,250,000)
Export sale to China (14,931,000)
Share in AOP‘s gross sales [18,600,000 × 40%] 7,440,000
Adjusted turnover 50,279,000
W-2: Computation of accounting profit for ACT
Accounting profit-unadjusted 10,975,000
Add:Export sale loss/Diff. of Dep. (–604,469+29.7%(4,800,000–2,520,000)– FTR* (72,691)
Less: Sales tax on sale in Balakot [21,750,000/(1–(30%–17%) × 17%] (4,250,000)
Less: Prize on prize bond – FTR (300,000)
Less: Dividend income – exempt (25,000)
Less: Income from associates (3,900,000)
Less: Tax refund (125,000)
Add: Share of profit from AOP 875,000
Accounting profit for the year 3,177,309
*Note:
A note should be attached by stating that Accounting profit on FTR business was Rs. 72,691 that has
reversed from the given profit as per profit and loss account in order to compute profit for Alternative
Corporate Tax (ACT) u/s 113C of the Income Tax Ordinance, 2001.

Answers
CHAPTER 03 – SALES TAX
28 Olive Limited
Computation of Net Sales Tax Liability
For the tax period May 2019
Rs. in ‘000
SALES TAX CREDIT (INPUT TAX) Gross Taxable
Sales Tax
Value Value
Domestic Purchases(packing material) @17% 6,000 6,000 1,020
Advertisement services in province of Punjab @ 16% 650 650 104
Importsof finished goods including 3% VAT on commercial

imports @20% 8,000 8,000 1,600
Imports -domestic consumption 15,000 15,000 2,550
Fixed Assets (Machinery) 1,200 1,200 204
Fixed Assets (Vehicle) – Inadmissible 1,500 0 0
Clearing agent services 20
Inadmissible input- exempt supplies&zero rated supplies(W-1) (1,108)
Input Tax for the month 4,390
(+) Previous month credit brought forward 325
Accumulated credit 4,715
Input tax on fixed asset (204)
SALES TAX DEBIT (OUTPUT TAX)
Domestic Supplies of manufactured goods 20,000 20,000 3,400
Exempt goods 4,000 0 0
Supplies of imported goods 10,000 10,000 1,700
Exports 4,000 4,000 0
Output tax for the month 5,100
Debit for the month 5,100
Sales tax withheld by the return filer as withholding agent (W-2) 124
Admissible credit [(4,511(4,715-204) or 90% of 5,100)

whichever is lower] – Note 3 4,511
Add: Input on fixed asset 204
Sales Tax payable (5,100-4,511-204)+ 124(WHT) 509
Refund claim (input consumed in export)- (W-1) 554

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.
nd
N-2:Sales tax @ 16% on custom agents [serial # 3, 2 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: No further tax has been charged on export sales as they are not required to be register under
Sales Tax Act, 1990 &read with SRO 585(I)/2017, Dated: 01/07/2017.
N-5: Sales Tax on clearing agent services has not been included in residual input tax on the
assumption thus it has not been used for exempt or export sales.
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 consumption 15,000 15,000 2,550
Fixed Assets 1,200 1,200 204
Advertisement services 104
Residual input tax TOTAL 3,878
Rupees
Total sales other than sales out of imports 28,000
Exempt supplies 4,000
Inadmissible input tax (3,878 / 28,000 x 4,000) (A) 554
Sales tax refundable (3,878 / 28,000 x 4,000) (C) 554
Inadmissible input 1,108
W-2: Computation of sales tax withheld by a return filer as withholding agent
Rs. in ‘000
Tax withheld from clearing agent (100% WHT payable to PRA) 20
Tax withheld from advertisement services in Punjab Province 650 x 16% 104
124
A person who is a recipient of advertisement services is required to withhold and deposit the amount
of sales tax mentioned on the invoice and where sales tax amount is not indicated, the recipient of
advertisement services shall deduct and deposit the sales tax at the applicable rate.

Answers
29 Kamyab Engineering Limited (KEL)

Computation of Sales Tax Payable/Refundable
For the tax period November 2018
Rs. in ‘000
Taxable Value Sales Tax
Sales Tax Credit (Input Tax)
Domestic purchases:
 From registered persons 70,700 12,019
 From unregistered persons 15,250 -
Commercial imports @ 20% - W-1 9,900 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 October‘s 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 (N-2) 13,000 -
Supplies of imported goods (W-3) 12,460 2,118
Admissible Tax Credit
Lower of 10,799 or 90% of 12,998] 10,799
Sales tax payable (12,998 -10,799) (A) 2,199
Further tax 3% of local taxable supplies to un-registered persons 720
i.e. 24,000 x 3% (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.
WHT on purchases from un-registered persons that are liable to be 153
registered (15,250 x 1%) U/R 3(ii) Sales Tax Special Procedure
Rules, 2007 (C)
(A)+ (B) + (C) 3,072

Rs. in ‘000
Taxable Value Sales Tax
Input tax credit to be carried forward -
Refund claim (input consumed in export) (W-2) 1,791
Less:
 Penalty (50)
 Additional tax (25)
Net amount refundable 1,716
Note:
If a registered person is liable to pay any tax, default surcharge or penalty payable under any law
administered by the Board, the refund of input tax shall be made after adjustment of unpaid
outstanding amount of tax or, as the case may be, default surcharge and penalty.[Section 10(2)]
N-2: No further tax has been charged on export sales as they are not required to be register under
Sales Tax Act, 1990 read with SRO 585(I)/2017, Dated: 01/07/2017.
Workings:
W-1:
Input tax on imports 2,000
Less: on private use (100,000 x 20%) (20)
(1,980)
W-2: Apportionment of input tax
Gross Taxable
Sales tax
value Value
Domestic purchases from registered persons 70,700 70,700 12,019
Electricity bills - - 60
Gas bills 21
Mobile Phone bills 26
Residual input tax Total 12,126
Total sales of manufactured goods 88,000

Exports 13,000
Inadmissible tax on exempt supplies (11,000 ÷ 88,000 x 12,126) 1,516
Input tax on exports – to be claimed as a refund (13,000 ÷ 88,000
x 12,126) 1,791
Total inadmissible/ un-adjustable input tax 3,307
W-3:
Commercial imports 12,500
Less: Mark-up on appliances sold on instalment basis (2÷102 x
2,040) (40)
Value of commercial imports 12,460

Answers
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%).
30 Gadget Limited (GL)

For the Tax Period May 2019
Rs. in ‘000
Taxable Sales
Value Tax
Sales Tax Credit (Input Tax)
Domestic purchases:
 Steel sheets, copper wire, aluminum and allied R.M 2,500 425
 Lubricants, spare parts and stores excluding cash purchases (5,400–
900) 4,500 765
 Gift items for customers -carpets, fancy watches etc. - -
 Printed stationary for the maintenance of factory record 500 85
Sales tax on services under respective provincial laws:
- Bill Board Advertisement Service@ 16% 700 112
 On banking services – In Islamabad [ICT section 3(3)] 600 -
8,800 1,387
Less: Purchases returned (900) (153)
Input tax attributable to both taxable and zero rated goods 1,234
Less: un-adjustable input tax (export and zero rated) – W-1 (586.959)
Input tax for the month 647.041
Sales Tax Debit (Output Tax)

Domestic supply of manufactured goods:
 Electric switch-gears and electric motors to diplomatic mission in
Islamabad 1,900 0
 Air Coolers to customers based in LHR, ISD and FSD 7,000 1,190
 Supply of motors and switches for consumption onboard a container ship 650 0
 Export of electric air coolers to customers in Spain and Zanzibar 3,800 0
On franchise services - not applicable in ICT 1,400 0
Output for the month 1,190
Input tax Credit
Lower of 647.041 or 90% of 1,190)
Sales Tax payable (1,190 -647.041) 542.959
Sales tax withheld 112
Sales tax payable (542.959+112) 654.959
Refund claim (input on export and zero rated supplies)W-1 586.959

Rs. in ‘000
Taxable Sales
Value Tax
W-1
Domestic purchases:
 Steel sheets, copper wire, aluminum and allied R.M 2,500 425
 Lubricants, spare parts and stores 4,500 765
 stationary for the maintenance of inventory record 500 85
Sales tax on services under respective provincial laws:
- Bill Board advertisement service (N-1) 700 112
 On banking services
 L/C opening charges 500 -
 Safe custody fee 100 -
Total 1,387
Less: Purchase return (153)
Total input on purchase of manufactured goods 1,234
Export supplies 3,800
Other zero rated supplies (1,900 + 650) 2,550
6,350
Input tax on zero rated and export to be claimed as a refund(6,350 /13,350
x1,234) 586.959
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.
31 Sunshine Limited (SL)

For the tax period November 2018 Rs. in ‘000
Alpha:
Purchase 10,000 1,700.00
Input tax for October – unadjusted inadvertently 500.00
2,200.00
Inadmissible tax – W-1 (48.89)
2,151.11
Gama
Purchase 15,000 2,550.00
Inadmissible –W-2 (2,550.00)
Input tax for month 2,151.11
Since Beta is a by-product of Alpha, this is residual input tax and need to be apportioned.

Answers
Rs. in ‘000
Domestic Supplies of Alpha to registered persons (add 15,000 17,000 2,890.00
2,000 difference of open market price)
Domestic Supplies of Alpha to un-registered persons 3,000 3,000 510.00
Domestic Supplies of Gama (Exempt goods) 18,000 - -
Export to Turkey (Gama) 7,000 - -
Domestic Supplies of Beta
rd
[3 sch. Item - retail price] 5,000 6,250 1,062.50
Supply of Beta to Export Processing Zone 625 625 0
Free replacement of defective units of Alpha 1,000 0
(sales tax already paid initially with original price) 0
Supply of Beta to employees 1,250 1,250
[third sch. item at retail price] 212.50
Output tax for the month 4,675.00
Output tax 4,675.00

Less: input (input already less than 90% of output) (2,151.11)
Payable 2,523.89
Input tax on fixed asset
(3,000.00)
(complete adjustment allowed)
Balance input to be carry forward 476.11
Refund on zero rated (48.89+714) 762.89
Sales tax payable @ 3% on sale to non-register is not
allowed to be adjusted as bottom line figure and must be 90
paid to FBR. 3,000 x 3%
Sales tax payable 90
W-1
Alpha Value of
supply
Taxable – local registered 15,000
Taxable – associate (4,000 – 2,000) 2,000
Taxable – unregistered 3,000
(A) 20,000
Beta
250,000 x 25 Taxable 6,250
50,000 x 25 Taxable 1,250
25,000 x 25 Zero rated 625
(B) 8,125
Total (A + B) 28,125
Input apportionment relating to zero rated (625/28,125)x2,200 48.89

W-2
Gamma Value Input Tax
Local exempt supplies 18,000 1,836
Export - Zero rated 7,000 714
25,000 2,550
Complete input tax will be disallowed. However refund of Rs. 714 can be claimed in respect of zero
rated.
Note:
rd
Sales tax withholding is not applicable on 3 schedule items.
32 Ummeid Limited (UL)
SALES TAX CREDIT (INPUT TAX) Gross Value Taxable Value Sales Tax
Domestic Purchases:
 From registered suppliers 25,000,000 24,900,000 4,233,000
 From un-registered suppliers 10,000,000 - -
Imports - domestic consumption 4,000,000 4,000,000 680,000
Raw material destroyed by fire [Note-1] 1,000,000 - -
Input tax not adj. in Oct. 2018[Note-2] 200,000 - -
(-) Inadmissible/un-adjustable input W-1 ( 2,149,438)
Input Tax for the month 2,763,562
Domestic Supplies:
 To registered persons –N-1 20,500,000 18,000,000 3,060,000
 To un-registered persons 9,000,000 9,000,000 1,530,000
Exempt goods 6,000,000 - -
Exports 12,500,000 12,500,000 0
Supplies to AB Limited 500,000 500,000 0
Supplies for the maintenance of aircraft 2,000,000 2,000,000 0
Output tax for the month 4,590,000

Answers
4,590,000
Admissible credit (2,763,562 or 90% of 4,590,000 whichever is lower) ( 2,763,562)
Sales Tax payable 1,826,438
From unregistered suppliers (assumed they are required to be registered)-

(10,000,000 x 1%) 100,000
Add: Input tax on goods destroyed by fire 170,000
Add: Excess tax collected- incidence passed on to consumers [Note-3] 19,200
3% further sales tax to be paid on supply to un-registered persons (Rs.

