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Fundamentals Level Skills Module
Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
ALL FIVE questions are compulsory and MUST be attempted.
Tax rates and allowances are on pages 23.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
P
aperF6
(PK
N)
Taxation
(Pakistan)
Tuesday 4 June 2013
The Association of Chartered Certified Accountants
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SUPPLEMENTARY INSTRUCTIONS
1. Calculations and workings need only be made to the nearest rupee.
2. All apportionments should be made to the nearest month except where the exact number of days is given in the
question.
3. All workings should be shown.
TAX RATES AND ALLOWANCES
The following tax rates and allowances for the tax year 2013 are to be used in answering all questions on this
paper.
A. Tax rates for salaried individuals where salary income exceeds 50% of taxable income
Taxable income Rate of tax on taxable income
0 to Rs. 400,000 0%
Rs. 400,001 to Rs. 750,000 5% of the amount exceeding Rs. 400,000
Rs. 750,001 to Rs. 1,500,000 Rs. 17,500 plus 10% of the amount exceeding Rs. 750,000
Rs. 1,500,001 Rs. 2,000,000 Rs. 95,000 plus 15% of the amount exceeding Rs. 1,500,000
Rs. 2,000,001 Rs. 2,500,000 Rs. 175,000 plus 175% of the amount exceeding Rs. 2,000,000
Rs. 2,500,001 and above Rs. 420,000 plus 20% of the amount exceeding Rs. 2,500,000
B. Tax rates for associations of persons and non-salaried individuals to whom the rates given in A are not applicable
Taxable income Rate of tax on taxable income
0 to Rs. 400,000 0%
Rs. 400,001 to Rs. 750,000 10% of the amount exceeding Rs. 400,000
Rs. 750,001 to Rs. 1,500,000 Rs. 35,000 plus 15% of the amount exceeding Rs. 750,000
Rs. 1,500,001 Rs. 2,500,000 Rs. 147,500 plus 20% of the amount exceeding Rs. 1,500,000
Rs. 2,500,001 and above Rs. 347,500 plus 25% of the amount exceeding Rs. 2,500,000
C. Tax rates for companies
Small company 25% of taxable income
Public company/private company 35% of taxable income
D. Tax rates on capital gains on the disposal of securities
Where the holding period of a security is
less than six months 10%
more than six months but less than 12 months 8%
12 months or more 0%
E. Tax rates on capital gains on the disposal of immovable properties
Where the holding period of immovable property is
up to one year 10%
more than one year but not more than two years 5%
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F. Tax rates for income from property
(i) For individuals and associations of persons
Up to Rs. 150,000 0%
Rs. 150,001 to Rs. 400,000 5% of the gross amount exceeding Rs. 150,000
Rs. 400,001 to Rs. 1,000,000 Rs. 12,500 plus 75% of the gross amount exceeding
Rs. 400,000
Above Rs. 1,000,000 Rs. 57,500 plus 10% of the gross amount exceedingRs. 1,000,000
(ii) For companies
Up to Rs. 400,000 5% of the gross amount
Rs. 400,001 to Rs. 1,000,000 Rs. 20,000 plus 75% of the gross amount exceeding
Rs. 400,000
Above Rs. 1,000,000 Rs. 65,000 plus 10% of the gross amount exceeding
Rs. 1,000,000
G. Other tax rates
On dividends received from a company 10%
H. Rates of deduction/collection of tax at source
Sale of goods (general rate) 35%
Sale of immovable property 05%
Services (other than transport) 6%
Contracts 6%
Commission or brokerage 10%
Profit on debt 10%
Import of goods (general rate) 5%
I. Depreciation rates
Buildings (all types) 10%
Furniture and fittings 15%
Plant and machinery (not otherwise specified) 15% of the tax written down value
Motor vehicles (all types) 15%
Computer hardware 30%}
J. Initial allowance
Eligible depreciable assets other than buildings 50% of cost
Eligible buildings 25% of cost
K. Pre-commencement expenditure
Amortisation rate for pre-commencement expenditure 20%
L. Benchmark rate
Interest free loans to employees 10% per annum
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This is a blank page.
Question 1 begins on page 5.
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ALL FIVE questions are compulsory and MUST be attempted
1 For the purpose of this question, you should assume that todays date is 15 July 2013.
Sahiwal Engineering Limited (SEL) is a public company incorporated under the Companies Ordinance, 1984 whose
shares were traded on the Lahore stock exchange from 1 July 2012 until 30 April 2013, on which date SEL was
delisted from the exchange. The control and management of the affairs of SEL was situated partly outside Pakistan
during the year ended 30 June 2013. More than 500 persons remained on the payroll of SEL during the year ended
30 June 2013.
SEL is engaged in the manufacture of engineering goods and its summarised income statement for the accounting
year ended 30 June 2013 is as follows:
Note Rs. Rs.
Turnover 1 90,000,000
Cost of sales 2 (58,000,000)
Gross profit 32,000,000
Less Expenditure
Administration expenses 3 7,000,000
Selling and distribution expenses 4 5,000,000
Financial charges 5 2,000,000
Provision for bad debts 6 1,500,000
Other expenditure 7 8,000,000
(23,500,000)
8,500,000
Other income 8 2,050,000
Net profit 10,550,000
Unless stated otherwise, SEL paid for all the expenditure through crossed cheques and tax was deducted and
deposited as required under the law. The goods manufactured by SEL are exempt from sales tax and SEL has not
opted to be assessed on the final tax basis on income arising from the sales of goods it manufactures.
Notes:
Note 1
Goods of Rs. 1,000,000 were sold to a public limited company which deducted tax from the payment made to SEL.
Due to an accounting error, only the net amount was recorded in the turnover.
