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ICAP
Practice Kit

Certified Finance and Accounting Professional


Advanced Taxation

Note:
Updated for the Finance Act 2017
Second edition published by
The Institute of Chartered Accountants of Pakistan
Chartered Accountants Avenue
Clifton
Karachi – 75600 Pakistan
Email: studypacks@icap.org.pk
www.icap.org.pk

© The Institute of Chartered Accountants of Pakistan, July 2017

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Notice
The Institute of Chartered Accountants of Pakistan has made every effort to ensure that at the time of writing,
the contents of this study text are accurate, but neither the Institute of Chartered Accountants of Pakistan nor
its directors or employees shall be under any liability whatsoever for any inaccurate or misleading information
this work could contain.

Practice Kit ii The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional
Advanced Taxation

C
Contents
Page

Index-Questions and Answers v

Section A Questions 1

Section B Answers 55

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


Certified Finance and Accounting Professional
Advanced Taxation

I
Index-Questions and Answers

Question Answer
page page
Chapter 1 –INDIVIDUAL
1 Mr. and Mrs. Adil 1 55
2 Mr. Khan 2 58
3 Mr. Yaqeen 3 59
4 Mr. Sohail 4 61
5 Mr. Iqbal 5 62
6 Mr. Saif 6 64
7 Mr. Pansari 7 67
Chapter 2 – Company Taxation
8 Big Pharma 9 69
9 Rainbow Limited (RL) - Foreign Controller / thin capitalization 10 70
10 Mateen and Vaqas 11 72
11 Mega Limited (ML) 11 74
12 Rose Petal Limited - Construction 13 76
13 Saturn Limited - Foreign Branches / Tax Credit 13 77
14 Sun Limited (SL) - Group Relief 14 79
15 Pills (Pvt) Limited 15 81
16 Maroof Limited (ML) - Construction contracts 16 84
17 Big Limited (BL) - Set off and surrender of losses 17 85
18 Bharosa Limited (BL) 17 86
19 Khawar Associates (KA) 19 89
20 Khalis Limited (KL) 19 90
21 ZJ Limited 21 93
22 Desi (Pvt) Limited - Thin Capitalization 23 95

Practice Kit v The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Question Answer
page page
Chapter 3 – sales tax
23 Olive Limited 24 97
24 Kamyab Engineering Limited (KEL) 24 99
25 Gadget Limited (GL) 25 101
26 Sunshine Limited (SL) 26 102
27 Ummeid Limited (UL) 27 104
28 Mazboot Furnishers (MF) 28 106
29 Tender Pops Limited (TPL) 29 108
30 Masawi Limited (ML) 30 108
31 Omega Limited (OL) 31 110
32 Harfun Limited (HL) 32 111
33 Razi Limited (RL) 33 112
34 Karma Limited 34 114
Chapter 4 – Capital Gain
35 Mr. Parekh 36 116
36 Capital Gain 36 117
Chapter 5 – Other Areas Income Tax
37 Book Author 37 118
38 Foreign Source Income - Returning expatriate 37 118
39 Transfer of Assets 37 118
40 Employee Share Scheme 37 118
41 Bad debts, Recovery of bad debts 37 119
42 Herbal Trading (HT) - Disposal of business 38 120
43 Withdrawal of approval to Non-Profit/foundations (IT Rules) 39 121
44 Residential Status 39 122
45 Beetle Limited (BL) 39 123
46 Skilled (Pvt.) Limited - Taxability of Joints Venture 40 124
47 Short term resident 40 124
48 Group Taxation 40 125
49 Tax avoidance scheme 40 125
50 Compulsory taxation under FTR 41 125
51 Selection of Audit 41 126
52 Khalq Limited (KL) - Government grant 41 126
53 Moon Limited (ML) - foreign payment 41 127
54 Mr. Pansari - dividend from exempt income 41 127
55 Gadget Limited (GL) - payment to non-resident 42 127
56 Opting out of PTR 42 127

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Index-Questions and Answers

Question Answer
page page
57 Associates 42 128
58 Tax evasion and avoidance 42 128
59 Derivative Product, Wash Sales, Tax Swap Sales 42 129
60 Methods for Cost of stock in trade 42 129
61 Salary of foreign government employee 42 129
62 Exception to Pakistan source Royalty & FTS 43 129
63 Profit on debt 43 130
64 Tax admissible vs tax reliefs 43 130
65 Resale price method 43 131
66 Group Taxation and Pre commencement Expenditure 43 131
67 Sweet Limited (SL) - Advance Tax and default penalty 43 132
68 Depreciable Asset, Eligible Depreciable Asset 44 132
69 Speculation Business 44 133
70 Disposal of business by AOP to Wholly owned company 44 133
71 Mr. Hoshyar - Penalty 44 133
72 Advance Ruling 44 134
73 Automatic selection of audit 44 134
74 Rejection of reward to whistle-blower 45 134
75 Imputable Income, PMEX 45 134
76 Definite information 45 135
Chapter 6 –Other Areas – Sales Tax
77 Mr. Furqan - Returns, De-registration 46 136
78 Withholding agents 46 136
79 Qualification / Disqualification of Representative 46 137
80 Consideration in kind - supply 46 137
81 Stock acquired before registration 46 138
82 Inadmissible input tax 47 138
83 Recovery of tax arrears 47 139
84 Representative of non-resident 47 139
85 e-intermediary appointment, responsibilities, cancellation 48 140
86 Representatives and personal liability 48 141
87 Service of notice-non resident 48 141
88 Registration 48 141
89 Credit note 48 142
90 Time of supply, CREST, supply chain 49 142
91 Scope of special audit (ST-Rules) 49 142
92 Joint and several liability 49 143

Practice Kit vii The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Question Answer
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93 Property not liable to attachment 49 143
94 Continuance of Proceeding (death) 49 144
95 Appointment of committee - disputes 49 144
96 Similar supply – open market price, special returns 49 144
97 Black Listing and Suspension of registration 50 145
98 Registration of retailers 50 145
99 Registration of Retailers 50 145
100 Non- active taxpayer 50 146
101 Temporary Registration 50 146
102 Taxable services 50 146
103 Mr. Munaf - Refund 50 147
Chapter 7 –Other areas federal excise act.
104 Fill in the blanks 51 148
105 Applicable value and rate of duty, supply 51 148
106 Records 51 148
107 Non-fund banking services, Franchiser 51 149
108 Excess duty collected 51 149
109 Person liable to pay FED 51 149
110 Alternative Source 52 149
111 Duty drawback 52 150
112 Discontinued business enterprise, transfer of ownership 52 150
113 Due date and duty due 52 150
114 Default surcharge, KIBOR 52 151
Conveyance, distributor, recovery of duty, particular of
115 52 151
service invoice
116 Cottage industry 52 152
117 Construed manufacturer, sales tax mode 53 152
118 Closure of business 53 152
119 Franchise 53 152
120 Withdrawal of Registration suspension order 53 153
121 Consequences of wrong registration 53 153
122 Determination of value for duty 53 153
123 Circumstances and Procedure of De-registration 53 153

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Certified Finance and Accounting Professional
Advanced Taxation

SECTION
A
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 2018:

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 @ 6% 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, 2018, 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


Certified Finance and Accounting Professional- Advanced Taxation

(vi) On July 01, 2017, 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 2015 was refunded.
(vii) Mr. Adil purchased 50,000 shares of Rs. 10 each, of an unlisted public company in July 2013 at
the rate of Rs. 150 per share. In August 2014, he received bonus shares, ranking paripassu, in
the ratio of 1 bonus share for every 5 shares held. In May 2018, 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 2018:
(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, 2018 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, 2015 at a fair market value of Rs. 2,000,000.

(c) On July 1, 2017 he was provided with an interest free loan of Rs. 2,500,000 which is repayable in
lump sum in December 2018. The prescribed benchmark rate is 10% per annum. On December
1, 2017 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, 2018. 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.

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Questions

(iii) On March 1, 2018, 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, 2018, 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 2015, 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 2018 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 2018. The average rate of tax of Mr. Khan for the last three years was 18%.

Note: Show all exemptions, exclusions and disallowances where relevant.

3 Mr. Yaqeen
Mr. Yaqeen, a Pakistani citizen, returned to Pakistan on 30 June 2017 after residing for six years in
Norway. On 1 July 2017 he joined a private hospital KKUH and received following emoluments:

Rupees
Basic salary (per month) 500,000
Medical allowance (per month) 60,000
Leave fare assistance 240,000

On 1 January 2018, 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 2018:
Rupees
Basic salary (per month) 800,000
Medical allowance (per month) 80,000
Utilities allowance (per month) 100,000

On 1 January 2018, 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 2018, 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 2018, 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.

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Other information relevant to Mr. Yaqeen for the tax year 2018 is as under:

(i) On 15 April 2018, 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 2018, 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 2018, he received annual rent of Rs 600,000 from the tenant cultivating the land.

(iv) On 1 May 2018, 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 2018.

(v) On 15 June 2018, he received insurance claim of Rs. 600,000 against theft of a painting which
was stolen on 31 May 2018. The painting was purchased by him on 1 January 2017 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 2017, Mr. Yaqeen received 20,000 shares in AB (Private) Limited (ABL), a company
incorporated under the Companies Ordinance, 1984 as a dividend in specie. On 30 June 2018,
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 2018. 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 2017, 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 2018.

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 2018.

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Questions

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 2018:

Rupees
Basic salary (per month) 300,000
Cost of living allowance (per month) 50,000
Milk allowance (per month) 10,000

In addition to the above emoluments, Mr. Iqbal was also provided the following:
(i) Special bonus equal to one month’s basic salary paid on 5 June 2018.
(ii) A new company maintained car for his personal use. The car was purchased on 1 March 2018 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 2017. Mr. Iqbal exercised the option on 5
January 2018 at a price of USD 1.5 per share. The market value of the shares at the close of
business on 5 January 2018 was USD 2.5 per share. He sold 3,000 shares on 30 June 2018 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 2018 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 2018. The market value of these shares at the close of business on 15 May 2018 was
Rs. 12.5 per share.
Mr. Iqbal received additional income from the following sources, for the tax year 2018:
(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 2016. 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.

Practice Kit 5 The Institute of Chartered Accountants of Pakistan


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Other related information is as under:


ƒ TL deducted withholding tax of Rs. 1,200,000 from Mr. Iqbal’s salary during tax year 2018.