9,000,000 x 3%) 270,000
Net sales tax payable with return 2,385,638
Return of excess tax collected- incidence not passed on to consumers 44,800
Refund claim (input consumed in export)(W-1) 1,279,428
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
Taxable
W-1: Apportionment of input tax Gross Value Sales Tax
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
Total inadmissible input tax (A) + (B) + (C) + (D) 2,149,438

Brief reasons for the treatment of following:
Notes:
1. Goods destroyed by fire:
Goods destroyed by fire and subsequently compensated by an insurance company does not
constitute supply as defined in section 2(33) of the Sales Tax Act, 1990. Sales tax paid on the
goods destroyed in fire is therefore not refundable or adjustable. If the amount of sales tax
involved has already been adjusted in the monthly return, it should be repaid to / recovered by
the Government. Adjustment is only allowed where inputs are used in making taxable supplies.
2. Input tax not claimed in the return:
Any input tax not deducted by a registered person within the relevant tax period may be
claimed in the return for any of the six succeeding tax periods. In this case, the six succeeding
tax periods elapsed in April 2019; UL therefore cannot adjust the amount of input tax of Rs.
32,000 from its output tax for the month of May2019.
This amount can now only be adjusted with the permission of the Commissioner Inland
Revenue u/s 66 of the Sales Tax Act, 1990.
3. Additional sales tax collected from the customer:
Any person who has collected any tax, under misapprehension of any provision of the Act or
otherwise, which is in excess of the tax actually payable and the incidence of which has been
passed on to the consumer, shall pay the amount of tax so collected to the Federal
Government.
In this case, since 70% of the stock, on which excess tax of Rs. 44,800 was collected, is still
unsold, UL should return this amount to AB Limited. However, the balance amount of Rs.
19,200, the incidence of which has been passed on to the consumers should be deposited with
the Federal Government.
33 Mazboot Furnishers (MF)
(a) Computation of Net Sales Tax Liability

Gross Taxable
Sales Tax
SALES TAX CREDIT (INPUT TAX) Value Value
Domestic Purchases:
Sales tax on services under respective
provincial laws:
Fire & theft insurance @ 13% SRA 25,000 25,000 3,250
-
Health insurance 5,000 -
 Opening stock 75,000 50,000 8,500
 During the month 250,000 250,000 42,500

Opening stock- Imports @20% 50,000 50,000 10,000
Rent 25,000 - -
Shoes for staff- input cannot be claimed 6,250 - -
Printed stationery 5,000 5,000 850

Answers
Staff entertainment-input cannot be claimed 3,750 - -

Fixed assets (Car) 780,000 - -
Input for the month
(-) Inadmissible/un-adjustableinput(A+B)W-1 65,100(13,170)

Domestic Supplies to registered persons 525,000 525,000 89,250
Supplies against international tender - 35,000 35,000 5,950
Exports –zero rated 140,000 140,000 0
Less: Admissible credit (90% of 95,200 or input tax excluding Fixed Assets
whichever is lower) (52,680)
Less: Input Tax on Fixed Assets –W-1 (40,800)
Sales Tax payable 11,880
Refund claim (input consumed in export)12,370+10,200 (W-1) 22,570
Gross Taxable
W-1: Apportionment of input tax Sales Tax
Value Value
Input tax for the month 65,100
Fixed Assets 51,000
Residual input tax TOTAL 116,100
Export (140/700 x 65,850) - inadmissible 13,020

Fixed Asset(140/700 x 51,000) -inadmissible 10,200
Allowable input on fixed asset (51,000-10,200) 40,800
Rupees
Total sales 700,000

Refundable input tax on export (140,000×116,100/700,000)A 23,220
N-1:No withholding sales tax has been deducted on banking and insurance services received
as the withholding sales tax provisions are not applicable by virtue of Rule 3 of Punjab Sales
Tax on Services (Withholding) Rules, 2015.
(b) Tax paid on stocks acquired before registration: [U/S 59]
The tax paid on goods purchased by MF, who subsequently registered with the Inland Revenue
Department, has been treated as input tax, as such goods were purchased by them from a
registered person against prescribed sales tax invoice issued during a period of thirty days
before making an application for registration and constitute their verifiable unsold stock on the
date of compulsory registration or on the date of application for registration or for voluntary
registration.

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
2018 i.e. not more than 30 days prior to application for registration and input tax paid at import
stage on goods imported in August 2018 i.e. not more than 90 days prior to application for
registration can be claimed by MF with its November 2018 return. However, he cannot claim
th
input tax on local purchases of Rs. 25,000on 10 Sep as period of 30 days has lapsed.
34 Tender Pops Limited (TPL)

SALES TAX CREDIT (INPUT TAX) Gross Value Taxable Value Sales Tax
Purchase of raw material from registered
suppliers 20,000,000 20,000,000 3,400,000
Sales tax paid on electricity bill - - 25,000
Local items under third sch. [75,000 x 200] 11,250,000 15,000,000 2,550,000
Packing material from a cottage industry-exempt 2,000,000 - -

Domestic Supplies to registered persons (19,000
– 350) 18,650,000 18,650,000 3,170,500
Supply of old stock at 30% discount (350/0.7) 350,000 500,000 85,000
Domestic Supplies to un-registered persons 8,000,000 8,000,000 1,360,000
Local third sch. Items to wholesalers @ Rs.200/- 9,900,000 11,000,000 1,870,000
Supplies against international tender 3,000,000 3,000,000 510,000
Supply against hire purchase agreement 459,000 450,000 76,500
Settlement of debt 175,000 200,000 34,000
Advance received against supply of goods 100,000 100,000 17,000
Admissible credit (90% of 7,123,000 or input tax whichever is lower) ( 5,975,000)

Sales Tax payable (7,123,000 - 5,975,000) 1,148,000
Notes:
N-1:Since consumer goods are consumed by end consumers, hence 3% additional sales tax shall not
be charged on sales to such non-registered persons.
N-2:Sales tax withholding is not Applicable on good specified in third schedule to the Sales Tax Act,
1990 and on supplies made by an active taxpayer as defined in the Sales Tax Act, 1990 to another
registered person with the exception of advertisement services.

Answers
35 Masawi Limited (ML)

Taxable Sales Tax Amount of

SALES TAX CREDIT (INPUT TAX) Value Rate Sales Tax
nd
Advertisement on television (Sr # 2 of 2 Schedule
of Punjab Sales Tax on Services Act, 2012 500,000 16% 80,000
Purchase of raw material from registered suppliers 5,000,000 17% 850,000
Purchase of raw material from un-registered
suppliers – Note 1 1,000,000 - -
Import of raw material 800,000 17% 136,000
Less: un-adjustable input tax (relating to zero rated)
W-1 (210,721)
Taxable supplies to registered persons 4,675,000 17% 794,750

Taxable supplies to un-registered persons 2,125,000 17% 361,250
Taxable supplies to duty free shops 1,020,000 0% 0
Export to Qatar 680,000 0% 0
Juices provided to workers 100,000 17% 17,000
Output tax for the month 8,600,000 1,173,000
Debit for the month 1,173,000
Sales tax withheld as withholding agent from registered suppliers of advertisement
services(500,000 x 16%) 80,000
Sales tax withheld as withholding agent from un-registered suppliersN-1 10,200
Admissible credit (lower of 855,279 or 90% of 1,173,000) 855,279
Sales tax payable (1,173,000 – 855,279)+(80,000 + 10,200) [80,000 to be paid to
provincial board]
Add 3% further tax on unregistered (2,125,000 x 3%) = 63,750 471,671
Refund claim (input consumed in zero rated supplies) (W-1) 210,721
Notes
N-1: In case of purchase form non-registered person, sales tax is required to be withheld @1% of
value of supplies. Further as non-registered person cannot issue sales tax invoice, therefore no
discount will be allowed in case of purchase from non- registered person.
Total Purchase 1,000,000
Less: Discount (380,000)
Purchase exclusive Discount 620,000
Discounted sale (380,000 / 0.95) 400,000
1,020,000 @1% = 10,200

W-1: Apportionment of input tax Taxable

Rate Sales Tax
Value
Domestic Purchases 5,000,000 17% 850,000
Imports -domestic consumption 800,000 17% 136,000
Advertisement of television services 500,000 16% 80,000
Rupees
Total sales 8,600,000
Supplies to duty free shop 1,020,000

Refundable input tax (1,066,000 ×1,700,000÷8,600,000) 210,721
36 Omega Limited (OL)


Purchases from un-registered supplier N.1 100,000 -

Sales Tax on services under respective provincial
laws N.7 5,000
Imports made ten days before the start of business 5,000
Purchases from registered corporate suppliers 725,000 17% 123,250
Advance against purchases to a registered supplier 75,000
N.2 -
Purchase of tyres and tubes [R.58T(5) of STSPR, 850,000
2007] -
Toll services to AOP N.3 45,000 0% -
Supply of finished cloth to Asia Airways N.3 500,000 17% 85,000
Goods sold to Small Corporation 250,000 17% 42,500
Sale of furniture to un-registered school N.4 125,000 17% 21,250
Stock of unsold furniture N.4 200,000 - -
Supply of tooth brushes in villages and towns 400,000 17% 68,000
Govt. Grant on tooth brushes N.5 150,000 - -
Sale of sugar to Sweet (Pvt.) Ltd. N.6 240,000 8% 19,200

Answers
Debit for the month 235,950

Sales tax withheld from un-registered supplier (100,000 ×)1% N.1 1,000
Admissible credit (lower of 133,250 or 90% of 235,950) 133,250
Sales tax payable (235,950–133,250) + (1,000) 103,700
N.1 Withholding tax would be charged @ 1% of the value of supply excluding sales tax. In the
absence of information, it has been assumed that the supplier of taxable goods was liable to
be registered but not actually registered. However, if they are not required to be registered
then OL shall not be required to withheld the 1% sales tax amount. U/R 2(3)(ii) of STSP
(withholding) Rules, 2007.
N.2 In the absence of sales tax invoice / advance payment receipt input tax cannot be claimed.
N.3 Supplies of goods, useable as industrial inputs, to registered or unregistered persons of the
five sectors (including textile), is charged to tax at the rate of 0%, whereas supplies to persons
not belonging to the said five sectors shall be charged to tax at the rate of 17% (SRO 491).
N.4 3% further tax is not charged in case of supply of goods to the end user/consumer.
Further possession of taxable goods held immediately before a person cease to be registered
is considered as supply. However in this case, OL has just closed down its one business
division and company itself is not going to be deregistered, hence unsold stock will not be
considered as supply.
N.5 Sales tax is levied on the amount received from the recipient of goods and not from anyone
other than the recipient. It is excluded from the definition of supply such as insurance claim.
Apparently it seems that discount allowed is not in conformity with normal business practice.
Hence full amount will be taxable.
N.6 Sales tax on sugar is charged @ 8%.
N.7 Input for sales tax on services in Lahore may be adjusted against output tax. However, no
withholding sales tax has been deducted on banking and insurance services received as the
withholding sales tax provisions are not applicable by virtue of Rule 3 of Punjab Sales Tax on
Services (Withholding) Rules, 2015.
N.8 Issuance of cheque book service charges exempt at 98.13 exempt portion.
37 Harfun Limited (HL)

Raw material purchased from AOP 8,750,000 17% 1,487,500
Packing material purchased from distributors 450,000 17% 76,500
Mineral water purchased for Annual dinner 158,000 inadmissible -
Preservatives purchased from a cottage industry 589,000 exempt -


Value Rate Sales Tax
Mango and banana purchased from registered 1,500,000 17%

person 255,000
Import of 3,000 boxes of squashes @ Rs. 680/box 2,040,000 17% 346,800

(N-1)
Value addition 3% 61,200
Purchase of fuel wood from wholesalers 1,050,000 17% 178,500
Purchase of fiscal cash register 650,000 17% 110,500
Purchase of office equipment 375,000 inadmissible -
Acquisition of mixing machine on finance lease 2,500,000 17% 425,000
Purchase of delivery trucks 2,340,000 inadmissible -
Sale of imported squashes 2,800 @ Rs. 680/box 1,904,000 17% 323,680
Sale of light energy saver lamps 500,000 exempt -
Sale of locally produced squashes 13,800,000 17% 2,346,000
- Assumed from Registered Person
Admissible credit (lower of 2,941,000-425,000-110,500=2,405,500)or 90% of

2,669,680 =2,402,712
Admissible credit [ 2,402,712+425,000+110,500] 2,938,212
Sales tax (2,669,680 – 2,938,212) (268,532)
Sales tax to be carried forward (2,405,500 – 2,402,712) 2,788
Notes:
N-1
Third Schedule applies only to locally manufactured goods. Hence even though items being imported
fall in category of third schedule, the principle do not apply. The principles of commercial imports
would apply. Value addition tax @ 3% shall also be paid.
rd
Squashes are third schedule item. Sales tax withholding is not applicable on 3 Schedule items.

Answers
38 Razi Limited (RL)
RAZI LIMITED (SL)

Rs. in ‘000
Gross Taxable
SALES TAX CREDIT (INPUT TAX) Sales Tax
Value Value
Domestic Purchases:
- From registered supplier (8,000,000 – 300,000) 7,700 7,700 1,309
- From un-registered supplier 2,000 - -
Import 900 900 153
Tissue paper used as packing material 675 675 114.75
Waste paper at reduced rate (300,000 x 5%) 300 300 15
(-) Inadmissible / un-adjustable input (W1) (358.316)
1,233.434
SALESTAX DEBIT (OUTPUT TAX)

Domestic Supplies - registered person (7,200–700–650) 5,850 5,850 994.50
Domestic Supplies to un-registered person (3,500 – 400) 3,100 3,100 527
Exempt supplies (650+250+400*)
* Rule 58T (1) and (5) of Sales Tax Special Procedure, 2007 1,300 - -
Exports(700 + 600)
th
Registered under DTRR serial # 7 of 5 Schedule. 1,300 0 0
1,521.50
Output tax for the month 1,521.50
Admissible credit (90% of 1,521.50 or input tax for the month
excluding fixed assets whichever is lower) 1,233.43
Output tax on local supply of imported foam (1,500 x 17%) 255
Less: Input tax on import of foam from China (1,200 x 20%) 240 15.00
Less: Input tax on fixed assets (W2) (87.32)
Add: Further sales tax on supplies to unregistered persons @ 3% 3,100 3,100 93.00
Add: RP as WH agent on purchases from un-registered persons
(liable to be registered but not registered) (Rs. 2,000,000 x 1%) 20.00
Extra tax on supply of imported foam @ 2% of 1,500,000 30.00
Sales tax payable with return 358.75
Refund claim (input consumed in export)(W1) 179.158
Refund claim on machinery (input consumed in export) (W1)
(C) 12.683

Gross Taxable
W-1: Apportionment of input tax Sales Tax
Value Value
Residual input tax ----- Rs. in ‘000 -----
Domestic Purchases – registered suppliers 7,700 7,700 1,309.00
Import(90% rule applicable wide SRO 647(I)/2007 dated 27 June
2007) 900 900 153.00
Tissue paper used as packing material 675 675 114.75
Waste paper purchased at reduce rate of 5% 300 300 15.00
Residual input tax TOTAL 1,591.75
Residual input tax against Machinery 1,000 1,000 100

Apportionment of residual input tax: Rs. in ‘000
Local supplies 8,950
Export 1,300
11,550
Refundable input tax on Zero rated sales (1,300 / 11,550 x 1,591.75) (A) 179.158
Inadmissible input tax on exempt sales (1,300 / 11,550 x 1,591.75) (B) 179.158
Total inadmissible / adjustable input tax (A) + (B) 358.316
(W-2): Apportionment of input tax on machinery

Adjustable against taxable supplies (8,950 / 10,250 x 100) 87.317
Refundable against export (1,300 / 10,250 x 100) (C) 12.683
rd
Note: Withholding tax is not applicable on 3 Schedule, Exempt and good covered under special
procedure rules, 2007.
39 Karma Limited
Karma Limited (KL)
Raw material from local registered suppliers 12,000,000 17% 2,040,000
Raw material from local un-registered suppliers
[3,000,000-950,000] 2,050,000 inadmissible -
Import of raw material [5,000,000 – 2,000,000] 3,000,000 17% 510,000
Import of raw material for infant use put up for retail 2,000,000 0%
sales 0
Special Tea purchased from STL[600 kg × Rs. 700] 420,000 17% 71,400
(-)Inadmissible/un-adjustable input W-1 454,357
Input Tax for the month (Accumulated credit) 2,167,043