Note 2
Cost of sales includes the following:
Rs.Write off of obsolete stock 500,000
Cess paid to the local government on the profits of the company 50,000
Note 3
Administration expenses include:
Rs.
Accounting depreciation 1,000,000
Contribution to an unapproved superannuation fund 300,000
Amount paid to a non-resident company for securing the exclusive rights to
manufacture water-kits for cars in Pakistan for a period of eight years commencing
from 19 April 2013 1,600,000Donation in kind to a relief fund run by the Government of Sindh 1,000,000
Compulsory annual fee, paid in cash, to the Engineering Development Board
established by the Federal Government 200,000
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Note 4
Selling and distribution expenses include:
Rs.
Payment to Monsoon Hotel for holding the annual get-together function for the
employees of the company and their families 600,000
Salaries paid, in cash, to temporary employees in rural areas. Tax was deducted
as required under the law. The monthly salary of each employee was Rs. 16,000 800,000
Note 5
Financial charges include:
Rs.
Profit on debt paid to a subsidiary company of SEL on which no tax was deducted.
SEL and its subsidiary are entitled to group taxation under the provisions of the
Income Tax Ordinance, 2001 700,000
Note 6
The bad debts account comprises:
Rs.
Balance on 1 July 2012 2,000,000
Provision made during the year (2% of debtors) 1,500,0003,500,000
Trade debts written off being irrecoverable (800,000)
Loan to an associate written off being irrecoverable (300,000)
Balance on 30 June 2013 2,400,000
Note 7
Other expenditure comprises:Rs.
Accounting loss on sale of machinery 500,000
Provision for taxation 5,500,000
Provision for anticipated losses 2,000,0008,000,000
Note 8
Other income comprises:
Rs.
Recoveries against bad debts written off but not allowed as a deduction in the prior years 750,000Additional payment received on the delayed payment of a tax refund by the Federal
Board of Revenue 1,300,0002,050,000
Note 9
Creditors include:
Rs.
Rent payable which was allowed as a deduction, on the accrual basis, against the
income for the year ended 30 June 2009 400,000
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Note 10
The tax written down values (TWDV) of SELs fixed assets on 1 July 2012 were:
Rs.
Land 15,000,000
Office and factory buildings 9,000,000
Plant and machinery 4,000,000
Motor vehicles 1,500,000
Further information about SELs fixed asset transactions during the year to 30 June 2013:
(i) The construction of residential quarters for the factory workers was completed on 31 January 2013 at a cost of
Rs. 10,000,000 and the workers were allowed occupation on 15 March 2013. The cost includes the price of
the land paid at Rs. 3,000,000.
(ii) A new car for the business use of the chief executive was purchased on 15 February 2013 for Rs. 2,300,000.
The company incurred a further Rs. 200,000 to enhance the security and safety features of the car before
handing it over to the chief executive on 1 March 2013.
(iii) It is a consistent accounting policy of SEL that any item of furniture costing less than Rs. 75,000 is written off
immediately in the accounts as expense. Purchases of such items in the accounting year ended 30 June 2013amounted to Rs. 750,000.
(iv) Machinery having TWDV of Rs. 500,000 on 1 July 2012 was sold for Rs. 300,000 on 31 December 2012.
Note 11
In addition to the advance tax referred to in Note 1, tax paid by or collected from SEL during the year ended 30 June
2013 was:
Rs.
Income tax paid on the registration of the new car (as in Note 10(ii)) 50,000
Income tax paid along with electricity bills 900,000
Advance tax paid in cash in four equal instalments on the due dates 5,000,000
Required:
(a) State, with reasons, whether you consider Sahiwal Engineering Ltd (SEL) to be a resident or a non-resident
company. (2 marks)
(b) Compute the taxable income of SEL for the tax year 2013, giving clear explanations for the inclusion or
exclusion of each of the items listed in the notes.
Note: The reasons/explanations for the items not listed in the computation of taxable income should be shown
separately. Specific marks are allocated for this part of the requirement. (24 marks)
(c) Calculate the tax payable by/refundable to SEL for the tax year 2013.
Note: Ignore the minimum tax provisions. (4 marks)
(30 marks)
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2 For the purpose of this question, you should assume that todays date is 15 July 2013.
Mr Rizwan, resident in Pakistan, has provided the following information in respect of his tax affairs for the year ended
30 June 2013.
From employment with Highgrowth Ltd as technical officer
Mr Rizwan worked with Highgrowth Ltd (Highgrowth) throughout the year ended 30 June 2013. On reaching the
age of 55 years, he opted for early retirement with effect from 20 July 2013. He has provided the followinginformation relating to his employment with Highgrowth:
(i) Emoluments received in cash:
annual basic salary of Rs. 1,200,000;
technical allowance at 5% of his basic salary;
Rs. 50,000 in lieu of availing of his annual recreational leave;
utility allowance at 6% of his basic salary; and
Rs. 100,000 as consideration for consenting to a restrictive covenant refraining him from entering into
employment with any other competitive company for a period of one year.
(ii) Highgrowth provided Rizwan with fully furnished accommodation for his family in Lahore. The fair rent of the
accommodation was estimated to be Rs. 50,000 per month. Had the company not provided him with thisaccommodation, he would have been entitled to a house rent allowance at 60% of his basic salary.
(iii) A new car was taken on a finance lease on 1 January 2013 by Highgrowth exclusively for Rizwans private use.
The fair market value of the leased car at the commencement of the lease was Rs. 2,000,000. The total
payments to be made over the lease term of three years were Rs. 2,500,000. The company deducted
Rs. 72,000 from Rizwans salary for his personal use of the car for the six months to 30 June 2013.