ƒ On 1 July 2017, 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.
ƒ On 1 August 2017, he purchased 50,000 shares in a listed company AB Limited at a price of
Rs. 20 each. On 1 January 2018, AB Limited announced 20% right shares to existing
shareholders at a price of Rs. 18 per share. On 25 January 2018, Mr. Iqbal subscribed the right
issue in full.
ƒ During tax year 2017 his assessed taxable income was Rs. 3,000,000.

Required:
Under the Income Tax Ordinance, 2001 and Rules made thereunder, compute the taxable income and
income tax payable by or refundable to Mr. Iqbal for the tax year ended 30 June 2018.
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 2018, 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 2018.
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 2017 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 2018, 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 2018. 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 2018, 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 2017 and 31 December 2017 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.
Following further information is also available:
(i) On 1 July 2017, 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 2018. 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, 2017 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.

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(ii) On 1 May 2018 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 2017
as dividend in specie from Rahat (Pvt.) Limited. He holds 12,800 shares in Rahat (Pvt.) Limited
costing Rs. 35 each.
(iii) In August 2017, 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 2017 whereas 25 persons joined
in January 2018 and 30 in March 2018.
Following items were included in club’s profit and loss account for the tax year 2018:
ƒ 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.
ƒ Rs. 2,750,000 against import of old fitness machines from China. The withholding tax paid
at import stage was Rs. 150,000.
ƒ 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.
ƒ 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.
ƒ Other miscellaneous expenses amounting to Rs. 120,000.
(iv) On 15 June 2018, Mr. Saif donated a plot of land to Pakistan Sports Board. He had purchased
this plot in tax year 2003 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 thereunder, compute the taxable
income and income tax payable by or refundable to Mr. Saif for the tax year 2018.
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 2018.
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 2017 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.

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Certified Finance and Accounting Professional- Advanced Taxation

(iii) Free provision of two cans of olive oil per month. The market value of each can was Rs. 500.
(iv) In July 2016, 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 2017 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 of USD 8.5 per share. (Assume the dollar rupee parity on
the above dates was USD 1 = PKR 102).
Following further information is also available:
(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 2016 and 2017 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 2017.
(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 thereunder, compute the
taxable income of Mr. Pansari for the tax year 2018.
Note: Show all relevant exemptions, exclusions and disallowances.

Practice Kit 8 The Institute of Chartered Accountants of Pakistan


Questions

CHAPTER 02 – COMPANY TAXATION

8 Big Pharma
Big Pharma Limited (BPL) is engaged in the manufacturing of pharmaceuticals products. The
Company has three branches in Pakistan and one branch each in Qatar and Oman. BPL sells its
products through various distributors. Assume that the company’s profit and loss account and the
related details for the period ending June 30, 2018 are as under:
Rs. in ‘000
Sales 96,000
Cost of sales (66,850)
Gross profit 29,150
Administrative and selling expenses (10,600)
Finance cost (3,100)
Other charges (including WWF of Rs. 0.350 million) (2,400)
Other income 4,100
Profit before taxation 17,150

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)

Practice Kit 9 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 2017. 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 2018. Tax rate applicable to the
company is 30%.

9 Rainbow Limited (RL) - Foreign Controller / Thin Capitalization


Rainbow Limited (RL) is incorporated under the Companies Ordinance, 1984 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, 2017, 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, 2017, 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, 2018, 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 2019.
The following information is available in respect of RL at June 30, 2018.

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, 2018 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, 2018.

Practice Kit 10 The Institute of Chartered Accountants of Pakistan


Questions

10 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:
ƒ Mateen 60%
ƒ 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 2018 assuming that they have no other sources of income.

11 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 2018:

Rs. in ‘000
Sales 1,100,000
Cost of sales (792,000)
Gross profit 308,000
Administrative and selling expenses (135,000)
Financial charges (110,000)
Other charges (27,500)
Other income 117,000
Profit before taxation 152,500

Practice Kit 11 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Additional information:

(i) In July 2017, ML purchased and installed plant and machinery for the purpose of balancing,
modernization and replacement of existing plant and machinery from an Austrian based non-resident
supplier at a cost of Rs. 52 million. The title in goods was transferred outside Pakistan. ML did not
deduct any tax from payments made to the supplier. The plant is depreciated on a straight line basis
over its useful life of ten years. The investment in plant was made with borrowed funds.

(ii) Cost of sales includes a penalty of Rs. 0.5 million paid in respect of breach of customs regulations.

(iii) Administrative expenses include amounts of Rs. 4.8 million, paid against purchase of industrial
software having a useful life of three years and Rs. 5 million paid in cash for electricity expenses. The
software was installed and used with effect from 01 April 2018.

(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:

ƒ 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.
ƒ 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 2011, 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 2017 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 2018.
(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.

Practice Kit 12 The Institute of Chartered Accountants of Pakistan


Questions

12 Rose Petal Limited - Construction


Rose Petal Limited (RPL) is engaged in the construction business for the past many years. In April
2015, 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 2015
and be completed on 30 June 2018.
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
2016 3,000,000 3,105,000
2017 3,000,000 2,632,500
2018 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.

13 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
2018:

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:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and net tax payable
/ refundable for the tax year 2018. Give brief reasons for the treatment of the items excluded from
computation or for which no expense deduction is allowed.

Practice Kit 13 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

14 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 2018:

(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:
ƒ 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.
ƒ Income of Rs. 150,000 on account of profit on debt.
ƒ 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:
ƒ Rs. 80,000 written off against a loan provided to an employee.
ƒ Sales promotion expenses of Rs. 600,000 paid by VL to Moon Advertisers. The benefits
are expected to extend to three years.
ƒ A loss of Rs. 500,000 on disposal of shares in a private company. These shares were
acquired by VL on 31 March 2016.
In case of ML:
ƒ 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.
ƒ A gain of Rs. 400,000 on disposal of shares in a private company. These shares were
acquired by ML on 01 April 2016.
ƒ 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 2017
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.

Practice Kit 14 The Institute of Chartered Accountants of Pakistan


Questions

(vii) The assessed losses brought forward from tax year 2017 were as follows:

SL VL ML
Rs. in ‘000
Business loss 200 500 50
Unabsorbed tax depreciation 250 500 100
Capital loss 750 250 200
(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 2018.
Note: Show all relevant exemptions, exclusions and disallowances.

15 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 2017:

Rs. in ‘000
Sales 39,150
Cost of sales (25,700)
Gross profit 13,450
Administrative and selling expenses (5,350)
Financial charges (1,500)
Other charges (2,000)
Other income 900
Profit before taxation 5,500

Additional information:

(i) 20% of the above sales are made to customers in Indonesia and Singapore. Export sales are
stated after deduction of foreign withholding tax of Rs. 1,170,000.

(ii) Local sales are inclusive of 16% sales tax. All the above expenses, other than cost of sales,
are related only to the company’s local sales.

(iii) On 1 January 2017, 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 2018. 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.

Practice Kit 15 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(iv) On 15 June 2017, 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:

ƒ 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.
ƒ Rs. 200,000 paid as donation to a hospital established under a private trust.
ƒ 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 2017, 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 2017, 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 2016 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 2017 amounted to Rs. 1,800,000.

(xi) Tax paid u/s 147 amounted to Rs. 400,000 whereas tax deducted u/s 154 by banks from
export proceeds amounted to Rs. 78,300.
Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and net tax payable
for the tax year 2018. Give reasons for the treatment of items in (iii) and (vii) above. Also explain the
treatment of items not appearing in your computation.

16 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 2016, 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 2016 and was completed in November 2017. ML received
following amounts after deduction of 7% withholding tax:

Months Feb. 2017 May 2017 Sep. 2017 Dec. 2017


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 2017 and 2018 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 2017 and 2018.

Practice Kit 16 The Institute of Chartered Accountants of Pakistan


Questions

17 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 2017:
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 2016 and 2017 amounted to Rs. 130,000 and
Rs. 200,000 respectively. ZL’s tax assessment has been finalized up to tax year 2016.
(iii) Capital losses brought forward from assessment years 2011 and 2012 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 2016 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 2018 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.

18 Bharosa Limited (BL)


Bharosa Limited (BL) was incorporated on 1 July 2011 as an un-listed public company under the
Companies Ordinance, 1984. The company is engaged in the business of manufacturing and
distribution of soap and toiletries. On 1 November 2016 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 2017:
Rupees
Sales 24,900,000
Cost of sales (13,718,000)
Gross profit 11,182,000
Administrative and selling expenses (6,900,000)
Financial charges (980,000)
Other income 1,500,000
Profit before taxation 4,802,000

Practice Kit 17 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Additional information:
(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 2015 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 2016 and 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 2017 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:
ƒ A compensation of Rs. 100,000 payable annually to a former employee, who was injured
and permanently disabled while on duty.
ƒ A penalty of Rs. 25,000 on failure to deposit income tax withheld from the salaries of
factory staff.
ƒ Accounting depreciation of Rs. 870,000.
(iii) Administrative and selling expenses include the following:
ƒ 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.
ƒ 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.
ƒ 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.
ƒ 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.
ƒ 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.
ƒ 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 2016 at a cost of Rs. 230,000.
(vi) The tax written down values of BL’s assets on 1 October 2016 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.

Practice Kit 18 The Institute of Chartered Accountants of Pakistan


Questions

Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income and net tax payable by/refundable to BL for the tax year 2018.
Note: Show all relevant exemptions, exclusions and disallowances.

19 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 2018.

Rupees

Sales 2,348,000

Cost of sales (1,230,000)

Operating expenses (470,000)

Profit before tax 648,000

Following further information is also available:


(i) The above sales include the following:
ƒ 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.
ƒ Goods worth Rs. 825,000 sold to SP Limited (SPL). SPL deducted tax of Rs. 37,125
from the payment against this sale.
ƒ 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:
ƒ 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.
ƒ A donation of Rs. 60,000 to an educational institution established by the Provincial
Government.
ƒ 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 thereunder, compute KA’s
taxable income for tax year 2018. Give reasons for the treatment of the amounts of donation and
dividend as mentioned above.

20 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 2017:

Practice Kit 19 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Rs. in ‘000
Gross sales 350,500
Cost of sales (245,350)
Gross profit 105,150
Administrative and selling expenses (70,100)
Financial charges (15,515)
Other income 25,850
Profit before taxation 45,385
Additional information:
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.
(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.

Practice Kit 20 The Institute of Chartered Accountants of Pakistan


Questions

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, 2018, at a
price of Rs. 120 per share. KL purchased these shares in May 2014 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:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income and net tax payable by or refundable to KL for the tax year 2018.
Note: ƒ Ignore WWF, Minimum Tax and Alternative Corporate Tax.
ƒ Show all relevant exemptions, exclusions, reclassification and disallowances.