Answers

Taxable supplies to registered persons 6,400,000 17% 1,088,000
Taxable supplies to Cottage Ind. (Only purchase from 5,500,000 17%
Cottage Ind. exempt) 935,000
Taxable supplies to un-registered -end consumers 1,000,000 17% 170,000
Forward transaction on PMEX [SRO 445/12 June 600,000 N/A
2004] -
Supply of confectionery, chocolates and candies [N-1] 2,500,000 17% 425,000
(Rule 26 sales tax special procedure Rules, 2007)
 Supplied to TCP for export purposes 1,350,000 0% 0
 Supplied to TCP for local market 900,000 8% 72,000
Supply of Fertilizers-Murabaha [SRO 445/12 June
2004] 1,584,000 N/A -
Supply of Tea to FM Ent. – [400 kg × Rs. 700] 280,000 17% 47,600
Less: Supplies returned by the customer 950,000 17% (161,500)
Further tax @3% (Already deposited on behalf of
unregistered customer. This cannot be returned or
claimed by unregistered customer) - -
2,576,100
Accumulated debit for the month 2,576,100
Sales tax withheld from un-registered suppliers (2,050,000 × 1%) – [WHT applicable
rd
despite 3 schedule item since unregistered] 20,500
Further tax on supplies to un-registered end consumers-Exempt -
Extra tax under chapter XIII of ST Special Procedure Rules, 2007 [2,500,000 × 2%] 50,000
Admissible credit (lower of 2,167,043or 90% of 2,576,100 = 2,318,490 2,167,043
Sales tax payable(2,576,100 – 2,167,043) + (20,500+50,000) 479,557
Sales tax refundable on zero rated supplies 173,566
W-1: Apportionment of input tax Taxable Value Rate Sales Tax
Raw material from local registered suppliers 12,000,000 17% 2,040,000
Import [5,000,000 – 2,000,000] -domestic consumption 3,000,000 17% 510,000
Rupees
Total sales (6,400 + 5,500+1,000+2,500+1,350+600+900+1,584) 19,834,000
Supply of Fertilizers-Murabaha – inadmissible (Since goods were supplied to Small 2,184,000
Bank Ltd.) including forward transaction (1,584,000 + 600,000)
Supplies to TCP for export- Zero rated 1,350,000
Inadmissible input tax – inadmissible [(1,584,000+600,000) × 2,550,000 ÷ 280,079
19,834,000]
Refundable input tax- zero rated [1,350,000 × 2,550,000 ÷ 19,834,000] 173,566
Inadmissible/un-adjustable input tax 454,357

40 Pasdar Limited
Pasdar Limited (PL)


SALES TAX CREDIT (INPUT TAX)
Raw material from registered suppliers 4,710,000 17% 800,700

Packing material for textile products 850,000 17% 144,500
Raw material from cottage industries 1,500,000 exempt -
Import of finished goods 4,200,000 17% 714,000
Import of tyres for own consumption 800,000 inadmissible -
Overhauling services 3,000,000 inadmissible -
Purchase of taxable activity from GE 10,500,000 0% 0
Sindh sales tax on franchise fee 50,000
Punjab sales tax on franchise fee inadmissible -
Federal excise duty on franchise fee inadmissible -
Input tax on goods destroyed by fire (325,000)

Supply of electric iron 500,000 Exempt -
Supply of goods to Local Govt. 2,700,000 17% 459,000
Taxable supplies to un-registered persons 1,560,000 17% 265,200
nd
Supply of 2 hand worn clothing to un-registered 200,000 5%
persons 10,000
Claim against fire 2,750,000 - -
Gift vouchers – actionable claims 450,000 - -
Set off of loan 1,100,000 17% 187,000
Promotional give-away 235,000 17/117 34,145
Supply of lubricants 2,350,000 17% 399,500

WHT on taxable supplies to Local Govt.- not applicable -
Debit for the month 1,830,845

Answers
Sales tax withheld from cottage industries- Rules not applicable as not liable to be
registered -
Further tax on supplies to un-registered person in March 2018 [480,000 × 3%] 14,400
Further tax on supplies to unregistered person assuming liable to be registered 46,800
Further tax on supplies of worn clothing to un-registered persons- exempt 0
Admissible credit (lower of 1,510,200 or 90% of 1,830,845 = 1,647,761 (1,510,200)
Sales tax payable 381,845
41 Quick Fox Limited
Quick Fox Limited (QFL)

SALES TAX CREDIT (INPUT TAX)
Purchases from registered suppliers 2,620,000 17% 445,400
Lubricating oil 380,000 17% 64,600
Raw material from SL on 6/11/2017 390,000 17% 66,300
Raw material from SL on 20/11/2017 225,000 inadmissible -
Purchases from NA- paid in cash 285,000 Inadmissible -
Packing material purchased from un-registered 358,000 Inadmissible

suppliers -
Edible fruits from un-registered growers 700,000 exempt -
Import of air conditioners 852,000 17% 144,840
Value addition- import of wheel alignment machine 18,000
(QFL is not registered as a service provider therefore, required to pay value addition
for in-house use)
Advance from customers 117,000 17/117 17,000
Supply of goods to a manufacturer 435,000 17% 73,950
Supply of tyres to registered persons 660,000 17% 112,200


Taxable supplies to un-registered persons-end 310,000 17%

consumers 52,700
Sale of bicycles to un-registered dealers 900,000 0% 0
Sale of truck 1,205,000 17% 204,850

rd
3 Sch.goods to un-registered 160,500 17%
wholesaler(535,000/50×65-535,000) 27,285
Payment of underpaid tax in May 2017 (54,015-

45,000) 9,015
Sales tax withheld from un-registered supplier of packing material (358,000 × 1/117) 3,060
Further tax on supplies to end consumers– exempt -

th
Further tax on bicycles to un-registered dealers– exempt (5 Sch.) -
rd
Reversal of further tax on 3 schedule items to un-registered wholesaler in July 2017
The same will be paid to the Federal Govt, as excess tax collected -
Admissible credit (lower of 764,700 or 90% of 838,700 = 754,830 (754,830)
Sales tax payable 66,930
Input tax to be carried forward (764,700 – 754,830) 9,870

Answers
CHAPTER 04 – CAPITAL GAIN
42 Mr. Parekh
Computation of capital gain on sale of securities:
Purchases/Acquisitions Disposal
No. of
Date Price Cost** 01-5-19 07-5-19 21-5-19 31-5-19 31-5-19 31-5-19
Shares
31-3-18 1,400 20 28,000 600 800
15-9-18 700 22 15,400 700
01-4-19 900 18 16,200 400 500
31-5-19 500 23 11,500 500
Total 3,500 71,100 600 800 700 400 500 500
Selling price per share 17 19 18 26* 26* 26*
Sale proceed 10,200 15,200 12,600 10,400 13,000 13,000

Less: Cost 12,000 16,000 15,400 7,200 9,000 11,500
(1,800) (800) (2,800) 3,200 4,000 1,500
Less:0.5% of sale proceeds as expense 51 76 63 52 65 65
(Loss)/Gain on disposal (1,851) (876) (2,863) 3,148 3,935 1,435
Adjustment of eligible losses 1,851 (1,851)
- 876 (876)
Loss eligible for set off 2,863 (421) (2,442)
Net Gain on disposal - - 0 0 1,493 1,435
Holding period 396 402 248 60 60 0
Tax rate applicable 15% 15% 15% 15% 15% 15%
Tax to be collected Rs. Rs.
1,493 x 1,435 x
15% = 15% =
- - - - 223.95 215.25
Total tax 439.20
* Average rate taken for sale purchase on the same day as per Rule 13N(5)

43 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, 2018.
CGT
(ii) Purchases / Acquisitions Disposal
No. of 15 April 18 May
Date Price Cost* Total
shares 2019 2019
1-Jan-19 100 40 4,000 50 50
Bonus shares issued @ 25%
1-Jan-19 (Date of entitlement 1-04-19)
(Date of credit 15-5-2019) 75 75
1-Apr-19 100 *40 4,000
15-May-19 25 *50 1,250
50 75 125
Selling price per share 40 40
Sales proceed 2,000 3,000 5,000
Less: Cost 2,000 3,250 5,250
Loss Nil (250) (250)
*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 not collect 5% of value of bonus shares determined on the basis of day end
price on first day of closure of booksdue to omission of tax deduction section.
Assumption: Cost of acquisition and sale proceeds are deemed to include 0.5% as incidental
expenses.
(iii) Taxable Income of Anjum No. of shares Price Amount
Net gain/ loss of the borrower
Sale of borrowed shares 5,000 105 525,000
Repurchase of shares and returned to the lender (5,000) 95 (475,000)
0.50% of sale proceeds as incidental expenses
on sale (2,625)
0.50% repurchase price being incidental
expenses on acquisition (2,375)
Financial Cost paid to the lender 2 (10,000)
Net gain (Capital gain) - 35,000
Taxable income of Nazia
(a) Financial income of Nazia (Taxable) 10,000
(b) No CGT to be collected as for Nazia, on return 'of the borrowed shares by
Anjum, the cost and date of acquisition shall remain the same as was before
lending the shares to Anjum. 0

Answers
CHAPTER 05 – OTHER AREAS-INCOME TAX

44 Book Author
Authors: [Section 89]

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 2019 to preceding two tax years 2018 and 2017.
45 Foreign Source Income - Returning expatriate
Foreign-source income of returning expatriates: [Section 51]

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 2018, the foreign source income derived in the tax year
2019 would be exempt from tax.
46 Transfer of Assets
Transfers of assets:[Section 90(4),(5),(6)]

Any income arising from any asset transferred by a person directly or indirectly to the person‘s 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.
47 Employee Share Scheme
(i) Employee share scheme: [Section 14(3),(4)]

Where shares issued to an employee under an employee share scheme are subject to a restriction
on the transfer of the shares
 no amount shall be chargeable to tax to the employee under the head ―Salary‖ until the earlier
of
 The time the employee has a free right to transfer the shares; or
 The time the employee disposes of the shares; and
 The amount chargeable to tax to the employee shall be the fair market value of the shares at
the time the employee has a free right to transfer the shares or disposes of the shares, as the
case may be, as reduced by any consideration given by the employee for the shares including
any amount given as consideration for the grant of a right or option to acquire the shares.

The cost of the shares to the employee shall be the sum of

 The consideration, if any, given by the employee for the shares;
 The consideration, if any, given by the employee for the grant of any right or option to acquire
the shares; and
 The amount chargeable to tax under the head ―Salary‖.
(ii) Tax Year 2017:
In tax year 2017 no income would be added to Mr. Hayat‘s salary as he did not have a right to
transfer the shares.
Tax Year 2018:
In tax year 2018, when Mr. Hayat got the option to transfer the shares, the market value was Rs.
20 per share, therefore, Rs 120,000 (6,000 x Rs.20) would be added to his incomeunder salary.
Tax Year 2019:
In tax year 2019, following amount would be added to Mr. Hayat‘s income.
Consideration received on sale of shares 210,000
Less: Cost of shares (amount charged in 2018 to income) (120,000)
Gain on sale to be taxed as income 90,000
As holding > 1 year only 75% amount is taxable (assuming Unlisted Company 67,500
shares)
48 Bad debts, Recovery of bad debts

(a) Bad Debts: [Section 29(1)]
A person shall be allowed a deduction for a bad debt in a tax year if the following conditions
are satisfied, namely:
(i) The amount of the debt was:
 Previously included in the person‘s income from business chargeable to tax; or
 In respect of money lent by a financial institution in deriving income from business
chargeable to tax;
(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.
(b) (i) Recovery of Rs. 200,000:
Rupees
Total Amount written off in the accounts 500,000
Less: Amount allowed as deduction in tax year 2016 (350,000)
Excess Amount disallowed 150,000
Less: Amount recovered (200,000)
Excess Amount to be included in income of BL in Tax year 2019 (50,000)

Answers
(ii) Recovery of Rs. 120,000:

Rupees
Total amount written off in the accounts 500,000
Less: amount allowed as deduction in tax year 2016 (350,000)
Excess amount disallowed 150,000
Less: amount recovered (120,000)
Short fall to be allowed as bad debt deduction in Tax year 2019 30,000
49 Herbal Trading (HT) – Disposal of Business
(a) Disposal of business by individual to wholly-owned company: [Section. 95(1)]
Where a resident individual disposes of all the assets of his business to a resident company, no
gain or loss shall be taken to arise on the disposal if the following conditions are satisfied,
namely:–
(i) The consideration received by the transferor for the disposal is a share or shares in the
company (other than redeemable shares);
(ii) The transferor must beneficially own all the issued shares in the company immediately after
the disposal;
(iii) The company must undertake to discharge any liability in respect of the assets disposed of
to the company;
(iv) Any liability in respect of the assets disposed of to the company must not exceed the
transferor‘s cost of the assets at the time of the disposal;
(v) The fair market value of the share or shares received by the transferor for the disposal must
be substantially the same as the fair market value of the assets disposed of to the company
less any liability that the company has undertaken to discharge in respect of the assets; and
(vi) The company must not be exempt from tax for the tax year in which the disposal takes
place.
(b) Necessary changes to be made to the proposed scheme of transfer:
According to the proposed scheme, Mr. Adnan is fulfilling almost all the conditions mentioned
above, except the following:
(i) Consideration to be received:
Mr. Adnan is required to receive the entire purchase consideration in the form of shares only
instead of 50% in the form of shares and 50% cash.
(ii) Ownership interest in the company:
As Mr. Adnan, immediately after the disposal of his herbal business to MPL, is required to
beneficially own the entire paid up share capital of MPL, therefore, he must acquire the
ownership interest of his brother Rais who is also willing to dispose off his holding in MPL.
However, Mr. Adnan is not required to acquire the ownership interest of his spouse Razia as
he already beneficially owns her ownership interest.