(iv) Another car was provided for the business use of Rizwan. On 25 June 2013, in accordance with the terms of
his employment, Rizwan purchased this car from Highgrowth for Rs. 400,000. The fair market value of the car
on 25 June 2013 was Rs. 500,000.
(v) Highgrowth gave Rizwan a loan of Rs. 400,000 at a 2% mark-up on 1 October 2012 for the education of his
children. On 30 June 2013, Rizwan returned the principal amount of Rs. 350,000 along with the mark-uppayable on the total loan. The balance amount of Rs. 50,000 was, however, waived by Highgrowth on that
day.
(vi) Rizwan was provided with the services of a domestic servant for the full year. The monthly cost to Highgrowth
for the provision of this service was Rs. 7,000.
(vii) Rizwan was issued 1,000 shares in Highgrowth on 25 June 2013 under the companys employee share
scheme. There is a restriction on Rizwan not to sell or transfer the shares before 25 June 2014. On 25 June
2013, the breakup value of each share of Highgrowth was Rs. 15 per share against a face value of Rs. 10 per
share. Rizwan did not sell any of the shares during the year ended 30 June 2013.
(viii) Highgrowth deducted Rs. 125,000 as tax from Rizwans salary and this was deposited with the Commissioner
Inland Revenue as required under the law.(ix) Rizwan incurred expenses of Rs. 150,000 relating to self-education which was directly connected with his
employment at Highgrowth. The expenses included fees, books and travel, etc.
Share of income from Agrofriends
On 1 January 2013, Rizwan commenced a partnership with Mr Aqeel running a small consultancy firm, Agrofriends.
Profits are shared 40% to Rizwan and 60% to Aqeel.
The accounting year of Agrofriends ends on 30 June. The taxable income of the firm for the year ended 30 June 2013
was computed at Rs. 1,600,000 before adjustment on account of capital allowances (initial allowance and
depreciation) on computers purchased on 25 June 2013. The computers were put into use for the first time in
Pakistan on 30 June 2013. The total cost incurred on these computers was Rs. 200,000. Agrofriends has already
paid income tax on its income as required under the law.
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Share of income from property
Rizwan and his brother, Saeed, jointly own a freehold house in Islamabad which is let out. Each brother has a 50%
share in the house. The house was let throughout the tax year 2013 to Mr Waseem, at a monthly rent of US$ 1,500.
The total rent amount was paid in advance on 1 July 2012, on which date the exchange rates were:
State Bank of Pakistan rate 1 US$ = Rs. 885
Open market rate 1 US$ = Rs. 900
Required:
Compute Mr Rizwans taxable income and income assessable under the final/fixed tax regime and his total tax
payable for the tax year 2013. Give reasons for the treatment of any items excluded from the taxable income or
for which no expense/deduction is allowed.
(25 marks)
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Required:
Compute the tax payable by Mr Bilal for the tax year 2013 on the taxable income arising from the above
transactions. Give brief reasons for your treatment of each item. (16 marks)
(20 marks)
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4 (a) Briefly explain the basic features of direct and indirect taxes. Give two examples of each. (4 marks)
(b) Mr Naveed, a businessman, filed his return for the tax year 2012 on 30 September 2012. The Federal Board of
Revenue (FBR) selected him for an audit of his income tax affairs. During the audit proceedings, it was found
that he had failed to maintain records as required under the Income Tax Ordinance, 2001. As a result of the audit
proceedings, his taxable income and tax thereon were determined at Rs. 1,500,000 and Rs. 300,000,
respectively. The Commissioner has issued him a show cause notice to levy a penalty for non-maintenance of
the records.
Required:
(i) Calculate the amount of penalty which can be levied on Mr Naveed for non-maintenance of the records
as required under the Income Tax Ordinance, 2001;
(ii) State the time periods for which records are required to be maintained for a tax year in different
situations.
Note: The total marks will be split equally between each part. (4 marks)
(c) Briefly explain the procedure to be followed when the Federal Board of Revenue (FBR) exercises its powers
to exempt a taxpayer from penalty and default surcharges. (3 marks)
(d) For the purpose of this part, you should assume that todays date is 15 July 2013.
Ms Kausar filed her return of income for the tax year 2011 on 30 September 2011 at Rs. 700,000. Today, she
has discovered that, due to an omission, a taxable amount of Rs. 100,000 had not been declared in the original
return. Although no notice for audit or amendment has yet been received from the Commissioner Inland Revenue,
she intends to revise the return immediately.
Required:
State:
(i) the documents Ms Kausar will be required to file with the revised return;
(ii) whether it will be necessary to submit reasons for the revision of the return along with revised return;
(iii) whether Ms Kausar will be liable to pay any default surcharge or penalty on account of revision of her
return; and
(iv) whether Ms Kausar can revise the return without seeking the permission of the Commissioner Inland
Revenue.
Notes:
1. No computation is required in this part of the question.
2. The total marks will be split equally between each part. (4 marks)
(15 marks)
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Answers
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Fundamentals Level Skills Module, Paper F6 (PKN) June 2013 Answers
Taxation (Pakistan) and Marking Scheme
Notes:
1. The suggested answers provide detailed guidance on the subject for use as a study aid to the question paper. Candidates were
not expected to produce answers with this extensive detail, which would not be possible in a three hour exam.
2. All references to legislation shown in square brackets are for information only and do not form part of the answer expected from
candidates.
Marks
1 Sahiwal Engineering Limited
(a) Since Sahiwal Engineering Ltd (SEL) is a company incorporated in Pakistan under the Companies Ordinance,
1984, it shall be treated as a resident taxpayer in Pakistan. For a company incorporated under the
Companies Ordinance, 1984, the other test that the place of control and management of the company should
be wholly situated in Pakistan at any time in a tax year needs not to be satisfied to qualify as a resident
company. 20
(b) Taxable income for the tax year 2013 (accounting year ended 30 June 2013)
Note Rs. Rs.