21 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 2017.
Rs. in ‘000
Sales-net 218,500
Cost of sales (157,580)
Gross profit 60,920
Administrative and selling expenses (39,000)
Financial charges (4,700)
Other income 29,280
Profit before taxation 46,500
Additional information:
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.

Practice Kit 21 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(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 2017 (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 2016 at
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 2014, ZJL acquired 200,000 shares in ML at Rs. 50 per share constituting 55%
interest in ML. On 1 August 2017, 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 2017, 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 2017, ZJL received Rs. 1,250,000 as share of income from AOP. The gross
turnover of the AOP was Rs. 30,000,000. ZJL holds 35% interest in the AOP.
Further information:
(i) ZJL has filed the option to opt out of the final tax regime.
(ii) Total tax depreciation amounts to Rs. 4,300,000.
(iii) Tax paid u/s 147 was Rs. 1,000,000, tax deducted on import of packing materials u/s 148 was
Rs. 1,200,000, tax deducted by distributors u/s 153 was Rs. 1,050,000 and tax deducted on
realization of export proceeds u/s 154 was Rs. 300,000.
(iv) The assessed losses brought forward from tax years 2016 and 2017 were as follows:
2017 2016
------- Rupees -------
Business loss 2,900,000 3,550,000
Unabsorbed tax depreciation 2,550,000 -
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the
taxable income, net tax payable by or refundable to ZJL for tax year 2018 and amount of tax to be
carried forward along with the amount of default surcharge, if any.
Note:
x Your computation should commence with the profit before tax figure of Rs. 46,500,000.
x Ignore WWF and WPPF.

Practice Kit 22 The Institute of Chartered Accountants of Pakistan


Questions

x Show all relevant exemptions, exclusions and disallowances.

22 Desi (Pvt.) Limited - Thin Capitalization

Desi (Pvt.) Limited (DPL), a resident company, is 70% owned by Mega Inc. USA(MI).On 15 March
2017, DPL received a loan of US$ 3.0 million (equivalent to PKR 315.0 million) from MI with interest at
the rate of 11% per annum. Interest is to be paid half yearly in arrears. Repayments of the principal
would commence after 2017. The loan was received to finance a rural development project in Punjab
duly approved by the Federal Government in accordance with the Second Schedule.
On 1 June 2017, DPL received another loan of US$ 1.6 million (equivalent to PKR 168 million) from
MI with interest at the rate of 6% per annum. Interest on this loan is to be paid monthly in arrears. This
loan was received for the construction of a new factory building. The principal repayment would
commence from November 2018.
On 31 August 2017, 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
2017 was Rs. 4.0 million.
Following information has been extracted from DPL’s records for the year ended 30 September 2017.
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 2018.

Practice Kit 23 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

CHAPTER 03 – SALES TAX

23 Olive Limited
Olive Limited (OL) is registered at the Large Taxpayer Unit of the Inland Revenue Department. It is
engaged in the manufacture and trading of FMCG in the country. During the month of May 2018
following activities were carried out by the company:

Rs. in ‘000
Purchases:
(Items subject to sales tax):
ƒ Import of raw material for in-house consumption 15,000
ƒ Import of finished products 8,000
ƒ Packing material manufactured locally 6,000
Supplies:
ƒ Manufactured products:
- Local sales 20,000
- Exempt goods 4,000
- Export to Bangladesh 4,000
ƒ Commercial imports 10,000

Following information is also available:


(i) In order to meet the high consumer demand, OL purchased new machinery for Rs. 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 2018. Show computation wherever necessary.
(a) Sales tax liability and net sales tax payable with return.

24 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 2017.

Rs. in ‘000
Purchases:
Local:
ƒ Components from registered suppliers 70,700
ƒ Components from un-registered suppliers 15,250
Import of finished goods (inclusive of custom duty and FED) 10,000

Practice Kit 24 The Institute of Chartered Accountants of Pakistan


Questions

Supplies:
Manufactured goods:
ƒ Local taxable supplies to registered persons 40,000
ƒ Local taxable supplies to un-registered persons 24,000
ƒ 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 2016. 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, 2017.
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.

25 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 2018.
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
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

Following information is also available:

(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.

Practice Kit 25 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(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 2018.

(a) Sales tax payable/refundable.

26 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 2017:
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

Additional information:
(i) Supplies of Alpha to registered persons include sale of Rs. 2,000,000 to an associated company.
The open market price of Alpha at the time of sale was Rs. 4,000,000.
(ii) Free replacement of defective units is made in the case of Alpha, which is sold under warranty.
The market value of replacement units during the month of November 2017 was Rs. 1,000,000.
(iii) SL provided 50,000 units of Beta to its employees free of charge.
(iv) In November 2017, 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 2018. Sales tax paid
on this machinery amounted to Rs. 3,000,000.

Practice Kit 26 The Institute of Chartered Accountants of Pakistan


Questions

(v) Input tax of Rs. 500,000 was inadvertently not adjusted in the return for the month of October
2017.
(vi) The local supplies of Gama are exempt from the charge of sales tax.
(vii) All purchases are from registered suppliers.

All the above figures are exclusive of sales tax, wherever applicable. Sales tax is payable at the rate of
17%. The above products are not subject to duty under the Federal Excise Act, 2005.
Required:
In the light of the provisions of Sales Tax Act, 1990 and Rules made thereunder, calculate the sales
tax payable/refundable/carried forward, if any, for the tax period November 2017.

27 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 2018.
Rupees
Purchases:

Local:
ƒ Raw material from registered suppliers 25,000,000
ƒ Raw material from un-registered suppliers 10,000,000
Import of raw material 4,000,000
Supplies:
Local:
ƒ Taxable supplies to registered persons 20,500,000
ƒ Taxable supplies to un-registered persons 9,000,000
ƒ Exempt goods 6,000,000
Export to Portugal 12,500,000
Additional information:

(i) Raw materials purchased from a registered supplier in April 2018 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 2018 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 2017 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:

ƒ Goods worth Rs. 500,000 supplied to AB Limited which is registered as an exporter with
the Large Taxpayer Unit.
ƒ Supplies of Rs. 2,000,000 to a domestic airline for regular maintenance of an aircraft
weighing 8,500 kilograms.

Practice Kit 27 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(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 2018. Give brief reasons for the treatment
of:
 Goods destroyed by fire;

 The input tax not claimed in the return for the month of October 2017; and
 Additional sales tax collected from the customer.

28 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
2017 and the certificate of registration was issued on 7 November 2017.

Following information has been extracted from MF’s records for the month of November 2017:

Rupees
Sales 700,000
Less: Cost of sales
Opening stock 125,000
Purchases 250,000
375,000
Less: Closing stock (95,000)
280,000
Add: Engraving charges 50,000
(330,000)
Gross profit 370,000
Less: Operating expenses
Salaries and wages (45,000)
Rent (25,000)
Insurance (30,000)
Bank charges (15,000)
General expenses (25,000)
Depreciation (15,000)
(155,000)
Net profit 215,000

Practice Kit 28 The Institute of Chartered Accountants of Pakistan


Questions

Additional information:
(i) 20% of the sales relates to goods purchased locally and exported to customers in Iran whereas
5% of the sales were made against international tenders.
(ii) Opening stock is verifiable and consists of purchases made in different months as follows:
ƒ 15 August Rs. 50,000 (import)
ƒ 10 September Rs. 25,000 (local)
ƒ 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 2016.
(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 2017.
(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.

29 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 2018:
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

Practice Kit 29 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Following information is also available:


(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 2018.

30 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 Ordinance, 1984 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 2017:

Rupees

Purchases:

Raw material:

ƒ From local registered suppliers 5,000,000

ƒ From local un-registered suppliers 1,000,000

ƒ Import 800,000

Supplies:

Taxable supplies to registered persons 4,675,000

Taxable supplies to un-registered persons 2,125,000

Taxable supplies to duty free shops 1,020,000

Export to Qatar 680,000

Following information is also available:


(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.

Practice Kit 30 The Institute of Chartered Accountants of Pakistan


Questions

(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 2017.
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 thereunder, calculate the amount of
sales tax payable by or refundable to ML for the tax period November 2017.

31 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 2018.
Following information has been extracted from OL’s records for the month of May 2018:
(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 2018. 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 2018.
(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%.

Practice Kit 31 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Required:
In the light of the provisions of Sales Tax Act, 1990 / relevant provincial laws and Rules made
thereunder, compute the sales tax payable by or refundable to OL for filing the sales tax return for the
tax period May 2018.

32 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 2017.

(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.

(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 thereunder, compute the
amount of sales tax payable by or refundable to HL for the tax period November 2017.

Practice Kit 32 The Institute of Chartered Accountants of Pakistan


Questions

33 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 2018:
Rs. in ‘000
Purchases:
Raw material:
ƒ From local registered suppliers 8,000
ƒ From local un-registered suppliers 2,000
ƒ Import 900
Import of foam from China 1,200
Supplies:
Local:
ƒ Taxable supplies to registered persons 7,200
ƒ Taxable supplies to un-registered persons 3,500
ƒ Exempt goods 250
ƒ Sale of foam imported from China 1,500
Export to Malta 600
Additional information:
(i) RL imported specific machinery at Rs. 1,000,000 from Taiwan for the purpose of production of
shampoo. The machinery is covered under Eight Schedule of the Sales Tax Act, 1990.
(ii) Purchases from local registered suppliers include purchase of waste papers of Rs.
300,000 from Parsa Limited.
(iii) 7,500 boxes of tissue papers were purchased from registered suppliers, not included above,
at a wholesale price of Rs. 60 per box. The retail price of these boxes was Rs. 90 per box.
These tissue papers were used by RL as a packing material.
(iv) Taxable supplies to registered persons include the following:
ƒ Shampoo worth Rs. 700,000 supplied to a registered exporter Baramad Limited.
ƒ Tiles of Rs. 650,000 supplied to Raja (Pvt.) Limited. These tiles were purchased directly
from the manufacturer in April 2018.
(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 2018 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 2018, 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%.

Practice Kit 33 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the
amount of sales tax payable by or refundable to RL for the tax period May 2018. Also compute the
amount of withholding tax, if any.
Note: Show all relevant exemptions, exclusions and disallowances.