(iii) Transfer of liabilities
As MPL is required to undertake all the liabilities in respect of the assets disposed of by
Herbal Traders, Mr. Adnan should ensure that MPL assumes all the liabilities of Herbal
Traders including the liability of Barkat Enterprises.
Accordingly, Mr. Adnan will have to make the aforesaid changes to his proposed scheme of
transfer in order to get exemption from capital gain tax.
(c) Calculation of acquisition and consideration
(i) Number and the value of shares to be received by Mr. Adnan:
The fair market value of the consideration, in the form of shares, received by Mr. Adnan in
relation to transfer of his herbal business must substantially be the same as the fair market
value of the net assets (i.e. assets less liabilities) transferred by him to MPL.
Therefore, net worth of consideration of sales to be received by Mr. Adnan is computed

below:
Rupees
FMV of fixed assets 5,200,000
FMV of patents 2,300,000
Stock in trade (NRV) 4,000,000
Cash and bank balance 3,000,000
Trade debtors (3.0 m – 1.0m) 2,000,000
16,500,000
Less: Total liabilities including the liability of Barkat Enterprises (7,500,000)
Net worth of consideration of sales to be received by Mr. Adnan 9,000,000
Generally, for private limited companies, the break-up value of the shares is considered as
the FMV, this would mean that the shares to be issued to the individual must be equal to the
FMV of the net assets acquired by MPL.
Breakup value of MPL per share Rs.15
Number of shares to be issued to Mr. Adnan (9,000,000/15) 600,000
(ii) MPL’s Cost of acquisition of assets:
Rupees
Tax WDV of fixed assets 3,000,000
Tax WDV of patents 2,500,000
Stock in trade 4,000,000
Cash and bank balances 3,000,000
Trade debtors 3,000,000
Total cost of assets with MPL 15,500,000

Answers
Mr. Adnan’s cost in respect of the shares received by him as consideration.
Total cost of assets with MPL (calculated in (c)(ii) above) 15,500,000
Less: Total liabilities assumed by MPL (7,500,000)
8,000,000
Total number of shares received by Mr. Adnan 600,000
Cost of shares received as consideration Rs. 13.33
50 Withdrawal of Approval to Non-Profit/Foundations (IT Rules)
Power to withdraw approval: [Rule 217, Income Tax Rules, 2002]
The Commissioner may, at any time, withdraw the approval, if he is satisfied that:
(a) The constitution, memorandum and articles of association, trust deed, rules and regulations or
bye-laws, as the case may be, specifying the aims and objects of the organization do not
provide for prohibiting the making of any changes in the constitution, memorandum and articles
of association, trust deed, rules, regulations and bye-laws without prior approval of the Regional
Commissioner;
(b) The organization has:
(i) been or is being used for personal gain of any particular person or a group of persons;
(ii) been propagating the view of a particular political party or a religious sect;
(iii) been or is being managed in a manner calculated to personally benefit its members or
their families; or
(iv) not been, or will not be, able to achieve its declared aims and objects in view of its set
up, administration or otherwise as evaluated and certified by an independent certification
agency;
(v) failed to give valid reasons for setting apart, or not utilizing, or accumulating surpluses,
excluding restricted funds, in excess of twenty five per cent of the income for the year;
(vi) failed to file the return of income supported with the specified documents and also a
detailed performance evaluation report after every three years.
Provided that where such detailed performance evaluation report is not submitted on or
th
before the 30 of September following every three Tax Years, Commissioner of Income
Tax shall issue a show cause notice for withdrawal of approval to the concerned
organization as stated above;
(viii) failed to file statements of deduction of income tax under section 165 of the Income Tax
Ordinance, 2001 read with rule 44.
the names, CNIC/NTN, last income declared, tax year and addresses of the promoters,
directors, trustees, president, secretary, treasurer, manager and other office bearers, as
the case may be, of the organization and indicating clearly their family relationships, if
any, with each other.

51 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, 2019 under the
given circumstances.
For the tax year ended June 30, 2019, the relevant period is July 01, 2018 to June 30, 2019.
Therefore, the stay of Mr. Mubeen for the purpose of tax year 2019 is:
Month Days
July 2018 31
August 2018 31
September 2018 30
Total 92
Since his stay in Pakistan is less than 183 days in tax year2019, 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 2019 is:
Month Days
July 2018 31
August 2018 31
September 2018 30
October 2018 31
November 2018 30
December 2018 29
Total 182
The day he spent in Pakistan on June 30, 2019, while in transit, would not be counted as day
of his presence in Pakistan.
Therefore, Mr. Rana is a non-resident person as his total stay in tax year 2019 is less than 183
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 2019.
((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 2018 i.e. the
year starting from January 01, 2018 to December 31, 2018 (Special tax year 2019) is:
Month Days
July 2018 1
August 2018 31
September 2018 30
October 2018 31
November2018 30
December 2018 31
Total 154

Answers
In view of the permission granted by Commissioner Income Tax to Mr. Francis to use special
tax year, the number of days he spent in Pakistan beyond December 31, 2018 would fall under
tax year 2020. Therefore, 31 days which he spent in January 2019 would not be included in tax
year 2020.
As a result, Mr. Francis is a non- resident person as his total stay in tax year 2019 is less than
183 days.
52 Beetle Limited (BL)
(i) The Commissioner‘s contention is incorrect as the tax collected on import of plant and machinery
by an industrial undertaking for its own use is not final tax and hence it is adjustable. [Section
148(7)(a)]
(ii) Although commercial imports now covered under minimum tax regime however apportionment is
only required for those expenditures, deductions and allowances which are common in nature.
The expenditures included in cost of goods manufactured should not be apportioned unless these
include any item which can be considered as a common expenditure.
The Commissioner‘s contention with regard to cost of goods manufactured is, therefore, incorrect
unless he can prove otherwise, as discussed above.[Section 67]
(iii) Any property with respect to which the person is entitled to depreciation is not covered under the
definition of ―Capital asset‖, therefore, any gain on sale of such property would not be considered
as a capital gain. However, such gain would be treated as income from business and would be
charged to tax accordingly. The amount of gain is calculated as follows:
Rs. in million
Sale proceed of immovable property 120
Less: Tax WDV
Cost of immovable property ( consideration received) 120
Tax depreciation charged ( Rs. 90m – Rs. 70m) (20)
Tax WDV 100
Tax gain on disposal 20
Therefore, the gain of Rs. 20 million would be offered to tax as income from business instead of
Rs. 50 million as shown in the financial statements.[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 Commissioner‘s observation is, therefore, correct that such Royalty having not been paid for
over three years should have been offered to tax in the current tax year.[Section 34(5)]
(v) Bad debt is allowed if the amount of debt was previously included in the person‘s income from
business or in respect of money lent by a financial institution in deriving income from business.
Since BL is not a financial institution, loan written off could not be allowed as Bad debt and,
therefore, the Commissioner‘s contention is correct. [Section 29]

53 Skilled (Pvt.) Limited - Taxability of Joints Venture
Principles of taxation of joint venture: [Section 92]
(i) A joint venture is treated as an association of persons and is liable to tax separately from its
members.
In case a joint venture has net taxable income, tax would be calculated according to the rules and
principles applicable to the relevant head of income.
In case a joint venture incurs a loss in a tax year, the entire loss would be carried forward to the
following tax year and so on for a maximum period of six tax years.
(ii) Share of profits of company to be added to taxable income:[Section 92]

The share of profit derived by SPL and ECPL from the joint venture shall be added to their
respective taxable incomes. Tax liability of each company will then be calculated on their total
taxable income. The share of both the companies shall be excluded for the purpose of computing
the total income of the joint venture.
Where SPL and ECPL‘s share in the profit of a joint venture are added to their respective taxable
income; They would not be permitted a subsequent set-off in case the venture sustains a loss.
However, SPL & ECPL being the members of a joint venture shall be allowed to set-off their own
tax losses against their share of profit from the venture and pay tax on their adjusted income.
In case, the net effect of the above set-off results in a tax loss, both the companies shall be
entitled to carry forward their respective losses to the following tax year.
54 Short Term Resident
Foreignsource income of short-term resident individuals: [U/S 50]

Short- term resident individual is an individual who is:-
(i) A resident solely by reason of his employment; and
(ii) Present in Pakistan for a period or periods not exceeding three years.
The foreign source income of such individuals shall be exempt from tax under the Ordinance.
However, the following incomes are not covered under this exemption provision:
(i) Any income derived from a business of the person established in Pakistan; or
(ii) Any foreign-source income brought into or received in Pakistan by the person.
55 Group Taxation
Group Taxation: [U/S 59AA]

Holding companies and subsidiary companies of 100% owned group may opt to be taxed as one fiscal
unit.
Following conditions are required to be fulfilled for availing such benefit:
(a) Besides consolidated group accounts as required under the Companies Act, 2017, computation of
income and tax payable shall be made for tax purposes.
(b) The companies in the group shall give irrevocable option for taxation as one fiscal unit.
(c) The group taxation shall be restricted to companies locally incorporated under the Companies Act,
2017.

Answers
(d) The relief under group taxation would not be available to losses prior to the formation of the group.
(e) The option of group taxation shall be available to those group companies which comply with such
corporate governance requirements as may be specified by the Securities and Exchange
Commission of Pakistan from time to time and are designated as companies entitled to avail
group taxation.
(f) Group taxation may be regulated through rules as may be made by the Board.
56 Tax Avoidance Scheme

Tax avoidance scheme: [U/S 109]
Tax avoidance scheme means any transaction where one of the main purposes of a person in entering
into the transaction is the avoidance or reduction of any person‗s liability to tax under the Income Tax
Ordinance.
Reduction in a person's liability to tax as referred above means a reduction, avoidance or deferral of tax
or increase in a refund of tax and includes a reduction, avoidance or deferral of tax that would have
been payable under this Ordinance, but are not payable due to a tax treaty for the avoidance of double
taxation as referred to in section 107.
Re-characterization of income and deductions: [U/S 109]
For the purposes of determining liability to tax under the Income Tax Ordinance, 2001 the
Commissioner may
(i) Re-characterize a transaction or an element of a transaction that was entered into as part of a tax
avoidance scheme;
(ii) Disregard a transaction that does not have substantial economic effect; or
(iii) Re-characterize a transaction where the form of the transaction does not reflect the substance.
(iv) From tax year 2018 and onwards disregard an entity or a corporate structure that does not have
an economic or commercial substance or was created as part of the tax avoidance scheme.
57 Compulsory Taxation under FTR

(i) Compulsory taxation under Final Tax Regime: [U/S 152(1B)]
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:
Allowable deductions = HO Expenditures x PE Turnover
Worldwide Turnover

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-
resident‗s total head office expenditure bears to its worldwide turnover.
 Compensation for management services performed by the branch: [U/S 105(1)(d)(ii)]
In the determination of the income of a permanent establishment (P.E):
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.
However, amounts charged by the P.E towards reimbursement of actual expenses incurred
by the P.E to third parties shall be taken into account while determining the income of P.E.
58 Selection of Audit
Selection for audit: [Section 214C and 177]

Following methods are provided under the Ordinance for selecting a person for audit of his income tax
affairs:
(1) The Board may select a personfor 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 personunder 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 Finance Act, 2018 has inserted Clause 105 in Part IV of the Second Schedule, whereby
provisions of sections 177 and 214C have been made inapplicable, in cases where the income
tax affairs of the tax payer have been audited in any of the preceding 3 tax years. However, as an
exception to these newly introduced restrictions on the selection of cases for audit, a proviso has
also been inserted whereby the CIR is empowered to select a person‘s case for an audit with the
approval of the Board.
59 Khalq Limited (KL) – Government Grant

nd
Government grant: [Clause 102A of Part I of 2 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 of said grant is not chargeable to tax. Hence cost of plant and machinery will be 50 –
20 = 30 million.
60 Moon Limited (ML) – Foreign Payments
Medical expenses of CEO: [Section 152(5) & (7)(b)]

Every person paying an amount to a non-resident person is required to deduct tax from the gross
amount paid unless the non-resident person is not chargeable to tax in respect of the amount.

Answers
A non-resident‘s business income is chargeable to tax if such income is a Pakistan source income.
Since JH Hospital in Boston, USA (JHH) is a non-resident company and the medical treatment provided
by it to the CEO was also outside Pakistan, US$ 30,000 cannot be attributable to any business activity
of JHH in Pakistan and therefore, US$ 30,000 paid by ML cannot be regarded as a Pakistan source
income of JHH.
As US$ 30,000 is not chargeable to tax in Pakistan, ML was not required to deduct tax as remitted in
accordance with the regulations of State Bank of Pakistan. ML was also not required to inform the
Commissioner in writing prior to making the payment, as the medical expenses were paid in
accordance with the State Bank‘s regulations.
In view of above, US$ 30,000 is a deductible expense for the tax year 2019.
61 Mr.Pansari – Dividend from Exempt Income

nd
(a) Dividend received from exempt income: [Clause 105B of Part I of 2 Schedule]
nd
Keeping in view provision of clause 105B part I of 2 Schedule the benefit of the RFL‘s 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.
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.
62 Gadget Limited (GL) – Payment to Non-resident
Payment to non-resident and deductibility of an expense: [U/S 101(4)] Pakistan Source Income
Where the business of a non-resident person comprises the rendering of independent services
(including professional services and the services of entertainers and sports persons), the remuneration
received by such person shall be regarded as Pakistan-source business income if the remuneration is
paid by a resident person or borne by a permanent establishment in Pakistan of a non-resident person.
Since GL is a Pakistan resident company, Rs. 10 million receivable by the Indian artist would be
regarded as her Pakistan source income.
Payment for Foreign Produced Commercial S-152A
GL is also required to deduct withholding tax at 20% 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 20%.
In view of the above, GL after deducting withholding tax from the payment of Rs. 10 million can claim it
as deductible expenditure.
63 Opting out of PTR
Persons who may opt out of presumptive tax regime (PTR):

Following persons may opt out of the PTR
1. Exporters / Export indenting agent [U/S 154(5)]
2. Resident person receiving payment from a prescribed person for the sale of goods [U/S 153(3) read
nd
with clause 56C of Part-IV of 2 Schedule]
3. Resident persons receiving payment from prescribed persons for contract receipts. [U/S 153(3)
nd
read with clause 56D of Part-IV of 2 Schedule]

4. Services to exporter (resident person or permanent establishment in Pakistan of a non-resident

person owing payments from every exporter or an export house agent rendering of or preceding of
nd
specified services) [U/S 153(2) read with clause 56E of Part-IV of 2 Schedule]
5. Every person receiving commissions / discount against sale of petroleum products [U/S 156A read
nd
with clause 56F of Part-IV of 2 Schedule]
6. Every person (as Agent) receiving commission from specified persons [U/S 233(3) read with clause
nd
56G of Part-IV of 2 Schedule]
Conditions:
The above persons may opt for the Normal Tax Regime (NTR) along with accounts and documents
provided the tax liability under NTR does not fall below a specified percentage of the tax already
deducted or collected, in each of the above respective case.
64 Associates
Associates: [U/S 85]
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.
The circumstances under which the following may be regarded as associates:
 A member of an association of persons and the association: [U/S 85(3)(c)]
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;
 A shareholder in a company and the company: [U/S 85(3)(e)]
Where the shareholder, either alone or together with an associate or associates, controls either
directly or through one or more interposed persons
(i) fifty per cent or more of the voting power in the company;
(ii) fifty per cent or more of the rights to dividends; or
(iii) fifty per cent or more of the rights to capital;
65 Tax Evasion and Avoidance
Tax evasion:
It refers to all attempts to minimise a taxpayer‘s liability through illegal means. It is a punishable offence
in the eyes of law.
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 taxpayer‘s liability through legal means and without violating the
tax laws.
It pertains to a situation when a taxpayer legitimately takes advantage of the deductions, concessions
and benefits provided by the tax laws in order to reduce or defer his/her tax liability. For example
operating as a small company to incur lower tax rate or availing tax credit on newly established
industrial undertaking.