Income from businessNet profit as per income statement 10,550,000 05
Add:
Sales under recorded due to an accounting error (1) 35,000 10
Cess paid to the local government (2) 50,000 05
Accounting depreciation (3) 1,000,000 05
Contribution to an unapproved superannuation fund (4) 300,000 05
Acquisition of manufacturing rights (5) 1,600,000 05
Charitable donation made in kind (6) 1,000,000 10
Salaries paid in cash (7) 800,000 10
Provision for bad debts (8) 1,500,000 05
Other expenditure (9) 8,000,000 15
Rent payable since the tax year 2009 (10) 400,000 10
Purchase of furniture (11) 750,000 05
15,435,000
Less:
Amortisation of acquisition of manufacturing rights (5) 40,000 15
Trade debts written off (12) 800,000 10
Recoveries against bad debts written off in prior years (13) 750,000 10
Additional payment for delayed tax refunds (14) 1,300,000 05
Tax loss on sale of machinery (11) 200,000 10
Initial allowance (11) 1,750,000 10
Tax depreciation (11) 2,662,500 30
(7,502,500)
Income from business 18,482,500
Income from other sources (14) 1,300,000 10
Total/taxable income 19,782,500
Items not included in the computation of taxable income
(i) Write off of obsolete stock Rs. 500,000
Writing off of obsolete stock is incidental to the carrying out of the business and allowable as a
deduction. [s.20 and general principles of taxation] 10
(ii) Compulsory annual fee to the Engineering Development Board Rs. 200,000
Any expenditure, in aggregate, under a single accounting heading in excess of Rs. 50,000 other than
by crossed bank cheque or crossed bank draft or any other banking instrument is not deductible with
certain exceptions. One of the exceptions is any fee expenditure. Hence, the Rs. 200,000 paid, in cash,
to the Engineering Development Board established by the Federal Government is deductible and no
adjustment is required. [2nd proviso to s.21(l)] 10
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Marks
Note 9
Other expenditure
(1) Accounting loss on sale of machinery Rs. 500,000
An accounting loss or profit resulting from the disposal of an asset is tax neutral. Therefore, to nullify
its effect, the amount of the accounting loss is added back in the total income. A loss is only allowable
where the consideration received on the disposal of a fixed asset is less than the tax written down of
the asset. [s.22(8)(b)]
(2) Provision for taxation Rs. 5,500,000
Provision for taxation is in the nature of an appropriation of profit and not expenditure to earn business
income. Hence, it is not allowable under the law. [s.21(a)]
(3) Provision for anticipated losses Rs. 2,000,000
Tax law allows only losses which are revenue in nature and which have occurred during the relevant
tax year. Anticipated losses are not allowable. [s.34(1)]
Note 10
Where a taxpayer is allowed a deduction for any expenditure in deriving income under the head Income from
Business and the person has not paid 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 of the liability is chargeable totax in the first year following the end of the three years.
Since the liability on account of rent payable was allowed in the tax year 2009 and it has not been paid by
the end of the tax year 2012, it is added back in the tax year 2013. [s.34(5)]
Note 11
Fixed assets
(1) Initial allowance and tax depreciation:
Asset TWDV on Addition/ Initial TWDV Rate of Depreciation
1 July 2012 (deletion) allowance for depreciation
during at 25% of depreciation
the year addition
of eligible
buildings
(1) (2) (3) (4) = (5) = (2 + 3) (6) (7)
(3) x 25% (4)
Rs. Rs. Rs. Rs.
Land 15,000,000 3,000,000
(see (a))
Office and
factory
buildings 9,000,000 9,000,000 10% 900,000
Residential
quarters 7,000,000 1,750,000 5,250,000 10% 525,000
(see (a)) (see (b))
Plant and
machinery 4,000,000 (500,000) 3,500,000 15% 525,000Motor vehicles 1,500,000 2,500,000 4,000,000 15% 600,000
(see (c))
Furniture 750,000 750,000 15% 112,500
(see (d))
Total 1,750,000 2,662,500
[ss.22 and 23 read with 3rd Sch]
Sub-notes to Note 11 (1)
(a) Land is not eligible for depreciation. The cost of construction of the residential quarters is,
therefore, reduced by Rs. 3,000,000, being the price of land. [s.22(15)]
(b) Only the cost representing the construction of the residential quarters is eligible for initial allowance
and depreciation. The rate of initial allowance in the tax year 2013 is 25% [previously it was50%]. Depreciation is charged on the cost of construction of the residential quarters af ter the initial
allowance has been deducted. Use of the eligible asset for even one day is sufficient for a valid
claim of depreciation and initial allowance.
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Marks
(c) For the tax year 2013 and onwards, a car having a cost of Rs. 2,500,000 is eligible for
depreciation on its full cost [the previous maximum cost was Rs. 1,500,000]. Further, a car is not
eligible for initial allowance. [ss.22(13)(a) and 23(5)]
The cost incurred to enhance the security and safety features of the car is capitalised and eligible
for depreciation.
(d) Furniture is eligible for tax depreciation but not for an initial allowance. [ss.22 & 23(5)(b)]
(2) Debiting of the cost of the furniture purchased during the year to the income statement is not allowable,
hence Rs. 750,000 must be added back in the total income, being capital expenditure. [s.21(n)]
(3) The loss on the sale of machinery of Rs. 200,000 (representing excess TWDV of Rs. 500,000 over the
sale proceeds of Rs. 300,000) is an admissible deduction. [s.22(8)]
Note 12
Trade debts written off Rs. 800,000
Since trade debts are irrecoverable and have actually been written off (and not merely provided for) in the
books of accounts, the amount is allowable as a deduction. [ss.29(1) & (2)]
Note 13
Recoveries against bad debts Rs. 750,000
Since the amount recovered belongs to the bad debt of prior years, its recovery in the current tax year wouldonly be taxable if it had previously been allowed as a deduction. Since the amount was not allowed as a
deduction in previous years, taxable income is reduced by the same amount to avoid double taxation.