34 Karma Limited
Karma Limited (KL) is registered at the large taxpayers unit (LTU) of Inland Revenue Department and
is engaged in the business of import, manufacture and supply of various products. Following
information has been extracted from KL’s records for November 2017.
Rupees
Purchases:
Raw material:
x From local registered suppliers 12,000,000
x From local un-registered suppliers (Third Schedule items) 3,000,000
x Import 5,000,000
Supplies:
x Taxable supplies to registered persons 9,500,000
x Taxable supplies to un-registered persons 6,500,000
Additional information:
(i) Raw material purchased from local un-registered suppliers includes goods worth Rs. 950,000
which were returned by an un-registered customer. These goods were sold in August 2017.
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:
x A forward transaction on Pakistan Mercantile Exchange Limited for the supply of goods
worth Rs. 600,000 to a large trading house in Karachi.
x 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 2017, 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 2017,
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 November 2017 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.

Practice Kit 34 The Institute of Chartered Accountants of Pakistan


Questions

(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 2017 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 2017.
(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
thereunder, 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 2017. Also compute the amount of withholding
tax, if any.
Note: Show all relevant exemptions, exclusions and disallowances.

Practice Kit 35 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

CHAPTER 04 – CAPITAL GAIN

35 Mr. Parekh
Mr. Parekh acquired and disposed of 3,500 shares of a listed company, Big Limited (BL). The details
are as follows:
Acquisition Disposal
Dated
No. of shares Rate No. of shares Rate
31-03-2017 1,400 20 - -
15-09-2017 700 22 - -
01-04-2018 900 18 - -
01-05-2018 - - 600 17
07-05-2018 - - 800 19
21-05-2018 - - 700 18
31-05-2018 500 23 400 25
31-05-2018 - - 1,000 27
Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, calculate the
amount of capital gain / loss and tax thereon, if any, on the above transactions. Ignore incidental
expenses on cost of acquisition of securities.

36 Capital Gain
Under the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, 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 2017 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 2018 at Rs. 40 per share and
deposited them into CDC account. On the same date i.e. 1 January 2018, PL declared 25%
bonus shares with 1 April 2018 as the date of entitlement. On 31 March 2018, the market value
of these shares was Rs. 50 each. On 15 April 2018 Bari disposed of 50 shares in PL at Rs. 40
each. The bonus shares were credited to Bari’s account on 15 May 2018. He sold the remaining
shares including bonus shares on 18 May 2018 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.

Practice Kit 36 The Institute of Chartered Accountants of Pakistan


Questions

CHAPTER 05 – OTHER AREAS - INCOME TAX


37 Book Author
In the light of the provisions of Income Tax Ordinance, 2001, briefly explain the taxability of income the
following situation.
Mr. Danishwar, a renowned author, completed his book on “Human Behavior” in more than two and a
half years time. He received a lump sum amount of Rs. 900,000 in May 2018 on account of royalty.

38 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 2016 and joined a clearing house of his brother Ikram. In March 2018
he received Rs. 1.0 million as his share of commission from the discontinued business in Taiwan.

39 Transfer of Assets
In the light of the provisions of Income Tax Ordinance, 2001, briefly explain the taxability of income the
following situation.
Mr. Ravi transferred his house to a trust with a condition that out of the total rental income of Rs.
840,000 per annum, Rs. 500,000 would be paid to his wife and the balance of Rs. 340,000 would be
paid to his minor son Ashok. Ravi also provided Rs. 350,000 to the trustees for the acquisition of his
property.

40 Employee Share Scheme


Mr. Hayat, chief engineer in Mega Limited, had received 6000 shares of the company in July 2015,
under an employee share scheme. Mr. Hayat had the option to transfer the shares in tax year 2017 or
thereafter. The market value of shares at the time of issue was Rs. 12 per share. In 2017 the share
attained a market value of Rs. 20; however, Mr. Hayat sold the shares in May 2018 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.

41 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 2015. 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 2015. In tax year 2018, 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

Practice Kit 37 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

42 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, 2018, 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, 2018

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, 2018 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, 2018 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, 2018:

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.

Practice Kit 38 The Institute of Chartered Accountants of Pakistan


Questions

(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.

43 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 Gilgit Baltistan 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.

44 Residential Status
In view of the provisions of Income Tax Ordinance, 2001 and the stated rules, determine the
residential status of the following persons for the tax year ended June 30, 2018 under the given
circumstances.
(i) Mr. Mubeen came to Pakistan for the first time on a special assignment from his company on
April 01, 2017 and left the country on September 30, 2017.
(ii) Mr. Rana, who had never travelled abroad in his life, got a job in Canada. He went to Canada
on December 29, 2017 to assume his responsibilities as a CFO. In June, 2018 his company
sent him to India on a training workshop. On June 30, 2018 on his way back to Canada he had
to stay in Karachi for a whole day in transit.
(iii) Mr. Baber, a Federal Government Employee was posted to the Pakistan mission in Geneva
from July 01, 2017 to June 30, 2018.
(iv) Mr. Francis, a sugar dealer in Brazil, came to Pakistan on July 31, 2017. 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, 2018. Assume that the Commissioner has granted him permission to use calendar
year as a special tax year.

45 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 2018, 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.

Practice Kit 39 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(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 2014.
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.

46 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.

47 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.

48 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.

49 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?

Practice Kit 40 The Institute of Chartered Accountants of Pakistan


Questions

50 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.

ƒ Head office expenditure

ƒ Compensation for management services performed by the branch

51 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 2017. Also state whether a person can again be selected for
audit in tax year 2018 if nothing was found during its audit in the tax year 2017.

52 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 2017. 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, 2018. 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 2018. Discuss
the tax treatment under the provisions of Income Tax Ordinance, 2001.

53 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 2018 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 2018 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

54 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 2018. 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.

Practice Kit 41 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

55 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 2018, 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.

56 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.

57 Associates
What is meant by “Associates”? State the circumstances under which the following may be regarded
as associates:
ƒ A member of an association of persons and the association of Persons
ƒ A shareholder in a company and the company

58 Tax evasion and avoidance


State the meaning of the terms “Tax evasion” and “Tax avoidance” giving example of the situation
when each can occur.

59 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

60 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.

61 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.

Practice Kit 42 The Institute of Chartered Accountants of Pakistan


Questions

62 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.

63 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.

64 Tax admissible vs tax reliefs


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

65 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.

66 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

67 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 2018, 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 2018 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.

Practice Kit 43 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

68 Depreciable Asset, Eligible Depreciable Asset


Under the provisions of the Income Tax Ordinance, 2001 briefly discuss the following:
“Depreciable asset” and “Eligible depreciable asset”.

69 Speculation Business
In tax year 2018, 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.

70 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 2018, 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.

71 Mr. Hoshyar - Penalty


Mr. Hoshyar, a non-salaried individual, filed his return of income for tax year 2018 on 27 November
2018 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.

72 Advance Ruling
The concept of “Advance Ruling” was brought into tax laws to facilitate foreign investors. Under the
provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, explain the following:
The meaning of the term “Advance Ruling”, who may issue such a ruling and within what time it is
required to be issued.

73 Automatic selection of audit


Under the provisions of the Income Tax Ordinance, 2001 state the following:
Circumstances under which a person may automatically be selected for audit of its income tax affairs.

Practice Kit 44 The Institute of Chartered Accountants of Pakistan


Questions

74 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.

75 Imputable Income, PMEX


Under the provisions of the Income Tax Ordinance, 2001 state the meaning of:

(i) Imputable income.


(ii) Pakistan Mercantile Exchange

76 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?

Practice Kit 45 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

CHAPTER 06 – OTHER AREAS -SALES TAX

77 Mr. Furqan - Returns, De-registration


Mr. Furqan intended to commence a manufacturing business and obtained the sales tax registration in
November 2017. 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 2018, he received a
notice from the department of Inland Revenue directing him to furnish the return by May 15, 2018.
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.

78 Withholding agents
List the persons specified as “Withholding agents” for the purpose of collection of sales tax under the
Sales Tax Special Procedure (Withholding) Rules, 2007.

79 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.

80 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.

81 Stock acquired before registration


Ms. Hina started her business on January 12, 2018 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.

Practice Kit 46 The Institute of Chartered Accountants of Pakistan


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, 2018 and
was registered with effect from May 2, 2018. Following was the position of her unsold stock of coffee
and dates at April 25, 2018:

S. No. Description Date of purchase Sales Tax paid (Rs.)


(i) 25 kg of coffee imported January 15, 2018 23,750
(ii) 125 packets of dates purchased February 2, 2018 12,325
(iii) 42 kg of coffee imported February 25, 2018 39,900
(iv) 458 packets of dates purchased March 28, 2018 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 2018.

82 Inadmissible input tax


Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, 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.

83 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.

84 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.

Practice Kit 47 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

85 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

86 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.

87 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?

88 Registration
Under the provisions of Sales Tax Act, 1990 and Rules made thereunder, briefly explain whether the
persons under each of the following situations are required to be registered with Inland Revenue
Department. Also compute the amount of sales tax, if any, payable by or refundable to such persons.
The rate of sales tax is 17%.
(i) A manufacturer whose annual turnover during the last twelve months ended 31 March 2018 is
Rs. 4,500,000 and the amount of his annual utility bills for the same period is Rs. 800,000.
(ii) A distributor whose annual turnover during the last twelve months is
Rs. 3,000,000.
(iii) An importer whose annual turnover is Rs. 12,000,000.
(iv) A commercial exporter who intends to claim a refund of Rs. 200,000.

89 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 2017. Finance manager issued the credit note
on 5 June 2018.
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 2018.

Practice Kit 48 The Institute of Chartered Accountants of Pakistan


Questions

90 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

91 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.

92 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

93 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.

94 Continuance of Proceeding (death)


After providing a reasonable opportunity of showing cause and of being heard, Mr. Khayanat was
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 against Mr. Khayanat
under the above circumstances and provisions relating to the payment of the dues as stated in the
demand note.

95 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.

96 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

Practice Kit 49 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

97 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.

98 Registration of retailers

In the light of the provisions of the Sales Tax Special Procedures Rules, 2007:
Identify the categories of retailers who are required to be registered as a retailer and pay sales tax on
standard rate of 17% under the Sales Tax Act, 1990 and Rules made thereunder.

99 Registration of Retailers

In the light of the provisions of the Sales Tax Special Procedures Rules, 2007:
Briefly describe the mechanism of charging sales tax from retailers not falling in categories specified in
above question.

100 Non- active taxpayer


Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, who may be regarded as
a ‘Non-active taxpayer’? State the consequences which a registered person may face on removal of his
name from the list of active taxpayers.

101 Temporary registration


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

102 Taxable services


Under the provisions of any of the Provincial Sales Tax on Services Acts, briefly describe the meaning
of ‘Taxable Service’.