Answers
66 Derivative Product, Wash Sales, Tax Swap Sales [Rule 13F]
(i) Derivative products [Rule 13L(f)]
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 and future commodity contracts traded at
PMEX.
(ii) Wash Sales
Where capital loss realized on sale of specific security by an investor in preceded or followed in
one month‘s period by purchase of the same security by the same investor whereby the
transaction falls within one month between same two parties or their related parties where one
was seller and other was buyer and they change places becoming buyer and seller respectively,
thus, maintaining portfolio.
(iii) Tax Swap Sales
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.
67 Methods for Cost of Stock in Trade

Stock-in-trade: [Section 35(5)]
A person accounting for income chargeable to tax under the head ―Income from Business‖ on a cash
basis may compute the person‘s cost of stock-in-trade on the prime-cost method or absorption-cost
method, and a person accounting for such income on an accrual basis shall compute the person‘s cost
of stock-in-trade on the absorption-cost-method.
68 Salary of Foreign Government Employee
Foreign Government Officials: [U/S 43]
Any salary received by an employee of a foreign government as remuneration for services rendered to
such government shall be exempt from tax under this Ordinance provided
(i) the employee is a citizen of the foreign country and not a citizen of Pakistan;
(ii) the services performed by the employee are of a character similar to those performed by
employees of the Federal Government in foreign countries;
(iii) the foreign government grants a similar exemption to the employees of the Federal Government
performing similar services in such foreign country.
69 Exception to Pakistan source Royalty & FTS
(i) Exceptions to the rule: [U/S 6(3)]
The following are the exceptions:
 Any royalty where the property or right giving rise to the royalty is effectively connected with a
permanent establishment in Pakistan of the non-resident person;
 Any fee for technical services where the services giving rise to the fee are rendered through a
permanent establishment in Pakistan of the non-resident person; or
 Any royalty or fee for technical services that is exempt from tax under this Ordinance.

(ii) Prescribed Person: [U/S 155(3)]
The ‗prescribed person‘ with reference to deduction of tax from rent of immovable property
means:
 The Federal Government;
 A Provincial Government;
 A Local Government;
 A company;
 A non-profit organization or a charitable institution;
 A diplomatic mission of a foreign state;
 A private educational institution, a boutique, a beauty parlour, a hospital, a clinic or a

maternity home;
 Individuals or association of persons paying gross rent of rupees one and a half million and
above in a year; or
 Any other person notified by the Board for the purpose of this section.
(iii) Circulars issued by the Board: [U/S 206]
 To achieve consistency in the administration of the Income Tax Ordinance and to provide
guidance to taxpayers and officers of the Board, the Board may issue circulars setting out the
Board's interpretation of the Ordinance.
 A circular issued by the Board shall be binding on all Income Tax Authorities and other
persons employed in the execution of the Ordinance, under the control of the said Board
other than Commissioners of Income Tax (Appeals).
 A Circular shall not be binding on a taxpayer.
70 Profit on Debt
Profit on debt: [U/S 2(46)]

Profit on a debt, whether payable or receivable, means—
(i) Any profit, yield, interest, discount, premium or other amount owing under a debt, other than a
return of capital; or
(ii) Any service fee or other charge in respect of a debt, including any fee or charge incurred in
respect of a credit facility which has not been utilised;
Any profit received by a non-resident person on a security issued by a resident person shall be exempt
from tax under section 46 of the Ordinance where-
(i) The persons are not associates;
(ii) The security was widely issued by the resident person outside Pakistan for the purposes of
raising a loan outside Pakistan for use in a business carried on by the person in Pakistan;
(iii) The profit was paid outside Pakistan; and
(iv) The security is approved by the Board for the purposes of exemption.

Answers
71 Tax Admissible vs Tax Reliefs
Tax admissible expenses and Tax reliefs.

Tax admissible expenses: are the expenses borne by a person that legitimately reduces the revenue
to arrive at its taxable income from any source of income.
Tax reliefs: are the allowances and deductions which also serve to reduce the tax liability. Such
deductions are often not directly associated with the earning of revenue, but have been given by the
revenue authority to encourage certain activities. They may be deducted from income to arrive at the
tax base on which tax is computed, or deducted directly from the actual tax liability by way of tax credit.
72 Resale Price Method

Resale price method: [U/R 25]
The following steps shall apply in determining the arm's length result under the resale price method,
namely:-
(i) determine the price that a product purchased from an associate has been sold to a person who is
not an associate (referred to as the "resale price"); and
(ii) from the resale price is subtracted a gross margin (referred to as the "resale gross margin")
representing the amount that covers the person's selling and other operating expenses and, in
light of the functions performed (taking into account assets used and risks assumed), make an
appropriate profit; and
(iii) from that amount is subtracted any other costs associated with the purchase of the product, such
as customs duty; and
(iv) the amount remaining is the arm's length result.
73 Group Taxation and Pre Commencement Expenditure

(i) Group taxation: [U/S 59AA]
 Holding companies and subsidiary companies of 100% owned group may opt to be taxed as
one fiscal unit. In such cases, besides consolidated group accounts as required under the
Companies Act, 2017, computation of income and tax payable shall be made for tax purposes.
 The companies in the group shall give irrevocable option for taxation as one fiscal unit.
 The group taxation shall be restricted to companies locally incorporated under the Companies
Act, 2017.
 The relief under group taxation would not be available to losses prior to the formation of the
group.
 The option of group taxation shall be available to those group companies which comply with
such corporate governance requirements and group designation rules or regulations as may
be specified by the Securities and Exchange Commission of Pakistan from time to time and
are designated as companies entitled to avail group taxation.
 Group taxation may be regulated through rules as may be made by the Board.
(ii) Pre-commencement expenditure: [U/S 25(5) read with Part III of the Third Schedule]
Pre-commencement expenditure means any expenditure incurred before the commencement of a
business wholly and exclusively to derive income chargeable to tax, including the cost of
feasibility studies, construction of prototypes, and trial production activities, but shall not include
any expenditure which is incurred in acquiring land, or which is depreciated or amortised under
section 22 or 24.
A person shall be allowed a deduction for any pre-commencement expenditure in accordance

with the following:

 Pre-commencement expenditure shall be amortized on a straight-line basis at the rate of 20%.
 The total deductions allowed in the current tax year and all previous tax years in respect of an
amount of pre-commencement expenditure shall not exceed the amount of the expenditure.
 No deduction shall be allowed in the manner as mentioned above, where a deduction has
been allowed under another section of the Income Tax Ordinance, 2001 for the entire amount
of the pre-commencement expenditure in the tax year in which it is incurred.
74 Sweet Limited (SL) – Advance Tax and Default Penalty
Incidence of further tax liability: [U/S 147]

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.
Default Surcharge-[U/S 205 (1B)]
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 the Fourth
quarter of special tax 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 2019. Therefore, SL is exposed to the levy of default
surcharge under section 205(1B).
The amount of default surcharge would be calculated as follows:
Rupees
Total gross tax liability as per return 32,500,000
90% of the tax liability (32,500,000 × 90%) 29,250,000

Less: Amount deducted/paid at source under normal tax regime
[20,500,000+2,250,000+250,000*] (23,000,000)
Amount of short fall 6,250,000
Period of default (from 1 July 2018) to (30 June 2019) (92days + 274 days) 366 days
Rate of default surcharge 12% pa
Amount of default surcharge
(from 01/07/2017to 30/06/2018) 6,250,000 x 12% x 366/366 = Rupees 750,000
*Profit on debt for company under NTR and tax deducted is adjustable.
75 Depreciable Asset, Eligible Depreciable Asset
Depreciable Asset:[U/S 22(15)]

Answers
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.
Provided that where depreciable asset is jointly owned by tax payer and Islamic Financial Institution
Licensed by SBP or SECP, as the case may be, pursuant to an arrangement of Musharika financing or
Diminishing Musharika financing, the depreciable asset shall be treated to be wholly owned by the tax
payer.
Eligible depreciable asset: [U/S 23(5)]
Eligible depreciable assetmeans a depreciable asset other than:
(a) any road transport vehicle unless the vehicle is plying for hire;
(b) any furniture, including fittings;
(c) any plant or machinery that has been used previously in Pakistan; or
(d) any plant or machinery in relation to which a deduction has been allowed under another section of
the Ordinance for the entire cost of the asset in the tax year in which the asset is acquired .
76 Speculation Business
Speculation business[U/S 19(2)]

Speculation businessmeans any business in which a contract for the purchase and sale of any
commodity (including stocks and shares) is periodically or ultimately settled otherwise than by the actual
delivery or transfer of the commodity.
The given case is fully covered in the definition of speculation business loss that may be adjusted only
against speculation income whereas un-adjusted loss shall be carried forward for adjustment against
following six tax years income from speculation.
77 Disposal of Business by AOP to Wholly Owned Company
Disposal of business by association of persons to wholly-owned company.[U/S 96(1)]

(1) Where a resident association of persons disposes of a business of the association to a resident
company, no gain or loss shall be taken to arise on the disposal if the following conditions are
satisfied, namely:
 The consideration received by the association for the disposal is a share or shares in the
company (other than redeemable shares);
 the association must own all the issued shares in the company immediately after the disposal;
 each member of the association must have an interest in the shares in the same proportion to
the member‗s 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
association‗s 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.
78 Mr. Hoshyar - Penalty
(i) Offences and penalties: [U/S 182(1)]
Where a person fails to furnish a return of income that must be submitted by him, within the due
date.Such person shall pay a penalty equal to 0.1% of the tax payable in respect of that tax year
for each day of default subject to a maximum penalty of 50% of the tax payable provided if the
penalty is less than Rs. 20,000 or no tax is payable such person shall pay a penalty of Rs.
20,000. Therefore, Mr. Hushyar will be liable for penalty as calculated below:
Tax payable Rs. 2,173,000
No. of days of default (31+27) 58
Rate of penalty for each day of default 0.1%
Amount of penalty (2,173,000 x 0.1% x 58) Rs. 126,034
Maximum amount of penalty is 50% of tax payable Rs. 1,086,500

Minimum amount of penalty Rs. 20,000
Therefore, the amount of penalty payable by Mr. Hoshyar would beRs. 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.
79 Advance Ruling
Advance Ruling: [U/S 206A &U/R 231A]
Advance ruling means determination by the Committee in relation to the transaction which has been
undertaken or is proposed to be undertaken by a non-resident person the question of law specified in
the application.
Who may issue and the time frame for issuance:
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.
80 Rejection of Reward to Whistle-Blower
Rejection of reward to Whistleblowers: [U/S 227B(3)]
The claim for reward by the whistleblower shall be rejected, if:
 The information provided is of no value;
 The information is not supported by any evidence;
 The Board already had the information;
 The information was available in public records; or
 No collection of taxes is made from the information provided from which the Board can pay the
reward.

Answers
81 Imputable Income, Pakistan Mercantile Exchange

Imputable income: [U/S 2(28A)]
Imputable income in relation to an amount subject to final tax means the income which would have
resulted in the same tax, had this amount not been subject to final tax.
Pakistan Mercantile Exchange: [U/S 2(42A)]
PMEX is the abbreviation for Pakistan Mercantile Exchange Limited a futures commodity exchange
company incorporated under the Companies Act, 2017 and is licensed and regulated by the Securities
and Exchange Commission of Pakistan.
82 Define Information
Definite information includes information on: [U/S 122(8)]
(i) Sales or purchases of any goods made by the taxpayer
(ii) Receipts of the taxpayer from services rendered; or
(iii) Any other receipts that may be chargeable to tax under the Ordinance; and
(iv) The acquisition, possession or disposal of any money, asset, valuable article by the tax payer;
or
(v) Investment made by the taxpayer; or
(vi) expenditure incurred by the taxpayer.
83 Pakiza Limited
(a) Computation of tax depreciation for tax year 20X7:
Plant Building Furniture
Depreciation rate 15% 10% 15%
Initial allowance 25% 15% -
-------------- Rupees --------------
Cost of asset 8,200,000 5,000,000 1,200,000
Add: Installation charges 700,000 - -
Transportation cost 200,000 - -
Insurance premium - - -
Repair cost - - -
Less: Government grant (700,000) - -
8,400,000 5,000,000 1,200,000
Initial allowance (a) (2,100,000) (750,000) -

6,300,000 4,250,000 1,200,000
Normal allowance (b) (945,000) (425,000) (180,000)
Total depreciation – tax year 20X6(a+b) (3,045,000) (1,175,000) (180,000)
Tax WDV at 30/6/20X6 5,355,000 3,825,000 1,020,000
Normal allowance – tax year 20X7 803,250 382,500 153,000
Depreciation charge for tax year 20X7 1,338,750

(b) Person who may be appointed by the Federal Government as a judicial and accountant
member of the Appellate Tribunal.
Judicial member:
(i) A person may be appointed as a judicial member of the Appellate Tribunal if the person
 has exercised the powers of a District Judge and is qualified to be a Judge of the
High Court;
 is or has been an advocate of a High Court and is qualified to be a Judge of the High
Court
Accountant member:
(i) he is an officer of Inland Revenue Service equivalent to the rank of Regional
Commissioner;
(ii) a Commissioner Inland Revenue or Commissioner Inland Revenue (Appeals) having at
least three year experience as Commissioner or Collector
(iii) a person who has, for a period of not less than ten years, practiced professionally as a
chartered accountant within the meaning of the Chartered Accountants Ordinance,
1961;or
(iv) a person who has, for a period of not less than ten years, practiced professionally as a
cost and management accountant within the meaning of Cost and Management
Accountants Act,1966.
(c) Date of acquisition:
(i) Acquisition of a security on account of a nomination under bequest:
The date of death of the person making such bequest, or the date of transmission by
succession or under a will by the deceased, as the case may be, whichever is earlier.
(ii) Borrowed security:
The date on which the investor purchases the security to cover his short position and to
return the security to the security lender.
84 National Finance Commission
(a) National Finance Commission:

Within six months of the commencing day and thereafter at intervals not exceeding five years,
the President shall constitute a National Finance Commission consisting of the Minister of
Finance of the Federal Government, the Ministers of Finance of the Provincial Governments,
and such other persons as may be appointed by the President after consultation with the
Governors of the Provinces.
(b) The duty of the National Finance Commission is to make recommendations to the President as
to:
(i) the distribution between the Federation and the Provinces of the net proceeds of the
taxes;
(ii) the making of grants-in-aid by the Federal Government to the Provincial Governments;
(iii) the exercise by the Federal Government and the Provincial Governments of the
borrowing powers conferred by the Constitution; and
(iv) any other matter relating to finance referred to the Commission by the President.