[s.29(3) & s.73]
Note 14
Additional payment for delayed refund Rs. 1,300,000
Under the law, if an excess amount of tax paid by a taxpayer is not refunded by the tax department within
the prescribed time limit, the taxpayer is entitled to an additional amount from the tax department. Taxability
of such additional amount was disputable. Through an amendment in the Finance Act, 2012, it has been
made taxable under the head Income from Other Sources. Therefore, it is deducted from the head Income
from Business and taxed under the head Income from Other Sources.
(c) Tax liability for the tax year 2013
Rs. Rs.
Taxable income for the tax year 2013 (from (b)) 19,782,500
Tax at 35% 6,923,875 05
Tax credit admissible on the donation in kind to the relief fund run by the
Government of Sindh.
The value of the donation in kind (Rs. 1,000,000) is 505% of the
taxable income which is within the allowable upper limit of 20% of taxable
income. Hence a tax credit is allowable on this amount as below:
Tax assessedx Value of donation in kind
Taxable income
6,923,875 x 1,000,000 [ss.61(1) & (2)] (350,000) 1519,782,500
6,573,875
Less tax already paid
Tax deducted from payment on account of sales to a public company 35,000 05
[ss.153(3) & 168]
Tax paid at the time of registration of car [ss.168 & 231B] 50,000 05
Tax collected along with electricity bills [ss.168 & 235] 900,000 05
Advance tax paid in four instalments [s.147] 5,000,000 05
(5,985,000)
Tax payable with return [s.137] 588,875
4030
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Marks
2 Mr Rizwan
Taxable income and tax payable for the tax year 2013 (accounting year ended 30 June 2013)
Rs.
Income from salary
Basic salary [s.12(2)(a)] 1,200,000 05
Technical allowance (Rs. 1,200,000 x 5%) [s.12(2)(c)] 60,000 10
Payment in lieu of recreational leave [s.12(2)(a)] 50,000 10
Utilities allowance (Rs. 1,200,000 x 6%) [s.12(2)(c)] 72,000 10
Payment for honouring restrictive covenant [s.12(2)(e)(v)] 100,000 20
Perquisite representing accommodation (working 1) 720,000 20
Perquisite representing car (working 2) 27,178 20
Benefit on purchase of car (working 3) 100,000 10
Waiver of outstanding loan of Rs. 50,000 [s.13(9)] 50,000 05
Services of domestic servant to Rizwan (working 4) 84,000 10
Income under the head salary 2,463,178
Income from business
Share of profit from AOP Agrofriends (working 5) 0 25
Income from property [taxable under fixed tax regime] (working 6) 796,500 20
Total taxable income 3,259,678
Tax payable on taxable income
Rs. Rs.
Tax on income from property (working 6) 42,238 05
Tax on taxable income other than income from property (working 7) 428,053 25
Total tax payable 470,291
Less tax deducted at source by the employer [s.149] (125,000) 05
Tax payable with return [s.137] 345,291
Explanation of items not included in the computation of taxable income
(i) Car provided for business use
A car was provided to Rizwan for business use. No personal benefit is derived by him, hence, no amount is
taxable as a perquisite. [ss.12 & 13] 10
(ii) Concessional loan Rs. 400,000
Any loan advanced at a profit rate which is less than the benchmark rate constitutes a perquisite. However,
by virtue of an amendment in the Finance Act, 2012, no amount on account of the concessional rate of profit
is taxable if the loan amount does not exceed Rs. 500,000. [2nd proviso to s.13(7)] 10
(iii) Benefit of shares allotted to Rizwan under an employee share scheme
Although the shares of the company were allotted to him at a price lower than the breakup value (which is
assumed to be the fair market value in the absence of any other information about their valuation), there was
a restriction on the sale or transfer of the shares. Where the issuance of shares is subject to a restriction on
the transfer of the allotted shares, no amount is chargeable to tax to the employee until the earlier of:
(a) the time the restriction is removed; or
(b) the time the employee actually disposes of the shares.
Neither of these events occurred before 30 June 2013. Hence, no amount is taxable as salary of Rizwan for
the tax year 2013. [s.14(3)] 10
(iv) Expenditure on self-education
No deduction is allowable for any expenditure incurred by an employee in deriving his salary income.
[s.12(4)] 10
(v) Share from association of persons (AOP), Agrofriends
As an AOP is taxed separately from its members, where the AOP has paid the tax, the share of profit received
by a member of the AOP out of the income of the AOP is exempt from tax. However, it shall be added for
the determination of the tax rate applicable to his other income (working 7). [s.92(1)] 10
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Workings:
Working 1
Accommodation provided to Rizwans family is a perquisite of Rizwan provided by his employer and is taxable.
The value of this perquisite is equal to the amount that would have been paid by the employer if such
accommodation were not provided, subject to a minimum value being equal to 45% of the basic salary. Since
Rizwan was entitled to a 60% house rent allowance, had he not been provided with the accommodation, the same
amount is taken as the value of the perquisite as computed below:
Rs.
Basic salary 1,200,000
Value of the perquisite (1,200,000 x 60%) 720,000
The fair rent of the accommodation at Rs. 50,000 per month is not relevant for the purposes of computing the
value of the perquisite representing accommodation. [s.13(12) read with rule 4 of the income tax rules, 2002]
Working 2
The car was provided for Rizwans exclusive personal use on 1 January 2013 by leasing it on the same day.