103 Mr. Munaf - Refund


On 15 September 2017 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 2017)

Practice Kit 50 The Institute of Chartered Accountants of Pakistan


Questions

CHAPTER 07 – OTHER AREAS FEDERAL EXCISE ACT.

104 Fill in the blanks


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.

105 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

106 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.

107 Non-fund banking services, franchiser


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

108 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.

109 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.

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110 Alternative Source


Explain the following in the light of the provisions of Federal Excise Act, 2005.
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.

111 Duty drawback


Explain the following in the light of the provisions of Federal Excise Act, 2005.
The circumstances under which duty drawback may be allowed to a taxpayer. Also state the relevant
authority who may grant such drawback.

112 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

113 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.

114 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?

(ii) Under the provisions of Federal Excise Act, 2005 explain KIBOR:

115 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

116 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.

Practice Kit 52 The Institute of Chartered Accountants of Pakistan


Questions

117 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’.

118 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.

119 Franchise
Under the provisions of the Federal Excise Act, 2005 define Franchise

120 Withdrawal of registration suspension order


Under the provisions of Federal Excise Act, 2005 and Rules made thereunder, explain:
How and under what circumstances a collector may withdraw the order for suspension of a person’s
registration.

121 Consequences of wrong registration


Under the provisions of Federal Excise Act, 2005 and Rules made thereunder, explain:
The consequences of wrong registration due to inadvertence or misconstruction.

122 Determination of value for duty


Explain the provisions of Federal Excise Act, 2005 with regard to the determination of the value and
chargeability of excise duty on the basis of retail price of goods.

123 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.

Practice Kit 53 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Practice Kit 54 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional
Advanced Taxation

SECTION
B
Answers

CHAPTER 01 – INDIVIDUAL

1 Mr. and Mrs. Adil

BURQ ENTERPRISES
Personal status: Association of Persons
Residential status: Resident
Tax Year: 2018
Income year ending: June 30, 2018
Computation of taxable income and tax liability
Consultancy
Imports FTR
Services
Rupees in ‘000’
Net Sales of generators (574,200 / 1.17) 490,769 0
Receipt from consultancy services 0 55,000
Cost of sales (W-1) (341,740) 0
Gross profit 149,029 55,000
Administrative and selling expenses (W-2)
(allocated on the basis of sales ratio) (70,859) ( 7,941)
Finance cost-Specific to FTR (W-3) (7,800) 0
Other Income (W-4)
(allocated on the basis of sales ratio) 450 50
Net Income 70,820 47,109

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Certified Finance and Accounting Professional- Advanced Taxation

Scheme of taxation FTR Minimum


Rate of tax 6% of the value
of goods
Tax liability (W-5) 24,780 15,707
Less: Tax deducted at source (24,780) ( 5,500)
Net tax payable 0 10,208

W-1: Cost of sales Rs. in ‘000’


Cost of sales of generators 429,520
Less: Inadmissible expenses
Customs duty 0
Sales tax paid at import stage (63,000)
Withholding tax paid on commercial imports (413.0 m x 6%) ( 24,780)
341,740

W-2: Administrative and selling expenses


As per profit and loss account 96,300
Less: Inadmissible expenses
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 9,000


Less: Inadmissible expenses
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: Rupees
Tax deductible on services is treated as Minimum Tax. Hence BURQ ENTERPRISE is required
to pay tax as higher of Normal Liability or Minimum Tax (including turnover tax under section
113) deducted at source.
Calculation of Tax liability under Normal Tax regime is as under:
Upto Rs. 6,000,000 1,319,500
Balance (47,109,000-6,000,000) x 35% 14,388,150
15,707,650

Practice Kit 56 The Institute of Chartered Accountants of Pakistan


Answers

MR. ADIL
Personal status: Individual
Residential status: Resident
Tax Year: 2018
Income year ending: June 30, 2018
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 120,000
only 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 – 16,954,500 16,954,500 33,909,000
13,200,000)
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

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Certified Finance and Accounting Professional- Advanced Taxation

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)
Bonus shares are now taxable @ 5% such tax is deducted on the MV (Ex Price) of Bonus Shares on
the first day after closure of books. In the absence of information it is assumed that Rs. 150 is ex price
which will be treated as cost of bonus shares.
Note: Cost of original old shares would remain same before and after bonus shares are issued.

2 Mr. Khan

Personal status: Individual


Residential status: Resident
Computation of Taxable income and Tax thereon
Tax Year 2018
Rs. in ‘000
Income from Salary
Basic salary for six months (350,000 × 6) 2,100
Conveyance allowance (50,000 × 6) 300
Value of accommodation (45% of basic salary or fair market rent whichever is 945
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 (2.0 million – 75K exempt under clause 13 of Part I of 1,925
Second Schedule) [Note]
Car purchased (1.5 million – 1.0 million) [ Sec. 13(11)] 500
Total Salary Income (A) 6,570
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 2018 (100,000 × 3) 300
Income from Property as separate Block of Income (SBI) 900

Practice Kit 58 The Institute of Chartered Accountants of Pakistan


Answers

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. 597 + 27.5%x (6,570-4,000)] 1,303.75

(b) On redundancy payment at the average rate of tax (4,000 x 18%) 720
(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 2,111.25


Less: Tax deducted at source from:
Salary income (1,837)
Property income (197.5)
Balance tax payable 76.75

3 Mr. Yaqeen

Personal status: Individual


Residential status: Resident
Computation of income tax liability For the tax year 2018
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

Practice Kit 59 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 [@30% on 4,922 +1,422] 2,898.60
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.
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.

Practice Kit 60 The Institute of Chartered Accountants of Pakistan


Answers

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 2018:
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 2018. [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 2018
Rupees
Income from property: [SBI]
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

Practice Kit 61 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

5 Mr. Iqbal
Personal Status: Individual
Residential Status: Resident
Computation of income tax liability
For the tax year 2018
Rupees
Income from Salary:
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
Capital Gain:
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
Income from other sources:
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

Practice Kit 62 The Institute of Chartered Accountants of Pakistan


Answers

Computation of net tax liability:


Tax on Rs. 7,000,000 1,422,000
Tax @ 30% on the amount exceeding Rs. 7,000,000 (7,396,164–
7,000,000) 118,849
Total gross tax payable under NTR 1,540,849
Less: Tax credit
ƒ Investment in life insurance [500,000 × 1,540,849 ÷ 7,396,164]
(Note-3 u/s 62) (104,165)
ƒ Contribution to an approved pension fund [ 900,000 ×1,540,849 ÷
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 taxable income Rs. 900,000 (Rs. 3,000,000 x 30%) [N-4] (187,498)
(291,663)
Net tax payable under NTR 1,249,186
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 1,304,186
Less: Taxes withheld at source
ƒ from salary (1,200,000)
ƒ by bank (15,000)
Net tax payable 89,186
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:
ƒ The time the restriction is removed; or
ƒ The time the employee actually disposes of the shares.
Since neither of these events occurred before 30 June 2018no amount is taxable as salary of
Mr. Iqbal for the tax year 2018.
(3) According to Section 62(1) of the Income Tax Ordinance, 2001 a resident person who has
invested in new shares or sukuks offered 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. 1,500,000

(4) It is assumed that he joined the above pension fund before the age of 40.

Practice Kit 63 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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:
The perquisite shall be computed as below:
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.

6 Mr. Saif

Personal Status: Individual


Residential Status: Resident
Computation of income tax liability
For the tax year 2018
Income from Salary: Rupees
Basic Salary (600,000×12) 7,200,000
Guaranteed bonus (relates to tax year 2019) -
Air ticket reimbursed 120,000
Perquisite representing car W-1 75,000
(Rs. 100,000 spent by RPL on maintenance is exempt in the hands of Mr.
Saif)
Perquisite representing accommodation W-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.)

Practice Kit 64 The Institute of Chartered Accountants of Pakistan


Answers

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

4,325,000

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

Income from other sources:

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 (inadmissible being capital in nature)

425,000

Total income 13,614,825

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)

Taxable income 13,097,125

Practice Kit 65 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Computation of net tax liability:

Tax on Rs. 7,000,000 1,422,000

Tax @ 30% on the amount exceeding Rs. 7,000,000 (i.e. on6,097,125) 1,829,137

Tax payable under NTR 3,251,137

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 3,256,292

Less: Taxes withheld at source

ƒ from salary (2,100,000 + 13,000 deducted on his salary by his own


business) (2,113,000)

ƒ on air tickets (10,000)

ƒ on import stage (150,000)

Net tax payable 983,292


Notes
Items not included in computation:
(a) Bonus in July 2018: 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 2018 will not be allowed as income from other
source as it is taxable on receipt basis.
(d) LCD TV: Being capital in nature is not allowed. Further, no depreciation / initial allowance
allowed in computing income under the held income from other sources except in case of lease
of building together with plant and machinery.
N-1
nd
Donation to pak 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 of income from Property: cannot be adjusted against income under other
heads as the same is now fully covered under separate block of income.

W-1 Perquisite representing car:


The perquisite shall be computed as below:
FMV of the car at the commencement of lease term 1,500,000
5% of the FMV (1,500,000 × 5%) 75,000
W-2 Perquisite representing accommodation:
The perquisite shall be computed as below:
Annual basic salary 7,200,000
Value of perquisite 45% of the basic salary (7,200,000 × 45%) 3,240,000

Practice Kit 66 The Institute of Chartered Accountants of Pakistan


Answers

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 Screen Fitness
machine

Cost of fitness machine 200,000 2,750,000


Less: Initial depreciation @ 25% (50,000) (687,500)
150,000 2,062,500
Normal depreciation @ 15% 22,500 (309,375)
WDV at 30-06- 2018 127,500 1,753,125

Total depreciation (Initial + Normal) 72,500 996,875

7 Mr. Pansari
Personal Status: Individual
Residential Status: Resident
Computation of Taxable Income and Income Tax Liability
For the tax year 2018
Income from Salary: Rupees
Basic salary per month (Rs. 450,000 x 12) 5,400,000
Conveyance allowance per month (Rs. 50,000 x 12) [N-1] 600,000
Conveyance for business and private use (Rs. 3,000,000 x 5%)[N-2] 150,000
Leave encashment (benefit due but voluntarily waived off is fully taxable)
[U/S 69(c)] 75,000
Marginal Perquisites (Rs. 500 x 2 x 12) [N-3] 12,000
Employee Shares Scheme:
Gain on acquisition of shares from Trio Limited (8,000 x 2x 102) 1,632,000
Pension from Ex-employer [N-4] -
Directors meeting fee [N-5] 200,000
Total income from salary 8,069,000
Capital Gain under NTR
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

Practice Kit 67 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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]
(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]

Practice Kit 68 The Institute of Chartered Accountants of Pakistan


Answers

CHAPTER 02 – COMPANY TAXATION

8 Big Pharma
Personal Status: Company
Residential Status: Resident
Computation of income tax liability
For the tax year 2018
Rs. in 000’
Accounting profit before taxation 17,150
Add: Inadmissible expenses:
Accounting depreciation recorded in:
ƒ Cost of sales 3,200
ƒ 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 1,300
CIR obtained)
WWF as per accounts 350
Loss from Oman branch 3,400
Profit from Qatar branch (2,700)
Net loss from foreign source (to be carried forward 700
for adjustment against foreign source income of the
following tax year, if any.)
11,500
28,650
Less: Admissible expenses:
Tax depreciation (assumed inclusive of office 6,000
equipment given in question)
Bad debts written off (W–1) 300
(6,300)
Taxable income 22,350
Less: brought forward tax loss (6,100)
Taxable income 16,250
WWF (W–2) (350)
Net taxable income 15,900

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Certified Finance and Accounting Professional- Advanced Taxation

Tax @ 30% 4,770


Higher of [MTL u/s 113 or 30% on taxable income or
17 % of accounting profit) 1,200 or 4,770 Or (Rs.
17,150 x 17%)= 2,915.50
WWF 350
5,120
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 30%=810
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) (5)
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
Taxable income 16,250
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.