Answers
85 Pledge Call Transaction
Pledge call transaction: [Rule 13P(p)]

When a borrower defaults in payment to the lender, and securities were pledged as collateral, the
lender is entitled to transfer such securities from the account of the person in default to his own
account.
Tax treatment
When the securities are transferred from the account of person in default to the lender‘s account,
such transfer will be treated as disposal for tax purposes. The system price (day-end price) will be
taken as deemed consideration for the purpose of computation of capital gain and tax thereon. Since
no proceeds will be due to the person in default, thus, NCCPL may not be able to collect tax from
such person. However, NCCPL shall report such capital gain and the amount of tax, if any, in the
statements.
Arm’s length standard: [Rule 23(3]
Commissioner may apply the following methods for the purposes of determining an arm‘s length
result:
(i) the comparable uncontrolled price method;
(ii) the resale price method;
(iii) the cost plus method; or
(iv) the profit split method.
86 Non-Revenue Objectives
Non-revenue objectives
(i) To strengthen anaemic enterprises by granting them tax exemptions or other conditions or
incentives for growth;
(ii) To protect local industries against foreign competition by increasing local import taxes;
(iii) As a bargaining tool in trade negotiations with other countries;
(iv) To counter the effects of inflation or depression;
(v) To reduce inequalities in the distribution of wealth;
(vi) To promote science and invention, finance educational activities or maintain and improve the
efficiency of local forces;
(vii) To implement laws which eliminate discrimination among various elements in the
markets/businesses.

CHAPTER 06 – OTHER AREAS-SALES TAX
87 Mr. Furqan - Returns, De-registration
(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: [U/R 11 of Sales Tax Rules, 2006]
Reasons for De-registration:
Mr. Furqan may be liable for deregistration due to any of the following reasons:
(i) He ceases to carry on his business;
(ii) His supplies have become exempt from tax;
(iii) He transfers or sells his business;
(iv) Merger with another person; or
(v) Failure to file tax return for six consecutive months.
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.
88 Withholding agents
a) Withholding agents: [U/R 1 of Sales Tax Special Procedure (Withholding) Rules, 2007]
Following persons are specified as withholding agents for the purpose of deduction and deposit
of sales tax:
(i) Federal and provincial government departments;
(ii) Autonomous bodies;
(iii) Public sector organizations;
(iv) Companies as defined in the Income Tax Ordinance, 2001, which is registered for Sales
Tax, Federal Excise Duty or income tax;

Answers
(v) Recipients of services of advertisement, who are registered for sales tax.
(vi) Persons registered as exporters.

Withholding agent includes the accounting office which is responsible for making payment
against the purchases made by a government department.
b) Withholding agents: [Rule 1(2) of STSPR, 2007]
Following are the withholding agents under the Sales Tax Special Procedure (Withholding)
Rules, 2007:
 federal and provincial government departments;
 autonomous bodies;
 public sector organizations;
 companies as defined in the Income Tax Ordinance, 2001, which are registered for sales
tax, federal excise duty or income tax;
 recipients of service of advertisement, who are registered for sales tax;
 persons registered as exporters.
 Sixty days, one hundred and twenty days, Additional Commissioner Inland Revenue, Board,
nine months. [section 10(3)]
 a taxable supply, the first charge on the assets, transferee of business. [Section 49(1)]
 500,000 × 1÷117 = 4,274.[Rule 2(3)(ii) of STSPR, 2007]
89 Qualification / Disqualification of Representative
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;
(c) A person holding a Bachelor or Master degree in Commerce;
(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;
Provided that no such person shall be entitled to represent a taxpayer for a period of one year
from the date of his retirement or resignation, or in a case in which he had made, or approved,
as the case may be, any order under the relevant Acts; and
(e) An accountant.
Disqualifications: [Rule 60, Sales Tax Rules,2006]
The following persons shall not be entitled to represent a taxpayer, namely:
(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;
(c) A person who is an un-discharged insolvent; and
(d) A person who has been found guilty of misconduct as defined in sales tax rules.
90 Consideration in Kind-Supply [U/S 2(46)]
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: [U/R 20 of Sales Tax Rules, 2006]
Tameer Limited (TL) would follow the following procedure:
(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:
 Name and National Tax Number of the recipient (i.e. TL);
 Name and National Tax Number of the supplier (i.e. FL);
 Number and date of the original sales tax invoice;
 The reason of issuance of the Debit Note; and
 Signature and seal of the authorized person issuing the note.
(ii) The original copy of the debit note shall be sent to FL and the duplicate copy shall be retained by
TL for record.
91 Stock Acquired Before Registration [U/S 59]
(a) Tax paid on stocks acquired before registration:
The tax paid on goods purchased by Ms. Hina who subsequently got voluntary registration under
the Act or the rules made thereunder, shall be treated as input tax, subject to the following
conditions:
In case of locally purchased packed dates:
(i) The dates were purchased from a registered person against a valid sales tax invoice.
(ii) The invoice was issued during a period of thirty days before making the application for
registration; and
(iii) Such dates constitute her verifiable unsold stock on the date of application for voluntary
registration.
In case of imported coffee:
(i) The tax paid on the coffee at import stage must be during a period of ninety days before
making an application for registration.

Answers
(ii) She holds the bill of entry relating to such coffee; and
(iii) The unsold or un-consumed stocks are verifiable on the date of application for voluntary
registration.
(b) In view of the above, the following amount of input tax can be claimed by Ms. Hina with her sales
tax return for the month of May 2019.
Rs.
In case of locally purchased packed dates: 41,325
(458 packets of dates purchased on March 28, 2019)
In case of imported coffee: 39,900
(42 kg of coffee imported on February 25,2019)
81,225
92 Inadmissible Input Tax

Certain transactions not admissible:
(i) Notwithstanding, the payment was made through a crossed pay order drawn on the business
bank account of the buyer, the transaction is inadmissible for the purpose of claiming input tax
since the payment was made after 180 days of the issuance of the tax invoice.[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 of Sales Tax Special Procedure Rules, 2007]
93 Recovery of tax Arrears
Recovery of arrears of tax: [U/S 48]

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, 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.
Provided that the Commissioner Inland Revenue or any officer of Inland Revenue shall not issue
notice under this section or the rules made thereunder for recovery of any tax due from a
taxpayer if the said taxpayer has filed an appeal under section 45B in respect of the order under
which the tax sought to be recovered has become payable and the appeal has not been decided
by the Commissioner (Appeals), subject to the condition that twenty-five per cent of the amount of
tax due has been paid by the taxpayer.
94 Representative of non-resident
Representative of a non-resident person: [U/S 58A(3)]

Any person in Pakistan may be regarded as the representative of a non-resident person for a tax year:
(i) Who is employed by, or on behalf of, the non-resident person;
(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;
(v) Who is the trustee of the non-resident person; or
(vi) Who is declared by the Commissioner by an order in writing to be the representative of the non-
resident person. But before such declaration, the Commissioner would give an opportunity of
being heard to such person.
95 E-intermediary Appointment, Responsibilities, Cancellation
(a) Procedure for appointment as e-intermediary: [U/R 150J]
A person, desirous of being appointed as e-intermediary and having sufficient information

technology infrastructure and professional experience in the field of providing taxation services,
shall apply to the e-declaration administrator on the prescribed format. Professional experience
shall mean.
(i) CA or ICMAP firm
(ii) Authorized representative of person
(iii) Income tax practitioner
(iv) Any person approved by Board.

Answers
The e-declaration administrator, after receipt of application for appointment as e-

intermediary, and after verification, as aforesaid, shall forward the application along with
his specific recommendations to the Board for appointment of the applicant as e-
intermediary.
The e-declaration administrator, after receipt of application for appointment as e-
intermediary, and after verification, as aforesaid, shall forward the application along with
his specific recommendations to the Board for appointment of the applicant as e-
intermediary.
(b) Responsibilities of an e-intermediary : [U/R 150N]
The e-intermediary shall be responsible for security and confidentiality of the 'Unique User
Identifier' allotted to him, and where any e-declarations is transmitted to the computerized
system by using his Unique User Identifier‗, transmission of that e-declaration shall be
deemed to have been transmitted by the e-intermediary to whom such 'Unique User
Identifier' has been allotted.
The e-intermediary shall retain the data relating to all e-declarations transmitted by him
electronically on behalf of a registered person, for a period of five years following the
date of such declarations.
Where an e-intermediary has retained a printed copy of the return electronically
transmitted by him duly signed by the representative of the registered person, he shall
be deemed to have transmitted the return, in good faith.
(c) Cancellation of appointment as an e-intermediary [U/R 150F]
1 Where the Board is satisfied that the e-intermediary has
(i) Failed to comply with any of the conditions prescribed by theBoard; or
(ii) Acted in contravention of any of the provisions of the Act or these rules; or
(iii) Failed to take adequate measures for security and confidentiality of the
Unique User Identifier; or
(iv) Been convicted in an offence under the Act or any other law for the time being in
force; the Board may cancel the appointment of such e-intermediary after affording
him an opportunity of being heard.
2 Pending consideration whether the appointment of the e-intermediary be cancelled, the
Board may suspend the appointment.
3 An e-intermediary who intends to surrender his appointment, shall file an
application to this effect to the Board.
4 The Board may, on receipt of an application as above, cancel the appointment of the e-
intermediary after necessary inquiry, as it may deem proper to conduct.
96 Representatives and Personal Liability
Persons regarded as representative in each of the following cases: [U/S 58A]

The representative in respect of each of the following cases means:
(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.
(ii) Association of persons: If Association of person is a firm then partner, in other cases a director
or a manager or secretary or agent or accountant or any similar officer of the association.

(iii) Federal Government: Any individual responsible for accounting for the receipt and payment of
moneys or funds on behalf of the Federal Government.
Personal liability of the representative(U/S 58B):
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
(i) Alienates, charges or disposes of any moneys received or accrued in respect of which the tax is
payable; or
(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.
97 Service of Notice to Non Resident
Service of notice: [U/S 56(2)]

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:
(i) Personally served on the representative of the person;
(ii) Sent by registered post or courier service to the person‘s 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;
(iii) Served on the person in the manner prescribed for service of a summons under the code of Civil
Procedure, 1908; or
(iv) Sent electronically through email or to the e-folder maintained for the purpose of e-filing of Sales
Tax cum Federal Excise Returns by the limited companies, both public and private.
98 Registration
Requirement of registration: [U/S 14]
(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%). In case of
commercial importer, Value Addition Tax @ 3% would also be paid.
(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.

Answers
99 Credit Note
Adjustment of output tax: [U/R 21]

The adjustment in output tax can only be made if the corresponding credit note is issued within 180
days of the date of the relevant supply.
As the supply was made on 4 December 2018, the 180 days would expire on 2 June 2019. Therefore,
AL cannot issue the credit note after 2 June 2019 unless the collector, at AL‘s request, giving reasons in
writing, extend the period of 180 days by a further 180 days.
100 Time of Supply, CREST, Supply Chain
(i) Time of supply: [U/S 2(44)]
Time of supply, in relation to,-

 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 supplyor the time when any
payment is received by the supplier in respect of that supply, whichever is earlier;
 A supply of goods under a hire purchase agreement, means the time at which the
agreement is entered into; and
 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)]
‗Crest‘ means the computerized program for analysing and cross-matching of sale tax returns,
also referred to as computerized Risk-based Evaluation of Sale Tax.
(iii) Supply chain: [U/S 2(33A)]
‗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.
101 Scope of Special Audit (ST-Rules)
Scope of special audit: [U/R 42 of Sales Tax Rules, 2006]

The scope of the special audit shall be the expression of professional opinion with respect to the
following, namely:-
(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.

102 Joint and Several Liability
(i) Joint and several liability of registered persons in supply chain [U/S 8A]
Where a registered person receiving a taxable supply from another registered person is in the
knowledge or has reasonable grounds to suspect that some or all of the tax payable in respect of
that supply or any previous or subsequent supply of the goods supplied would go unpaid of which
the burden to prove shall lie on the department, such person as well as the person making the
taxable supply shall be jointly and severally liable for payment of such unpaid amount of tax;
Provided that the Board may by notification in the official gazette, exempt any transaction or
transactions from the provision of this section.
(ii) Change in the rate of tax [U/S 5]
If there is a change in the rate of tax—
 Taxable supply made by a registered person shall be charged to tax at such rate as is in
force at the time of supply;
 Imported goods shall be charged to tax at such rate as is in force;
 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 that where a goods declaration is presented in advance of the arrival of the
conveyance by which the goods are imported, the tax shall be charged as is in force on the
date on which the manifest of the conveyance is delivered:
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.
103 Property Not Liable to Attachment
Property not liable to attachment and sale in execution. [U/R 80]

Following particulars shall not be liable to attachment or sale, namely:
(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;
(iii) Stipends and gratuities allowed to a pensioner of a Government or payable out of any service or
family pension fund notified in the official Gazette by the Federal Government or the Provincial
Government in this behalf, and political pensions;
(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;

Answers
(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.
104 Continuance of Proceeding (Death)
Continuance of proceedings: [U/R 138 of Sales Tax Rules, 2006]

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.
105 Appointment of Committee - Disputes
Types of Disputes: [U/S 47A(1)]
Following are the types of disputes in relation to which a registered person may apply to the Board for
the appointment of a committee for the resolution of a dispute which is under litigation in any Court of
Law or an Appellate authority.
(i) The liability of tax against the registered person, or admissibility of refunds, as the case may be;
(ii) The extent of waiver of default surcharge and penalty; or
(iii) Any other specific relief required to resolve the dispute.
Time Frame: [U/S 47A(2)]
The Board may, after examination of the application of a registered person, appoint a committee within
sixtydays of receipt of such application in the Board.
Composition of the committee: [U/S 47A(2)]
The committee appointed by the Board for the resolution of dispute would consist of the following:
(i) An officer of Inland Revenue not below the rank of a Commissioner and
(ii) a person to be nominated by the taxpayer from a panel notified by the Board comprising,-
a) senior chartered accountants and senior advocates having experience in the field of taxation;
and
b) reputable businessmen as nominated by Chambers of Commerce and Industry: Provided that
the taxpayer shall not nominate a Chartered Accountant or an advocate if the said Chartered
Accountant or the advocate is or has been an auditor or an authorized representative of the
taxpayer; and
(iii) a retired Judge not below the rank of District and Sessions Judge, to be nominated through
consensus by the members appointed under clauses (i) and (ii).