According to the tax law, 10% of the fair market value (FMV) of the car on 1 January 2013 shall be treated as a
perquisite received by him. The lease rentals to be paid by the company are not taken into consideration when
computing the value of the perquisite. Since the car was provided for half of the year, the value of the perquisite
is worked out proportionately. Further, the amount paid by the employee is also to be deducted. Therefore, the
perquisite shall be computed as below:
Rs.
FMV of the car 2,000,000
10% of the FMV (2,000,000 x 10%) 200,000
Restricted to the number of days (181) it was used during the tax year 2013
(200,000 x 181/365) 99,178
Less amount paid by Rizwan (72,000)
Amount to be treated as salary 27,178
[ss.13(3) & (6) read with rule 5 of the income tax rules, 2002]
Working 3
Rs.
Fair market value of the car on 25 June 2013 500,000Less:
Amount paid by Rizwan (400,000)
Perquisite on account of acquisition of car 100,000
[s.13(11)]
Working 4
Since the services of a domestic servant were provided to Rizwan by the employer, the amount Rizwan will be
chargeable to tax will include the total amount paid to the domestic servant as computed below:
Rs.
Monthly salary of domestic servant 7,000
Annual salary (7,000 x 12) 84,000
[s.13(5)]Working 5
Share from Agrofriends
Agrofriends is an AOP of which Rizwan has a 40% share in the profits.
Rs.
Taxable income before adjustment on account of capital allowances on computers 1,600,000
Initial allowance on computers (Rs. 200,000 x 50%) [s.23] (100,000)
Tax depreciation on computers (Rs. 200,000 100,000) x 30% [s.22] (30,000)
Taxable income of the AOP 1,470,000
Rizwans share (1,470,000 x 40%) 588,000
Working 6
Income from property
The property is jointly owned with his brother and each has a specific share; therefore, the share in property
income is to be assessed in the hands of individual partners and not as an association of persons. [s.66]
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Since the rent is received in foreign currency, it must be converted into Pakistan rupees at the State Bank ofPakistan rate prevailing on the day the amount was received, i.e. on 1 July 2012 as below:
Total annual rent of the property in US$ (1,500 x 12) US$ 18,000
Rs.
Total rent in Pakistan Rupees (18,000 x 885) [s.71] 1,593,000Rizwans 50% share 796,500
Tax payable on Rs. 796,500[Rs. 12,500 plus 75% of the gross amount exceeding Rs. 400,000](12,500 + 75% x (796,500 400,000)) 42,238
[s.15 read with Div VI of Pt I of the 1st Sch]
Working 7
Rs.
Taxable income including Income from property 3,259,678Less Income from property to be taxed separately [working 6] (796,500)
2,463,178
Add share from the Agrofriends for rate purposes [working 5] 588,000
Taxable income plus share from Agrofriends 3,051,178
Rs. 588,000 being the share of profit [working 5] received by Rizwan from the AOP Agrofriends is exempt fromtax. [s.92(1)] However, for the purpose of determining the rate of tax applicable to the other taxable income(Rs. 2,463,178), Rs. 588,000 is included in Rizwans income as if it were chargeable to tax. [s.88] Thecomputation is as below:
Rs. Rs.
Tax payable on taxable income including share from AOP[Rs. 420,000 plus 20% of the amount exceeding Rs. 2,500,000](420,000 + 20% x (3,051,178 2,500,000)) (A) 530,236Taxable income if the share of profits from the AOP were chargeable to tax (B) 3,051,178Actual taxable income (C) 2,463,178Tax on taxable incomeA/B x C
(530,236/3,051,178 x 2,463,178) 428,053
3 (a) Immunity from enquiries into the nature and sources of amounts invested in shares
No enquiries as to the nature and sources of an amount invested in the shares of a public company tradedat a registered stock exchange in Pakistan shall be made provided that the following conditions are fulfilled:
(1) the investment is made any time between 24 April 2012 and 30 June 2014;
(2) the amount remains invested for a minimum period of 120 days in the prescribed manner;
(3) tax on the capital gains, if any, is discharged in accordance with the rules provided in the EighthSchedule to the Income Tax Ordinance, 2001; and
(4) a statement of investments is filed with the Commissioner Inland Revenue along with the return ofincome and wealth statement for the relevant tax year within the due date as provided in the law.
[s.118]
[Rule 2(2) of the 8th Schedule] 40
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(b) Mr Bilal
Tax payable for the tax year 2013 (accounting year ended 30 June 2013)
Transaction Note Capital gain/(loss) Tax
Rs. Rs.
Capital gains/(losses) and tax on the disposal of
immovable properties taxable as a separate block
On the sale of agricultural land (1) 2,020,000 202,000 30On the exchange of the plot in Lahore (2) 1,500,000 75,000 15
On the sale of the flat in Karachi (3) 0 0 10
Capital gains on securities taxable as a separate block
On the sale of call options (4) 50,000 5,000 20
On the sale of shares in Turbo Motors Ltd (5) 248,940 19,915 30
Income under the head Capital gains assessable
to tax along with other heads of income
On the sale of shares in Farid Sugar Mills (6) 1,125,000 15
Less:
Capital loss brought forward (7) (440,500) 10
Total taxable income 684,500
Tax at 10% of the amount exceeding Rs. 400,000
(684,500 400,000) x 10% 28,450 05
[Para (1) of Div I, Pt I of the 1st Sch]
Tax payable under the final tax regime (FTR)
Rs. Rs.