9 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.

Practice Kit 70 The Institute of Chartered Accountants of Pakistan


Answers

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
30,2018:
Amount in million
Received from:
BP $ 4.2
ATX Gmbh $ 3.8
$ 8.0
@ Rs. 85 ($ 8.0 million x 85) Rs. 680.0

Total equity at the beginning of the year: Rs. in million


Net assets as at June 30, 2018 (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 30.06.2018) 357
Foreign debt from ATX
$ 3.8 million x 85 (on 30.06.2018) 323
680
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 Rupees
(10-08-2017 to 14-05-2018)
Total interest expenses (357 million × 12% ×278/366) 32,539,672

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Profit on debt paid/accrued for BP and ATX


(15-05-2018 to 30-06-2018):
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


(15-05-2018 to 30-06-2018):
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 2018:


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.

10 Mateen and Vaqas


Personal Status: AOP
Residential Status: Resident
Advice to Mateen and Vaqas
Computation of tax impact on different structures

(i) Partnership Rupees


Profit before taxation 1,095,000
Add: Inadmissible expenses:
Salaries:
Mateen 1,100,000
Vaqas 970,000
Accounting depreciation 975,000
4,140,000
Less: Admissible expenses:
Tax depreciation (1,462,500)
Taxable income 2,677,500

Computation of tax payable by partnership: Rupees


Total taxable income 2,677,500
Tax on Rs. 2,677,500 [344,500 + 44,375] (A) 388,875
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.

Practice Kit 72 The Institute of Chartered Accountants of Pakistan


Answers

(ii) Company (Public/Private) Rupees


Taxable income as per (i) above 2,677,500
Less: Salaries:
Mateen (1,100,000)
Vaqas (970,000)
Adjusted taxable income 607,500
Tax @ 30% 182,250
Profit after tax 425,250
Calculation of Dividend:
Accounting profit before tax 1,095,000
Less: Tax (as calculated above) (182,250)
Profit after tax 912,750
Dividend on Rs. 912,750 @ 60% (547,650)
Profit retained after dividend 365,100

Total tax payable by the business:


On company profits [Higher of 1.25% of turnover, Alternate corporate 186,150
tax or NTR]
Add: Tax payable on salaries by -
ƒ Mateen (1,100,000)[14,500 + 10%(1,100,000 – 750,000)] 49,500
ƒ Vaqas (970,000)[14,500 + 10%(970,000 – 750,000)] 36,500
Tax payable on dividend:
Mateen (547,650 x 60% = 328,590 X 15%) 49,289
Vaqas (547,650 x 40% = 259,060 X 15%) 38,859
Total tax payable in case of a company (B) 360,298

(iii) Small Company Rupees


Taxable income as per (i) above 2,677,500
Less: Salaries:
Mateen (1,100,000)
Vaqas (970,000)
Adjusted taxable income 607,500
Tax @ 25% (1,095,000 x 17% OR 25% of 607,500) ( 186,150)
Profit after tax 421,350
Calculation of Dividend:
Accounting profit before tax 1,095,000
Less: Tax (as calculated above) (186,150)
Profit after tax 908,850
Dividend on Rs. 908,850 @ 60% (545,310)
Profit retained after dividend 363,540

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Certified Finance and Accounting Professional- Advanced Taxation

Total tax payable by the business:


On company profits (1.25% of sales or ACT 1,095,000 x 17%) 186,150
Add: Tax payable on salaries by -
ƒ Mateen (1,100,000)[14,500 + 10%(1,100,000 – 750,000) 49,500
ƒ Vaqas (970,000)[14,500 + 10%(970,000 – 750,000) 36,500
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) 353,947

Based on the above information it would be better for Mateen and Vaqas to operate as a limited
liability company in ‘small company’ category, if possible, being lowest tax impact (Rs. 353,947). Even
as normal limited liability company the tax impact is Rs. 360,298 as against the amount of tax of Rs.
388,875 payable in case of partnership.

11 Mega Limited (ML)

Personal Status: Company

Residential Status: Resident

(a) MEGA LIMITED


Computation of income tax liability

For the tax year 2018

Income from Business: Rs. in ‘000

Accounting profit before taxation 152,500

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

Practice Kit 74 The Institute of Chartered Accountants of Pakistan


Answers

Less: Admissible expenses:

Initial allowance on new plant and machinery [25% x 52(M)] ( 13,000)

Normal depreciation on new plant and machinery ( 5,850)


[15% x 52(M) – 13(M)]
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)

Taxable income 71,050

Computation of net tax liability:

Tax on Rs. 71.050 million @ 30% or higher of 1.25% of 1,100,000 or


17% of [Rs. 152,500 (less exempt & covered under FTR) – 50,000 – 21,315
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 12,215 (A)

Alternative Corporate Tax:

Accounting Income 152,500

Less: Exempt + Royalty (50,000 + 27,000) (77,000)

Services outside Pakistan (not excluded in section 75,500


113C)

ACT @ 17% 12,835

BMR tax credit (5,200)

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 15,815

Practice Kit 75 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 8,950

Note:
ƒ 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.
ƒ Nothing would be deducted from payments to non-resident against import of plant and machinery
since the title was transferred outside Pakistan. [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 2018. Therefore, ML is exposed to
the levy of default surcharge under section 205(1B).

12 Rose Petal Limited - Construction

Personal Status: Company


Residential Status: Resident
Taxable income:
Tax Year Rupees
2016 (2,250,000 x 46%) 1,035,000
2017 (2,250,000 x 39%) 877,500
2018 (2,250,000 x 15%) 337,500

Practice Kit 76 The Institute of Chartered Accountants of Pakistan


Answers

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
2016 46%
6,750,000

2 , 632 ,500
2017 39%
6 ,750 ,000

1,012 ,500
2018 15%
6 ,750 ,000

Note:
It is assumed that RPL is a public company listed on registered stock exchange in Pakistan. Therefore
its income will be assessed under normal tax regime. [Section 153]
In case RPL is not listed, gross receipts will be treated as taxable income tax deductible @ 7% will be
final tax liability of RPL. [Section 153]

13 Saturn Limited - Foreign Branches / Tax Credit

Personal Status: Company

Computation of taxable income and income tax liability

For the tax year 2018

Amount in Rupees

Pakistan source income Foreign source income Total

Local Export
Korea China
(NTR) (FTR)

Income from Business:

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) -

Excess provision written


back admissible as
straight deduction
[Note-(ii)] (100,000) - - - (100,000)

Practice Kit 77 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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


30% export 30% 30%
proceeds

Tax liability 1,290,000 70,000 240,000 - 1,600,000

Less: Foreign tax credit (240,000) (240,000)


(lesser of foreign tax paid
or Pakistan tax payable
on such income)
[Note-(iv)]
- - - 1,360,000

Less: Taxes paid during


the year (1,600,000) (70,000) - - (1,670,000)

Net tax payable /


(refundable) (310,000) - - - (310,000)

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%.

Practice Kit 78 The Institute of Chartered Accountants of Pakistan


Answers

14 Sun Limited (SL) - Group Relief

Personal Status: Company


Residential Status: Resident
Computation of income tax liability
For the tax year 2018
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

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Certified Finance and Accounting Professional- Advanced Taxation

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

Computation of net tax liability:

Tax regime NTR NTR NTR

Tax on taxable income [@30% or 1.25% of turnover


whichever is higher or 17% ACT on accounting profit
before tax] [N-1] 756 60 221

Less: Tax deduction at source:


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) 33 (215) 151

N-1

1.25% MTL U/S 113 212.50 75 43.75

17% ATC U/S 113C 629 - 221

30% NTR 756 - 81.30

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

Practice Kit 80 The Institute of Chartered Accountants of Pakistan


Answers

Depreciatio
Opening Addition /
Assets Total Rate n for the
WDV (Deletion)
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.

15 Pills (Pvt) Limited


Personal Status: Company
Residential Status: Resident
Computation of taxable income
Tax year 2018
(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
Less: Inadmissible expenses
Accounting depreciation (360) (1,080) (1,440)
Add: Admissible expenses
Tax depreciation: Leased Machinery [640*15%] 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
Less: Inadmissible expenses
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)

Practice Kit 81 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(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 (1758) (1758)
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% 30%
Gross tax liability : Alternative Corporate Tax
Minimum tax liability 27,000 x 1.25% = 338 whichever is
higher (Note vi) 78.3 661
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 - 261

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 2018, 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.