106 Similar Supply – Open Market Price, Special Returns
(i) Similar Supply: [U/S 2(31)]

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.
(ii) Special Returns: [U/S 27]
In addition to the return specified under section 26
 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
 The Commissioner may require any person whether, registered or not, to furnish a return
whether on his own behalf or as an agent or trustee in a prescribed form and such person
shall furnish the return not later than the date specified in this regard.
107 Black Listing and Suspension of Registration
(i) Effect in case of black listing or suspension of a registration [U/S 21(3)]

During the period of suspension of registration, the invoices issued by such person shall not be
entertained for the purposes of sales tax refund or input tax credit, and once such person is black
listed, the refund or input tax credit claimed against the invoices issued by him, whether prior or
after such black listing, shall be rejected through a self-speaking appealable order and after
affording an opportunity of being heard to such person.
(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.
108 Registration of Retailers-I [Section 2(43A) read with Rule 4 of Sales Tax Special
Procedure Rules, 2007]
Retailers falling in any of the following categories shall be required to be registered as a retailer under
the Sales Tax Act 1990:-
(a) A retailer operating as a unit of a national or international chain of stores;
(b) a retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;
(c) A retailer whose cumulative electricity bill during the immediately preceding twelve consecutive
months exceeds rupees six hundred thousand; and

Answers
(d) A wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale
basis to the retailers as well as on retail basis to the general body of the consumers:
Provided that the above provisions shall remain applicable to retailers who do not obtain registration:
Provided further that the retailers operating as a unit of a franchise or any other arrangement of a
national or multinational chain of stores, shall obtain a separate registration as distinct from their
principal.
109 Registration of Retailers-II [Section 3(9)read with Rule-6 of Sales Tax Special Procedure
Rules, 2007]
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%
110 Non- Active Taxpayer

Non-active tax payer: [U/S 2(1)]
A registered person who falls in any of the following categories is regarded as a non-active tax payer:
 Who is blacklisted or whose registration is suspended or is blocked;
 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.
Consequences faced by Non-active taxpayer:
A non-active taxpayer shall not be entitled to:
 File goods declaration for import or export;
 Issue sale tax invoices;
 Claim input tax or refund; or
 Avail any concession under the Sales Tax Act or Rules made thereunder.
 No person including government departments, autonomous bodies and public sector
organisations, shall make any purchases from a non-active tax payer.
 In case of entry of an invoice issued by a non-active taxpayer by any registered buyer in
Annexure-A of his return, a message shall appear to the effect that the supplier is a non-active
taxpayer and no input tax credit shall be admissible against such invoice.
111 Temporary Registration

Temporary registration: [U/R 5A of Sales Tax Rules, 2006]
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.

112 Provincial Sales Tax
a) Taxable service: [Section 3 of Punjab Sales Tax on Services Act, 2012]

A taxable service is a service listed in the Second Schedule to the Provincial Act, which is
provided:
 By a registered person from his registered office or place of business in Punjab.
 In the course of an economic activity, including its commencement or termination of the
activity.
Explanation:
The above deals with services provided by registered persons, regardless of whether those
services are provided to resident persons or non-resident persons.
b) Application of principle of origin and reverse charge: (Punjab/ Balochistan/ Khyber

Pakhtunkhwa) [Note: Any one of the three is required]
(i) Where a person is providing taxable services in a Province other than the Punjab/
Balochistan/ Khyber Pakhtunkhwabut the recipient of such services is resident of the
Punjab/ Balochistan/ Khyber Pakhtunkhwa or is otherwise availing such services in the
Punjab/ Balochistan/ Khyber Pakhtunkhwa and has charged tax accordingly, the person
providing such services shall pay the amount of tax so charged to the Government.
(ii) Where the recipient of a taxable service is a person registered under the Act,he shall
deduct the whole amount of tax in respect of the service received and pay the same with
the Government.
(iii) Where a person is providing taxable services in more than one Province or territory in
Pakistan including the Punjab/ Balochistan/ Khyber Pakhtunkhwa,such person shall be
liable to pay tax to the Government to the extent the tax is charged from a person resident
in the Punjab/ Balochistan/ Khyber Pakhtunkhwaor from a person who is otherwise availing
such services in the Punjab/ Balochistan/ Khyber Pakhtunkhwa.
(iv) Where rendering of a taxable service originates from the Punjab/ Balochistan/ Khyber
Pakhtunkhwa but terminates outside Pakistan,such person shall be required to pay tax on
such service to the Government.
(v) Where a taxable service originates from outside Pakistan but is received or terminates in
the Punjab/ Balochistan/ Khyber Pakhtunkhwa,the recipient of such service shall be liable
to pay the tax to the Government.
(vi) The person who are required to pay the tax to the Government in terms of sub-sections (i),
(ii), (iii), (iv) and (v) shall be liable to registration for the purpose of this Act.
(vii) All questions or disputes relating to the application of the principle of origin given in this
section shall be resolved in terms of the already recorded understanding between the
Federal Government and the Provincial Governments on the implementation of reformed
General Sales Tax:provided that pendency of any such question or dispute shall not
absolve the concerned person from his obligation to deposit the tax.
(viii) The provisions relating to origin and reverse charge shall apply notwithstanding any other
provision of this Act or the rules and the Government may specify special procedure to
regulate the provisions of this section.

Answers
c) i) Activities which are regarded to be excluded from the ambit of ‘Economic activity’:
An economic activity does not include:
 the activities of an employee providing services in that capacity to an employer; or
 a private recreational pursuit or hobby of an individual.
ii) Person:
Person means:
 an individual;
 a company;
 an association of persons;
 Federal Government;
 a provincial Government;
 a local authority or local government; or
 a foreign government, a political subdivision of a foreign government, or a public
international organization.
113 Mr.Munaf - Refund
Computation of refund: [U/S 10 read with section 67]

Rupees
Amount of refund 75,000
Add: Additional amount due to delayed refund: W.1 658
Less: Amount of tax penalty adjusted [U/S 10(2)] (15,000)
Net amount of refund 60,658
W1-Computation of additional amount:

Date on which refund was due [45 days from 15-9-2018] [U/S 10(1)] 29-10-2017
Number of days delayed [30-10-2018 to 30-11-2018] 32 days
Rate at which additional amount is to be paid [KIBOR p.a] 10%
Additional amount to be paid [75,000 × 10% × 32/365] [U/S 67] Rs. 658
114 Fill in the Blanks
(i) Sixty days, one hundred and twenty days, Additional Commissioner Inland Revenue, Board,
nine months. [Section 10(3)]
(ii) a taxable supply, the first charge on the assets, transferee of business. [Section 49)1]
(iii) 500,000 × 1÷117 = 4,274 [Rule 2(3)(ii) of STSPR, 2007]
115 Tier-1 retailers
Tier-1 retailers: [Rule 4 Chapter II of Sales Tax Special Procedure Rules, 2007]
(i) A retailer operating as a unit of national or international chain of stores;
(ii) A retailer operating in an air-conditioned shopping mall, plaza or centre, excluding kiosks;

(iii) A retailer whose cumulative electricity bill during the immediately preceding twelve consecutive
months exceeds Rupees six hundred thousand; and
(iv) A wholesaler-cum-retailer, engaged in bulk import and supply of consumer goods on wholesale
basis to the retailers as well as on retail basis to the general body of the consumers;
Payment of sales tax by Tier-1 retailers:
The provisions relating to payment of sales tax by Tier-1 retailer are as follows:
 Tier-1 retailer shall pay sales tax at the rate of seventeen percent
 the retailers making supplies of finished goods of the five sectorsspecified in Notification issued
by the Board in this regard, shall pay sales tax in respect of such supplies at the rates
prescribed in the said Notification:
 Tier-1 retailers, in lieu of net tax payable at the applicable rate,shall have an option to pay sales
tax under the turnover regime at the rate of two percent of their total turnover,including turnover
relating to exempt supplies, without adjustment of any input tax whatsoever:
 retailers opting to pay sales tax on the basis of total turnover shall file an option to the Chief
Commissioner of Regional Tax Office or Large Taxpayers Unit having jurisdictionby fifteenth day
of Julyopting to pay sales tax on the basis of turnover and such an option shall remain in force
for the whole financial year.
116 Conditions under sales tax rules, 2006
(i) Persons not entitled to represent a taxpayer before the Appellate Tribunal:
[Rule 60 of Sales Tax Rules, 2006]
The following persons shall not be entitled to represent a taxpayer before the Appellate Tribunal,
namely:–
 any person who has been convicted as a result of any criminal proceedings under any law
for the time being in force in Pakistan;
 a person who has been dismissed or compulsorily retired from service;
 a person who is an undischarged insolvent; and
 a person who has been found guilty of misconduct as defined inclause (xxxi) of sub-rule (1)
of rule 2.
(ii) Cancelation of registration:[Rule 150K of Sales Tax Rules, 2006]
Where the Board is satisfied that any user authorized to use the computerized system has:-
 failed to comply with any of the conditions prescribed by the Board; or
 acted in contravention of any of the provisions of the Act or Chapter XII; or
 Failed to take adequate measures for security and confidentiality of the unique user
identifier; or
 been convicted in an offence under this Act or any other law for the time being in force; the
Board may cancel the authorization of that user after affording him an opportunity of being
heard.

Answers
CHAPTER 07 – OTHER AREAS FEDERAL EXCISE ACT

In the light of the provisions of Federal Excise Act, 2005, fill in the following blanks with the appropriate
answers.
(i) Every person who for any reason whatever has collected any duty in excess of the duty actually
payable and the incidence of which has been passed on to the consumer, shall pay the amount
so collected to the Federal Government.[Section 11]
(ii) ―Non-tariff area‖ means Azad Jammu and Kashmir, Northern Areas and such other territories or
areas to which the Federal Excise Act does not apply.[Section 2(17)]
(iii) ―Establishment‖ includes an undertaking, firm or company, whether incorporated or not, an
association of persons and an individual.[Section 2(10)]
(iv) ―Distributor‖ means a person appointed by a manufacturer in or for a specified area to purchase
goods from him for sale to a wholesale dealer in that area.[Section 2(8)]
118 Applicable Value and Rate of Duty, Supply
Applicable value and rate of duty: [U/S 10]

The value and the rate of duty applicable to any goods or services shall be the value, retail price, tariff
value and the rate of duty in force.
 In the case of goods, on the date on which the goods are supplied for export or for home
consumption;
 In the case of services, on the date on which the services are provided or rendered; and
 In the case of goods produced or manufactured outside the areas to which this Act has been
applied and brought to such areas for a sale or consumption therein, the date on which the goods
are brought to those areas.
Supply: [U/S 2(23a)]
Supply includes sale, lease or other disposition of goods and shall include such transaction as the
Federal Government may notify in the official Gazette from time to time.
119 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.
120 Non-fund Banking Services, Franchiser
(i) Non-fund banking services: [U/S 2(16a)]

Franchise means an authority given by franchiserunder which the franchisee is contractually or
otherwise granted any rightto produce, manufacture, sell or trade in or do any other business activity in
respect of goods or to provide serviceor to undertake any process identified with franchiseragainst 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.
Includes all non-interest based services provided or rendered by the banking companies or non-
banking financial institutions against a consideration in the form of a fee or commission or
charges.
(ii) Franchiser: [U/R 2(mb)]
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.
121 Excess duty collected
(a) Collection of excess duty: [U/S 11]
Every person who for any reason whatever has collected or collects any duty, which is not
payable as duty or which is in excess of the duty actually payable and the incidence of which has
been passed on to the consumer, shall pay the amount so collected to the Federal Government
and all the provisions of Federal Excise Act or rules made there under shall apply for the
recovery of such amount and claim for the refund of any such amount paid or recovered shall not
be admissible on any ground whatever.
(b) Duty on services provided free of charge: [U/S 12(2)]
Where any services are liable to duty under Federal Excise Act at a rate dependent on the
charges therefore, the duty shall be paid on total amount of charges for the services including the
ancillary facilities or utilities, if any, irrespective whether such services have been rendered or
provided on payment of charge or free of charge or on any concessional basis.
122 Person liable to pay FED
Persons liable to pay Federal Excise Duty: [U/S 3(5)]

The liability to pay duty shall be:-
(i) In case of goods produced or manufactured in Pakistan, of the person manufacturing or
producing such goods;

Answers
(ii) In case of goods imported into Pakistan, of the person importing such goods;
(iii) In case of services provided or rendered in Pakistan, of the person providing or rendering such
service, provided where services are rendered by the person out of Pakistan, the recipient of
such service in Pakistan shall be liable to pay duty; and
(iv) In case of goods produced or manufactured in non-tariff areas and brought to tariff areas for sale
or consumption therein, of the person bringing or causing to bring such goods to tariff areas.
123 Alternative Source

The alternative sources on which duty may be levied and collected by the Board: [U/S 3(3)]
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:
(i) 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.
124 Duty Drawback

Duty drawback: [U/S 5(2)]
The Board may, by notification in the official Gazette, grant drawback of duty paid on any goods used
in the manufacture of any goods manufactured in and exported out of Pakistan, or shipped as
provisions or stores for consumption on board a ship or aircraft proceeding to a destination outside
Pakistan, at such rate or rates and subject to such conditions and limitations as may be specified in the
notification.
Notwithstanding the above, Board may prohibit the payment of drawback, refund or adjustment upon
exportation of goods to any specified foreign port of territory.
125 Discontinued Business Enterprise, Transfer of Ownership
Discontinued business enterprise: [U/S 9(1)]
Where any business enterprise is discontinued and any amount of duty chargeable on the business
enterprise, whether before, or in the course of, or after its liquidation cannot be recovered from the
business enterprise, every person who was an owner of, or partner in, or director of, the business
enterprise shall, jointly and severally with such persons, be liable for the payment of such duty.
Transfer of ownership of a business to another person as an ongoing concern: [U/S 9(2)]
In the case of sale or transfer of ownership of a business or part thereof involving any charge of duty to
another person as an ongoing concern, the chargeable duty shall be paid by the person to whom
ownership is transferred provided that if any amount of duty payable by such person remains unpaid,
such unpaid amount of duty shall be the first charge on the assets of the business and shall be payable
by transferee of business:
Provided that no business enterprise or a part thereof shall be transferred unless the outstanding duty
is paid and a no objection certificate in this behalf is obtained from the Commissioner concerned.