Dividend income (6) 1,500,000 10
Tax on dividend income at 10% (1,500,000 x 10%) (6) 150,000 05
Total tax 480,365
Less: tax already paid
on the sale proceeds of agricultural land at 05% of total
proceeds Rs. 9,000,000 (9,000,000 x 05%) [s.236C] 45,000 05
on cash withdrawals from bank [s.231A] 12,000 05(57,000)
Tax payable with return 423,365
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20
Notes:
Note 1
Sale of agricultural land
Through an amendment in the Finance Act, 2012, a gain on the disposal of immovable properties held not
beyond two years has been made chargeable to tax according to the rates prescribed for such capital gains
in the First Schedule to the Income Tax Ordinance, 2001. The capital gain on the disposal of agricultural
land is computed as below:
Rs. Rs.
Consideration received 9,000,000
Less:
Purchase price [s.76(2)(a)] 6,500,000
Transfer fees [s.76(2)(b)] 160,000
Expenditure on the valuation of the property [s.76(2)(b)] 40,000
Brokerage to real estate agent [s.76(2)(b)] 80,000
Expenditure to improve the fertility of the land [s.76(2)(c)] 200,000
(6,980,000)
Capital gain 2,020,000
Tax at 10% as the holding period of the land was less than one year
(2,020,000 x 10%) [Div VIII of Pt I of 1st Sch] 202,000
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Note 2
Exchange of a plot of land in Lahore with a plot in Okara
The exchange of an asset is also treated as a disposal of the asset for tax purposes. [s.75(1)(a)]
The fair market value of the plot that was obtained in exchange with Mr Asad is less than the fair market
value of the plot Bilal gave to him. Tax law in such situations prescribes that the fair market value of the asset
disposed of shall be taken as the consideration received. [s.77(1)] Consequently, the capital gain/(loss) is
worked out by taking the consideration received at Rs. 7,500,000. Other factors given in the question, such
as the expected future increase in the value of the plot received in exchange, are not relevant for the
computation of the capital gain.
Rs.
Deemed consideration on the disposal on 15 July 2012 7,500,000
Less:
Cost of the plot on 15 February 2011 (6,000,000)
Capital gain 1,500,000
Tax at 5% as the holding period of the land was more than one year and less than
two years (1,500,000 x 5%) [Div VIII of Pt I of 1st Sch] 75,000
Note 3Sale of flat in Karachi
Rs.
Consideration received for the sale on 10 August 2012 5,000,000
Less cost incurred at the time of purchase on 1 January 1995 (4,000,000)1,000,000
Since the disposal was made after holding the flat for more than two years, no gain is taxable under the law.
[s.37(1A)]
Note 4
Sale of call options
Gain on the sale of securities is taxed as a separate block of income. The definition of a security includesderivative products, e.g. call options. [s.37A(3)] The capital gain on the sale of the call options is, therefore,
treated as a gain on securities and tax thereon is computed as below:
Rs. Rs.
Consideration received on the sale of 100,000 call options at
Rs. 25 per call option on 25 June 2013 (100,000 x 25) 250,000
Less:
Cost incurred on 20 June 2013 at Rs. 19 per call option
(100,000 x 19) 190,000
Other admissible expenditure 10,000
(200,000)
Capital gain 50,000
Tax on the capital gain of Rs. 50,000 at 10% as the holding period
is less than six months (50,000 x 10%) [Div VII of Pt I of 1st Sch] 5,000
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Note 5
Sale of shares in Turbo Motors Ltd
Since 50% of the shares in Turbo Motors Limited are held by the Government of Balochistan, the company
is treated as a public company for the purposes of the computation of any capital gain/(loss) despite the fact
that it is not a listed company. Shares of a public company are included in the definition of a security. The
capital gain/(loss) is computed as below:
Rs. Rs.
Consideration received on the sale of 5,000 shares at
Rs. 170 per share (5,000 x 170) 850,000
Less:
Purchase price at Rs. 120 per share (5,000 x 120) 600,000
Capital value tax paid (5,000 x 120 x 001%) 60
Commission on purchase of the shares (5,000 x 01) 500
Commission on sale of the shares (5,000 x 01) 500
(601,060)248,940
Tax at 8% of the capital gain as the holding period is more than six months
but less than 12 months (248,940 x 8%) [Div VII of Pt I of 1st Sch] 19,915
Note 6
Sale of FSM shares
A dividend in specie derived in the form of shares of a company registered under the Companies Ordinance,
1984, is taxed at the time of disposal of such shares and not at the time of their receipt. In this instance,
although 150,000 shares were received as a dividend in specie in the tax year 2011, the dividend was not
taxable in that year, but in the tax year 2013, when the shares were disposed of. Therefore, the fair market
value of these shares on the date of acquisition, i.e. Rs. 10 per share, will be taxed as dividend income in
the tax year 2013.
The amount of dividend taxed is treated as the cost of these shares and taken into account for the purpose
of the calculation of the capital gain:
Dividend income
Rs.
Dividend in the form of 150,000 shares in Farid Sugar Mills (Pvt) Ltd
at Rs. 10 per share taxed in the tax year 2013 1,500,000
Capital gain
Rs.
Consideration received on 1 January 2013 3,000,000
Cost of the dividend in specie (1,500,000)
Capital gain 1,500,000
Since the shares were held by Bilal for more than one year, only 75% of the
capital gain is taxable (1,500,000 x 75%) [s.37(3)] 1,125,000
Note 7
Capital loss
Bilal had a brought forward loss of Rs. 440,500 relating to the tax year 2010 arising from a disposal of
shares in a private company. Bilal is entitled to carry forward this loss for a period of six years following the
year in which it arose and set it off against capital gains (which are not taxable as a separate block). Since
there were no capital gains in the tax years 2011 and 2012, it has rightly been brought forward for offset
against the capital gains accruing to Bilal on the disposal of capital assets (other than immovable properties
and securities). [s.59]
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4 (a) Direct and indirect taxes
Taxes are broadly categorised into direct and indirect taxes. Indirect taxes are also called consumption taxes.