Practice Kit 82 The Institute of Chartered Accountants of Pakistan


Answers

(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

Practice Kit 83 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

16 Maroof Limited (ML) - Construction contracts


Personal Status: Company
Residential Status: Resident
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 2017 Rupees
Estimated Profit × percentage of completion [40,000,000×55%] 22,000,000
Withholding tax credit available
Income received: February 2017 12,622,000
May 2017 15,760,000
28,382,000
Withholding tax paid (28,382,000 ×7 ÷ 93) 2,136,280
Tax year 2018 Rupees
Taxable Profit 18,000,000
Estimated Profit × percentage of completion [40,000,000×45%]
Withholding tax credit available
Income received: September 2017 35,000,000
December 2017 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


‫݀݁ݎݎݑܿ݊݅ݏݐݏ݋ܿݐܿܽݎݐ݊݋ܥ‬
ܲ݁‫ ݀݁ݐ݈݁݌݉݋ܿݐܿܽݎݐ݊݋݂ܿ݋݁݃ܽݐ݊݁ܿݎ‬ൌ 
ܶ‫ݏݐݏ݋ܿݐܿܽݎݐ݊݋݈ܿܽݐ݋‬
30 June 2017 [33,000,000 ÷ 60,000,000] 55%
30 June 2018 [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]

Practice Kit 84 The Institute of Chartered Accountants of Pakistan


Answers

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


Zeta Limited
Computation of taxable income
For the tax year 2018
Rs. in ‘000
Income from Business:
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 2016 (130)
Less: B/f un-assessed business loss – tax year 2017 -
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 2011 -
Less: B/f capital loss – tax year 2012 (65)
735
Income from Other Sources:
Income for the year 100
Add: deemed income 85
185
Taxable income for the year 890
Business loss carried forward to next tax year Nil
Unabsorbed depreciation carried forward to next tax year
Speculation loss carried forward to next tax year 100

Practice Kit 85 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 2017 cannot
be set-off against the business income of 2018. [Section 56]
(2) Capital loss brought forward from tax year 2011 cannot be set off against capital gains of tax
year 2018 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 2016 can only be set-off against income from
speculation business chargeable to tax in tax year 2018. Since in tax year 2018, 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. 2016. [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]

18 Bharosa Limited (BL)

Personal Status: Company


Residential Status: Resident
Computation of Taxable Income and Income Tax Liability
For the tax year 2018
Income from Business: Rupees

Profit before taxation 4,802,000

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)

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

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Answers

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
Income from Other Sources:
Profit on debt (Bank profit) 180,000
Income from lease of manufacturing unit
Gross lease rentals (150,000 × 9) 1,350,000
Less:
Property tax (96,000)
Tax dep. on building (3,800,000 × 10%) 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

Computation of net tax liability:

Tax on taxable income [@30% 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)

Practice Kit 87 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

In view of the accounting loss for the year ACT cannot be calculated
? tax on taxable income @ 30% is higher 368,484
Tax credit @ 20% of tax payable for enlistment on SE (368,484 x
20%) (73,697)

294,787

Add: WWF 24,565

Total tax liability 319,352

Less: Tax deduction at source:

Advance tax paid u/s 147 and 151 (260,000+18,000) (278,000)


Balance tax payable 41,352

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) 1,198,800

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

Practice Kit 88 The Institute of Chartered Accountants of Pakistan


Answers

19 Khawar Associates (KA)


Personal Status: AOP
Residential Status: Resident
The income chargeable to tax under the head income from business is computed as under:
Computation of taxable income
For the tax year 2018
Income from Business: Rupees
Accounting profit before taxation 648,000
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)
Add:
Common expenses attributable to income subject to final taxW-1 936,000
Total income 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

Practice Kit 89 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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:
Donation paid to educational institution: N-1
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.
Dividend Income: N-2
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.

20 Khalis Limited (KL)


Computation of taxable income and income tax liability
For the tax year 2018
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

Practice Kit 90 The Institute of Chartered Accountants of Pakistan


Answers

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)
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 30% 1% 1% 12%

Tax for the year (N-3) 2,360.10 1,695.58 105.15 516 4,676.83
Less: paid u/s 147 (3,450.00) - - - (3,450.00)
Paid u/s 153 - - - - -
Paid u/s 154(3c)
1
[169,558 x 1%]* - (1,695.58) - - (1,695.58)
Paid u/s 233 - - - (432) (432)
Tax payable / (refundable) for
tax year (1,089.9) - 105.15 84 (900.75)
CGT on shares W-4A -
Total tax refundable (900.75)
1
* (175,951×85%=149,558+20,000=169,558)
Note: Fee received from Bahrain and capital gain on sale of shares in Blue Limited is exempt from
tax and since no direct expenditure was incurred in earning such income, no expenditure would be
allowed against such income.
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
Administrative and selling expenses: W-2 70,100

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Certified Finance and Accounting Professional- Advanced Taxation

Less: Inadmissible expenses:


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
Less: Inadmissible expenses:
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 x Rs. 120 – (30,000 shares x Rs. 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% ]
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.

Practice Kit 92 The Institute of Chartered Accountants of Pakistan


Answers

21 ZJ Limited
Personal Status: Company
Residential Status: Resident
Computation of Taxable Income and Income Tax Liability
For the tax year 2018
Income from Business: Rs. in ‘000
Profit before taxation 46,500
Add / (Less): Inadmissible items / transactions
Export sale to Red Cross in Somalia-NTR income
[since opt out of PTR] -
Adjustment of opening stock-absorption cost method [25,690–28,460] (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 2015 & 2016 [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 2016 (2,550)
Total business income for the year A 13,620
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 K)]U/R 13P(d)
related to negotiated deal transactions 6,300
Separate block of income
B 13,300
Income from Other Sources:
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

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Certified Finance and Accounting Professional- Advanced Taxation

Computation of net tax liability:


Tax regime [as opt out of PTR] NTR
Tax on taxable income [14,870 @ 30%] (i) 4,461
Minimum tax [199,000 × 1.25%] (ii) W-1 2,488
Minimum tax under Section 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 4,461
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 5,284
Add: default surcharge:
90% of gross tax payable for the year [5,284 × 90%] 4,756
Less: Taxes paid u/s 147, 148, 153 and 154 [1,000+1,200+1,050+300] (3,550)
Amount of shortfall during 2018 1,206
st
Period of default from 1 July 2017 to 31st January 2018 (assuming paid with return
on 31 January 2018) = 215 days
Amount of default surcharge @12% [1,206 × 01/07/2017 to 31/01/2018 12% × 215
÷ 366] 85
Tax liability including default surcharge 4,841
Less: Tax deduction at source:
Advance tax paid u/s 147 (1,000)
Advance tax paid u/s 148 (1,200)
Tax deducted u/s 153 (1,050)
Tax @1 deducted on export proceeds u/s 154 [30,000,000 × 1%] (300)
Net tax payable with return 1,291
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 2017) 1,400
Default surcharge on late payment of WHT (assuming paid with return on 31
January 2018 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
Rs. in ‘000
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 sale – minimum tax separately calculated (30,000)
Adjusted turnover 199,000

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W-2: Computation of accounting profit for ACT Rs. in ‘000


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

22 Desi (Pvt.) Limited - Thin Capitalization


Personal Status: Company
Residential Status: Resident
Calculation of deductible amount of interest on debt:
Aggregate outstanding balance of loans received by DPL from foreign controller (MI) as at 30
September 2017:
Rs. in million
Total equity at the beginning of the year:
Net assets as at 30 September 2017 (3,500 – 2,870) 630
Less: After tax profit for the year (350)
280
Less: Amount credited during the year to asset revaluation reserve (150)
Equity at the beginning of the year 130

Foreign equity-effective share of MI (0.7 × 130 million) 91


Less: debt owed by a non-resident foreign associate of MI (5)
Equity at the beginning of the year 86
nd
Foreign Debt attracting the provisions of thin capitalization: (interest exempt from tax-2
Schedule Clause 72)
Loan received on 15 March 2017 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 2017 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 2018:
Debt where thin capit. rule is applicable (315 million × 11% × 200÷365) 18,986,301

Interest paid/accrued for DPL in tax year 2018:


Debt where thin capit. rule is not applicable (168 million × 6% × 122÷365) 3,369,205

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Certified Finance and Accounting Professional- Advanced Taxation

Deductible profit on debt for the tax year 2018:


For DPL loan = 18,986,301÷1.2209 15,551,070
Profit on debt paid/accrued for DPL in tax year 2018:
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.

Practice Kit 96 The Institute of Chartered Accountants of Pakistan


Answers

CHAPTER 03 – SALES TAX

23 Olive Limited

Computation of Net Sales Tax Liability

For the tax period May 2018

Rs. in ‘000

SALES TAX CREDIT (INPUT TAX) Gross Taxable


Sales Tax
Value Value

Domestic Purchases(excluding fixed assets) @17% 6,000 6,000 1,020

Advertisement services in province of Punjab @ 16% 650 650 104

Imports excluding fixed assets including 3% VAT on


commercial imports @ (17+3)20% 8,000 8,000 1,600

Imports excluding fixed assets-domestic consumption 15,000 15,000 2,550


Fixed Assets (Machinery) 1,200 1,200 204

Fixed Assets (Vehicle) – Inadmissible 1,500 0 0

Sales tax on 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 10000 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

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Certified Finance and Accounting Professional- Advanced Taxation

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.

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Answers

24 Kamyab Engineering Limited (KEL)


Computation of Sales Tax Payable/Refundable
For the tax period November 2017
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 @ (17+3) 20% - W-1 10,000 1,980
Electricity Bills - 60
Gas Bills - 21
Mobile Phone - 26
Uniforms for line staff - -
Purchases from non-register - -
14,106
Less: Inadmissible / un-adjustable input tax (W-2) (3,307)
Input tax for the month 10,799
Input tax on purchases outstanding for more than 180 days is
presumed to be taken care of in 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
Output tax for the month 12,998
Admissible Tax Credit
Lower of 10,799 or 90% of 12,998]
Sales tax payable (12,998 -10,799) (A) 2,199
Further tax 2% of local taxable supplies to un-registered
persons i.e. 24,000 x 2 % (B)
No extra tax has been charged on the assumption that the
appliances supplied by the registered person do not fall in rule
58S of the Sales Tax Special Procedure Rules, 2007. 480
WHT on purchases from un-registered persons that are liable to
be registered (15,250 x 1%) U/R 3(ii) Sales Tax Special
Procedure Rules, 2007 153
(A)+ (B) + (C) 2,832

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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 value Taxable Value Sales tax
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


Exempt supplies 11,000
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
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%).

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Answers

25 Gadget Limited (GL)


Computation of Net Sales Tax Liability
For the Tax Period May 2018
Rs. in ‘000
Taxable
Sales Tax
Value
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
Rs. in ‘000
Taxable
Sales Tax
Value
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

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Certified Finance and Accounting Professional- Advanced Taxation

Rs. in ‘000
Taxable
Sales Tax
Value
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
ƒ L/C opening charges 500 -
ƒ 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.

26 Sunshine Limited (SL)


Computation of Net Sales Tax Liability
For the tax period November 2017 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.