126 Due Date and Duty Due
(i) Due date: [Section 2(8a)]

th
In relation to furnishing a return under the FEA, 2005, means the 15 day of the month following
the end of the month, or such other date as the Board may, by notification in the official Gazette,
specify and different dates may be specified for furnishing of different parts or annexures of
the return.
Duty due: [Section 2(9a)]
Duty due means duty in respect of supplies made or services provided or rendered during a
month and shall be paid at the time of filing of return.
(ii) Establishment: [Section 2(10)]
Includes an undertaking,firm or company, whether incorporated or not, an association of persons

and an individual.
Person: [Section 2(18)]
Includes a company, an association, a body of individuals, whether incorporated or not, a public
or local authority, a Provincial Government or the Federal Government.
(iii) Suspension of registration: [U/R 6(2)]
Where a collector has reasons to believe that;
 A registered person is found to have issued false invoices; or
 Evaded duty; or
 Has committed any offence or irregularity to evade duty; or
 Avoid his obligations under the Act or the Rules
he may, after confirming the facts and veracity of the information and giving opportunity to such
person to clarify his position, suspend his registration.
127 Default Surcharge, KIBOR
Default Surcharge: [U/S 8]

If a person does not pay the duty due or any part thereof within the prescribed time or receives a refund
of duty or drawback or makes an adjustment which is not admissible to him, he shall, in addition to the
duty due, pay default surcharge at the rate of 12 per cent of the duty due, refund of duty or drawback.
Period of default under the above circumstances:
(i) The period of default shall be considered from the date following the due date on which the duty
was payable to the preceding day on which the duty is actually paid; and
(ii) In case of inadmissible adjustment or refund of duty or drawback, the period of default shall be
considered from the date of such adjustment or as the case may be, refund of duty or drawback is
received.
(iii) KIBOR: [U/S 2(15a)]
It means Karachi Inter-Bank Offered Rate prevalent on the first day of each quarter of the
financial year.

Answers
128 Conveyance, Distributor, Recovery of Duty, Particular of Service Invoice

(i) Conveyance: [U/S 2(6)]
‗conveyance‘ means any means of transport used for carrying goods or passengers such as
vessel, aircraft, vehicle or animal etc.
(ii) Distributor: [U/S 2(8)]
‗Distributor‘ means a person appointed by a manufacturer in or for a specified area to purchase
goods from him for sale to a wholesale dealer in that area;
(iii) Mode of recovery of duty in case of short payment: [U/S 14A]
Notwithstanding the provisions of this Act or the rules made thereunder, 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
thereunder:
Provided that no penalty under this Act or rules made thereunder shall be imposed unless a show
cause notice is given to such person.
(iv) Particulars to be stated on the invoice issued at the time of providing services: [U/S 18]
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:
(a) Name, address and registration number of the seller;
(b) Name, address and registration number of the buyer;
(c) Date of issue of the invoice;
(d) Description of services;
(e) Value exclusive of excise duty;
(f) Amount of excise duty; and
(g) Value inclusive of excise duty.
129 Cottage Industry
Registration: [U/S 13 (2)]

If a cottage industry is engaged in the production or manufacture of goods liable to duty of excise under
the Federal Excise Act, 2005 it shall, unless otherwise specified, be required to obtain registration in the
prescribed manner regardless of its annual turnover or volume of sales of such goods.
The provisions of Sales Tax Act, 1990, including those relating to exemption threshold shall not apply
where the cottage industry obtains or is liable to obtain registration for the purposes of Federal Excise
Act but does not have or is not liable to registration under the Sales Tax Act, 1990.
130 Construed Manufacturer, Sales Tax Mode
(i) Manufacturer: [U/S 2(16)(b)(i)(ii)(iii)]

Following person(s) are construed to be included in the word ‗manufacturer‘:
 Any person who employs hired labour in the production or manufacture of goods; or
 Any person who engages in the production or manufacture of goods on his own account if
such goods are intended for sale: and

 Any person who, whether or not he carries out any process of manufacture himself or
through his employees or any other person, gets any process of manufacture carried out on
his behalf by any person who is not in his employment.
Provided that any person so dealing in goods shall be deemed to have manufactured
for all purposes of this Federal Excise Duty Act, such goods in which he deals in any
capacity whatever;
(ii) Sales tax mode: [U/S 2(21a)]
Sales tax mode means the manner of collection and payment under the Sales Tax Act, 1990, and
rules made thereunder, of the duties of excise chargeable under the Federal Excise Act specified
to be collected and paid as if such duties were tax chargeable under section 3 of the Sales Tax
Act and all the provisions of the Sales Tax Act and rules, notifications, orders and instructions
made or issued thereunder shall, mutatis mutandis, apply to the excise duty so chargeable.
131 Closure of business
Liability in case of closure of a private company: [U/S 9(1)]

Where any private company is closed and any amount of duty chargeable on the company, whether
before, or in the course of, or after its liquidation cannot be recovered from the company, every person
who was an owner or director of the company shall, jointly and severally with such persons, be liable for
the payment of such duty.
Liability in case of sale of a business to another person: [U/S 9(2)]
In the case of sale of a business or part thereof involving any charge of duty to another person as an
ongoing concern, the chargeable duty shall be paid by the person to whom such sale is made provided
that if any amount of duty payable by such person remains unpaid, such unpaid amount of duty shall be
the first charge on the assets of the business and shall be payable by the transferee of business.
Provided that no business enterprise or a part thereof shall be sold unless the outstanding duty is paid
and no objection certificate in this behalf fromthe Commissioner concerned is obtained.
132 Franchise and Franchiser
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.
Franchiser:[Rule 2(mb)]
Means any person who enters into franchise and includes any associate of franchiserwho enters into
franchise on his behalf.
133 Withdrawal of Registration Suspension Order. [Rule 6(3)]
In case a person, whose registration has been suspended subsequently approaches the Collector for
withdrawing the order for suspension of registration, the Collector may, after conducting such inquiry as
he may deem fit, including consultation with the concerned trade association or body, withdraw such
order subject to his satisfaction that such person has not issued false invoices, or evaded duty or has
committed any offence or irregularity to evade duty or avoid his obligation under the Federal Excise
Duty Act or rules.

Answers
134 Consequences of Wrong Registration [Rule 3A(6)]
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 thereunder, subject to the conditions, limitations and
restrictions prescribed under section 11 of the Act.
135 Determination of Value for Duty

Determination of value for the purposes of duty: [U/S 12]
Where any goods are chargeable to a duty on the basis of retail price, duty thereon shall be paid on the
retail price fixed by the manufacturer, at which any particular brand or variety of such goods should be
sold to the general body of consumers inclusive of all duties, charges and taxes, other than sales tax
levied and collected under the Sales Tax Act, 1990, or, if more than one such price is so fixed for the
same brand or variety, the highest of such price
Provided that where so and as specified by the Board, any goods or class of goods be liable to duty on
local production as percentage of retail price, the above provisions shall mutatis mutandis apply in case
such goods are imported from abroad.
Provided further that the Board may through a general order specify zones or areas only for the
purpose of determination of highest retail price for any brand or variety of goods.
The Board may fix the minimum price of any goods or class of goods, for the purpose of levying and
collecting of duty and duty on such goods shall be paid accordingly.
136 Circumstances and Procedure of De-registration

De-registration:
Circumstances for De-registration: [U/R 6(5) of FED Rules, 2005, read with Rule 11 of Sales Tax
Rules, 2006]
Following are the circumstances under which a person may be de-registered:
(i) He ceases to carry on his business or manufacture excisable goods or provide or render
excisable services;
(ii) His supplies have become exempt from tax;
(iii) He ceases to remain registered;
(iv) Fails to file tax return for six consecutive months.
Procedure of de-registration:
A registered person shall apply to the Commissioner Inland Revenue, on the prescribed form, stating
the reason(s) for the cancellation of his registration.
The Commissioner, upon completion of any audit proceedings or inquiry which may have been
initiated consequent upon the application of the registered person for deregistration shall complete the
proceedings or inquiry within 90 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.
The registration shall be cancelled by the Commissioner, on such application or on its own initiative,
from such date as may be specified, but not later than ninety days from the date of application or the
date on which all the dues outstanding against such person are deposited by him, whichever is later
and such person shall be caused to be de-registered through computerized system accordingly.

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.
137 Cancellation of Registration
Cancelation of the registration: [Rule 150K of Sales Tax Rules, 2006]

In case a person ceases to provide or render excisable services, he shall apply to the Collector for
cancellation of his registration in the Form STR-3and the Collector may, after such enquiry or audit as
he may deem fit to have, cancel the registration of that person from such date as may be specified,
but not later than three months from the date of such application or the date on which all the dues
under the Act or these rules and arrears, if any, outstanding against such person are deposited by
him, whichever is later.
138 Exemptions from Levy of Duty
Exemptions:[Section 16(2) of Federal Excise Act, 2005]

The Federal Government, by notification in the official Gazette, exempt subject to such conditions as
may be specified therein, any goods or class of goods or any services or class of services from the
whole or any part of the duty leviable under the excise act, whenever circumstances exist to take
immediate action for the purposes of:-
 National security,
 Natural disaster,
 National food security in emergency situations,
 Protection of national economic interests in situations arising out of abnormal fluctuations in
international commodity prices,
 Removal of anomalies in duties,
 Development of backward areas,
 Implementation of bilateral and multilateral agreements, and
 Matters relating to international financial institutions or foreign government-owned financial
institutions.
139 Sales Tax Mode
Sales tax mode:[Section 2(12)(a) of Federal Excise Act, 2005]

Sales tax mode means the manner of collection and payment under the Sales Tax Act, 1990, and
rules made there under, of the duties of excise chargeable under the Federal Excise Act
(FEA)specified to be collected and paid as if such duties were tax chargeable under section 3 of the
Sales Tax Actand all the provisions of the Sales Tax Act and rules, notifications, orders and
instructions made or issued there under shall, mutatis mutandis, apply to the excise duty so
chargeable.
Type of goods and services on which excise duty is liable to be charged in sales tax mode:
Excise duty on goods specified in second schedule of the FEA, 2005 or such services as may be
specified by the Board by way of Gazette notification shall be liable to be paid in sales tax mode.

Answers
140 Adjustments of excise duty
(a) Adjustment of duties of excise: [section 6]

Adjustment of excise duty on input goods shall be admissible only if:
 a person registered under the Federal Excise Act holds a valid proof to the effect that he
has paid the price of goods purchased by him including the amount of duty and received the
price of goods sold by him including the amount of duty through banking channels including
online payment whether through credit card or otherwise.
 the supplier of input goods has declared such supply in his return and he has paid amount
of tax due as indicated in his return.

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© The Institute of Chartered Accountants of Pakistan, August 2018

Practice Kit ii The Institute of Chartered Accountants of Pakistan

Index-Questions and Answers vii

Practice Kit iii The Institute of Chartered Accountants of Pakistan

Practice Kit iv The Institute of Chartered Accountants of Pakistan

Practice Kit v The Institute of Chartered Accountants of Pakistan

Practice Kit vi The Institute of Chartered Accountants of Pakistan

Index-Questions and Answers

1 Mr. and Mrs.Adil 1 65

18 Big Limited (BL) - Set off and surrender of losses 17 96

Practice Kit vii The Institute of Chartered Accountants of Pakistan

29 Kamyab Engineering Limited (KEL) 28 117

33 Mazboot Furnishers (MF) 32 124

35 Masawi Limited (ML) 34 127

36 Omega Limited (OL) 35 128

38 Razi Limited (RL) 37 131

41 Quick Fox Limited 41 135

42 Mr. Parekh 43 137

44 Book Author 44 139

49 Herbal Trading (HT) - Disposal of business 45 141

Practice Kit viii The Institute of Chartered Accountants of Pakistan

56 Tax avoidance scheme 47 147

60 Moon Limited (ML) - foreign payment 48 148

66 Derivative Product, Wash Sales, Tax Swap Sales 49 151

67 Methods for Cost of stock in trade 49 151

69 Exception to Pakistan source Royalty & FTS 50 151

72 Resale price method 50 153

82 Definite information 52 157

Practice Kit ix The Institute of Chartered Accountants of Pakistan

87 Mr.Furqan - Returns, De-registration 54 160

88 Withholding agents 54 160

92 Inadmissible input tax 55 163

96 Representatives and personal liability 56 165

99 Credit note 56 167

101 Scope of special audit (ST-Rules) 57 167

104 Continuance of Proceeding (death) 57 169

114 Fill in the Blanks 59 173

Practice Kit x The Institute of Chartered Accountants of Pakistan

117 Fill in the blanks 60 175

120 Non-fund banking services, Franchiser 60 176

124 Duty drawback 61 177

Conveyance, distributor, recovery of duty, particular of

140 Adjustment of excise duty 63 183

Practice Kit xi The Institute of Chartered Accountants of Pakistan

Practice Kit xii The Institute of Chartered Accountants of Pakistan

1 Mr. and Mrs.Adil

Following further information is also available from the records:

Practice Kit 1 The Institute of Chartered Accountants of Pakistan

Basic salary (per month) 350,000

Following further information is also available:

Practice Kit 2 The Institute of Chartered Accountants of Pakistan

Practice Kit 3 The Institute of Chartered Accountants of Pakistan

Practice Kit 4 The Institute of Chartered Accountants of Pakistan

Practice Kit 5 The Institute of Chartered Accountants of Pakistan

Practice Kit 6 The Institute of Chartered Accountants of Pakistan

Practice Kit 7 The Institute of Chartered Accountants of Pakistan

Following further information is also available:

Practice Kit 8 The Institute of Chartered Accountants of Pakistan

CHAPTER 02 – ASSOCIATION OF PERSONS AND COMPANY TAXATION

Cost of sales includes: Rs. in ‘000

Administrative and selling expenses include: Rs. in ‘000