A direct tax is one which is demanded from the very person who it is intended or desired should pay it,
whereas an indirect tax is one which is demanded from one person in the expectation and with the intention
that they shall pass on the burden of the tax to another person, ultimately to the end consumer of the goods
or services. In other words, in the case of indirect taxes, the immediate payer of the tax only acts as an
intermediary or a tax collecting agent.
Examples of direct taxes include: income tax, wealth tax and property tax.
Examples of indirect taxes include: sales tax, federal excise, customs duty and provincial sales tax. 40
(b) Mr Naveed
(i) Penalty payable for non-maintenance of records
Where a person does not maintain records as required under the Income Tax Ordinance, 2001 or the
rules made thereunder, a penalty of Rs. 10,000 or 5% of the amount of tax payable on taxable income,
whichever is higher, can be levied by the Commissioner.
On the basis of income tax liability determined by the Commissioner, Mr Naveed is liable to pay the
penalty below:
Rs.Tax due 300,000
5% of tax 15,000
Since the amount calculated at 5% of the tax is higher than Rs. 10,000, Mr Naveed shall be liable to
pay a penalty of Rs. 15,000 for the non-maintenance of records as required under the Income Tax
Ordinance, 2001. [Sr. No. 7 of table under s.182] 20
(ii) Period of maintenance of records
Records are required to be maintained for six years after the end of the tax year to which they relate.
However, where any proceedings are pending before any authority or court, the taxpayer is required to
keep the records until the final decision of the proceedings. [s.174(3)] 2040
(c) Exemption from penalty and default surcharge by the Federal Board of Revenue (FBR)
The FBR is empowered to exempt any person or class of persons from payment of the whole or part of any
penalty or default surcharge payable under the Income Tax Ordinance, 2001 in the following manner:
(1) The exemption may be published as a notification or as an order in the official Gazette of Pakistan.
(2) The reasons for the exemption shall be given in the notification or the order so published.
(3) The conditions or limitations, if any, applicable to such exemption from payment of the penalty or
default surcharge shall also be given in the notification or the order. [s.183] 30
(d) Ms Kausar
Ms Kausar can revise her return, on her own, without waiting for any notice from the Commissioner for thisomission. The points raised in the question are answered as follows:
(i) The revised return shall be accompanied by the revised accounts or the revised audited accounts, as
the case may be. [s.114(6)(a)]
(ii) Ms Kausar will have to give the reasons for the revision of the return, in writing, duly signed by her.
[s.114(6)(b)]
(iii) Ms Kausar will be liable to pay a default surcharge on the amount of tax evaded by the omission of the
amount for the period starting from the date it was due (30 September 2011) to the date it is actually
paid.
However, she will not be liable to pay any penalty as she is revising the return without receiving any
notice of audit or amendment of the assessment from the Commissioner Inland Revenue. [s.114(6A)]
(iv) Ms Kausar can revise her return to declare the correct amount of income without seeking any
permission from the Commissioner Inland Revenue. [s.114(6)] 40
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5 (a) Mr Usman
Sales tax payable/(refundable) for March 2013
Rs.
Output tax
Sale of taxable goods to the registered and unregistered persons
(Rs. 80,000,000 + Rs. 16,000,000) x 16% 15,360,000 05
Sale of goods against international tender Rs. 10,000,000 [exempt] 0 05Sale of exempt goods to a local charity Rs. 10,000,000 0 05
Export of goods to Turkey (Rs. 5,000,000 x 0%) 0 0515,360,000
Input tax
Purchase of raw materials for the manufacture of both taxable and exempt
supplies (working) 7,944,143 30
Input tax relating to the machinery (10,000,000 x 16/116) (also see explanation) 1,379,310 05
9,323,453
Sales tax payable/(refundable)
Output tax 15,360,000
Input tax (9,323,453)
Payable 6,036,547 05
Working:
Rs.
Input tax on the purchase of raw materials from registered persons
for manufacturing both taxable supplies and exempt supplies
(Rs. 70,000,000 x 16/116) 9,655,172
Input tax on the purchase of raw materials from unregistered persons 0
9,655,172
Less input tax on purchases returned (Rs. 1,000,000 x 16/116) (137,931)
9,517,241
Apportionment of Rs. 9,517,241 to taxable supplies
Rs. Rs.
Value of taxable supplies
sales to registered persons 80,000,000
sales to unregistered persons 16,000,000
exports to Turkey 5,000,000
(A) 101,000,000
Value of taxable supplies + exempt supplies
(Rs. 101,000,000 + Rs. 20,000,000) (B) 121,000,000
Input tax to be apportioned (C) 9,517,241
A/B x C
101,000,000/121,000,000 x 9,517,241 7,944,143
Explanation:
With effect from 1 July 2011, input tax paid on fixed assets is allowable fully in the tax period the input tax
is paid. Further, the restriction on the adjustment of input tax in excess of 90% of the output tax does not
apply in the case of fixed assets or capital assets. [Proviso to s.8B] 1070
(b) Time of supply
The Sales Tax Act, 1990 defines time of supply as below:
(i) For goods supplied under a hire purchase agreement
The time at which the agreement for the supply of goods under hire purchase is entered into is treated
as the time of supply for such goods. 10
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(ii) For goods supplied otherwise than under a hire purchase agreement
The time of supply is the time at which the goods are delivered or made available to the buyer. 10
(iii) For the rendering of services
The time of supply in relation to services is the time at which the services are rendered or provided to
the person obtaining such services. [s.2(44)] 10
3010