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SALES TAX DEBIT (OUTPUT TAX)


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 0 0
Export to Turkey (Gama) 7,000 7,000 0
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 @ 2% on sale to non-register is not
allowed to be adjusted as bottom line figure and must be 60
paid to FBR. 3,000 x 2%
Sales tax payable 60

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

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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.

27 Ummeid Limited (UL)

Computation of Net Sales Tax Liability


For the tax period May 2018
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. 2016 [Note-2] 200,000 - -
(-) Inadmissible/un-adjustable input W-1 ( 2,149,438)
Input Tax for the month 2,763,562

SALES TAX DEBIT (OUTPUT TAX)


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

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

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Answers

Add: Excess tax collected- incidence passed on to consumers [Note-3] 19,200


2% further sales tax to be paid on supply to un-registered persons (Rs.
9,000,000 x 2%) 180,000
Net sales tax payable with return 2,295,638
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 2017; UL therefore cannot adjust the amount of input tax of Rs.
32,000 from its output tax for the month of May2017.

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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.

28 Mazboot Furnishers (MF)

(a) Computation of Net Sales Tax Liability


For the tax period November 2017
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
Staff entertainment-input cannot be claimed 3,750 - -
Fixed assets (Car) 780,000 - -
Input for the month
(-) Inadmissible/un-adjustable input (A+B) W-1 65,100(13,170)
Input Tax for the month 51,930

SALES TAX DEBIT (OUTPUT TAX)


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
Output tax for the month 95,200

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Answers

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) Rs. 40,800
Rupees

Total sales 700,000

Export supplies 140,000


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
2017 i.e. not more than 30 days prior to application for registration and input tax paid at import
stage on goods imported in August 2017 i.e. not more than 90 days prior to application for
registration can be claimed by MF with its November 2017 return. However, he cannot claim
th
input tax on local purchases of Rs. 25,000 on 10 Sep as period of 30 days has lapsed.

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29 Tender Pops Limited (TPL)


Computation of Net Sales Tax Liability
For the tax period May 2018
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 - -
Input Tax for the month 5,975,000
SALES TAX DEBIT (OUTPUT TAX)
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
Output tax for the month 7,123,000
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 2% additional sales tax shall not
be charged on sales to non-registered persons.
N-2: Sales tax withholding is not Applicable on Local third schedule items.

30 Masawi Limited (ML)

Computation of Net Sales Tax Liability


For the tax period November 2017
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)
Input Tax for the month 855,279

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Answers

SALES TAX DEBIT (OUTPUT TAX)

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 suppliers N-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 2% further tax on unregistered (2,125,000 x 2%) = 42,500 530,421

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


Residual input tax TOTAL 1,066,000

Rupees

Total sales 8,600,000

Supplies to duty free shop 1,020,000

Export supplies 680,000

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

Practice Kit 109 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

31 Omega Limited (OL)

Computation of Net Sales Tax Liability


For the tax period May 2018
Taxable Sales Tax Amount of
SALES TAX CREDIT (INPUT TAX) Value Rate Sales Tax
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] -
Input Tax for the month 133,250
SALES TAX DEBIT (OUTPUT TAX)
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
Output tax for the month 235,950

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 were 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).

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Answers

N.4 2% 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

32 Harfun Limited (HL)


Computation of Net Sales Tax Liability
For the tax period November 2017
Taxable Sales Tax Amount of
SALES TAX CREDIT (INPUT TAX) Value Rate Sales Tax
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 -
Mango and banana purchased from registered 1,500,000 17%
person 255,000
Import of 3,000 boxes of squashes @ Rs. 2,040,000 17%
680/box (N-1) 346,800
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 -
Input Tax for the month 2,941,000

SALES TAX DEBIT (OUTPUT TAX)

Sale of imported squashes 2,800 @ Rs. 680/box 1,904,000 17% 323,680


Sale of light energy saver lamps 500,000 exempt -

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Certified Finance and Accounting Professional- Advanced Taxation

Sale of locally produced squashes 13,800,000 17% 2,346,000


Output tax for the month 2,669,680
- 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.

33 Razi Limited (RL)


RAZI LIMITED (SL)
Computation of Net Sales Tax Liability
For the tax period May 2018
Rs. in ‘000
Gross Taxable
SALES TAX CREDIT (INPUT TAX) Sales Tax
Value Value
Domestic Purchases:
- From registered supplier (8,000,000 – 7,700 7,700
300,000) 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 to 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 0 0
Exports(700 + 600)
th
Registered under DTRR serial # 7 of 5 Schedule. 1,300 0 0
1,521.50

Practice Kit 112 The Institute of Chartered Accountants of Pakistan


Answers

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 255
17%)
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 @ 2% 3,100 3,100 62.00
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 327.75
Refund claim (input consumed in export) (W1) 179.158
Refund claim on machinery (input consumed in export)
(W1) (C) 12.683
Taxable
W-1: Apportionment of input tax Gross Value Sales Tax
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
Exempt supplies 1,300
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 rule.

Practice Kit 113 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

34 Karma Limited

Karma Limited (KL)


Computation of Net Sales Tax Liability
For the tax period November 2017

Taxable Sales Tax Amount of


SALES TAX CREDIT (INPUT TAX) Value Rate Sales Tax

Raw material from local registered suppliers 12,000,000 17% 2,040,000


Raw material from local un-registered suppliers inadmissible
[3,000,000-950,000] 2,050,000 -
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 420,000 17%
[600 kg × Rs. 700] 71,400
2,621,400
(-)Inadmissible/un-adjustable inputW-1 454,357
Input Tax for the month (Accumulated credit) 2,167,043
SALES TAX DEBIT (OUTPUT TAX)

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)
ƒ Supplied to TCP for export purposes 1,350,000 0% 0
ƒ 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
Output tax for the month 2,737,600
Less: Supplies returned by the customer 950,000 17% (161,500)
Further tax @2% (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

Practice Kit 114 The Institute of Chartered Accountants of Pakistan


Answers

Sales tax withheld from un-registered suppliers (2,050,000 × 1%) – [WHT


rd
applicable despite 3 schedule item since unregistered] 20,500
Further tax on supplies to cottage Ind. [5,500,000 × 2%] 110,000
Further tax on supplies to un-registered end consumers-Exempt [1,000,000 × 0%] 0
Extra tax under chapter XIII of ST Special Procedure Rules, 2007 [2,500,000 × 2%] 50,000
Admissible credit (lower of 2,167,043 or 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
Residual input tax TOTAL 2,550,000
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 2,184,000


Small 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

Practice Kit 115 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

CHAPTER 04 – CAPITAL GAIN

35 Mr. Parekh
Computation of capital gain on sale of securities:

Purchases/Acquisitions Disposal
No. of
Date Price Cost** 01-5-18 07-5-18 21-5-18 31-5-18 31-5-18 31-5-18
Shares
31-3-17 1,400 20 28,000 600 800
15-9-17 700 22 15,400 700
01-4-18 900 18 16,200 400 500
31-5-18 500 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)

** Incidental expenses @ 0.50% of cost of acquisition of securities has been ignored.

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Answers

36 Capital Gain
(i) The extinguishment of 2,000 shares in BL will be treated as tax neutral event
(as there is no change in ownership of the shareholder (Hamid) is involved) and 1,000 shares
in GL will have the same cost base i.e. Rs. 30,000 (Rs. 30 per share).Therefore, no CGT will
be collected on such transfer. If subsequently Hamid sells shares of GL, capital gain will be
computed taking into account the date of acquisition i.e. July 01, 2017.
CGT
(ii) Purchases / Acquisitions Disposal
No. of 15 April
Date Price Cost* 18 May 2018 Total
shares 2018
1-Jan-18 100 40 4,000 50 50
Bonus shares issued @ 25%
1-Jan-18 (Date of entitlement 1-04-18)
(Date of credit 15-5-2018) 75 75
1-Apr-18 100 *40 4,000
15-May-18 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 also collect 5% of value of bonus shares determined on the basis of day end
price on first day of closure of books. i.e; Rs. 25x50x5%= 62.5
Tax paid shall be final tax
Assumption: Cost of acquisition and sale proceeds are deemed to include 0.5% as incidental
expenses.
(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

Practice Kit 117 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

CHAPTER 05 – OTHER AREAS-INCOME TAX

37 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 2018 to preceding two tax years 2017 and 2016.

38 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 2017, the foreign source income derived in the tax year
2018 would be exempt from tax.

39 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.

40 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

ƒ no amount shall be chargeable to tax to the employee under the head “Salary” until the earlier
of

ƒ The time the employee has a free right to transfer the shares; or

ƒ The time the employee disposes of the shares; and

ƒ 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.

Practice Kit 118 The Institute of Chartered Accountants of Pakistan


Answers

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

ƒ The consideration, if any, given by the employee for the shares;

ƒ The consideration, if any, given by the employee for the grant of any right or option to acquire
the shares; and

ƒ The amount chargeable to tax under the head “Salary”.

(ii) Tax Year 2016:

In tax year 2016 no income would be added to Mr. Hayat’s salary as he did not have a right to
transfer the shares.

Tax Year 2017:

In tax year 2017, 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 income under salary.

Tax Year 2018:

In tax year 2018, 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 2017 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)

41 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:
ƒ Previously included in the person’s income from business chargeable to tax; or
ƒ 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 2015 (350,000)
Excess Amount disallowed 150,000
Less: Amount recovered (200,000)
Excess Amount to be included in income of BL in Tax year 2018 (50,000)

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Certified Finance and Accounting Professional- Advanced Taxation

(ii) Recovery of Rs. 120,000:


Rupees
Total amount written off in the accounts 500,000
Less: amount allowed as deduction in tax year 2015 (350,000)
Excess amount disallowed 150,000
Less: amount recovered (120,000)
Short fall to be allowed as bad debt deduction in Tax year 2018 30,000

42 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.

Practice Kit 120 The Institute of Chartered Accountants of Pakistan


Answers

(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
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

43 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;

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(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) Has 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;
(vii) Failed to file statements of deduction of income tax under section 165 of the Income Tax
Ordinance, 2001 read with rule 44.
(ix) 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.

44 Residential Status
Resident Individual:[Section 82 read with Rule 14 of the Income Tax Rules, 2002]
(i) Residential status of the following persons for the tax year ended June 30, 2018 under the given
circumstances.
For the tax year ended June 30, 2018, the relevant period is July 01, 2017 to June 30, 2018.
Therefore, the stay of Mr. Mubeen for the purpose of tax year 2018 is:
Month Days
July 2017 31
August 2017 31
September 2017 30
Total 92
Since his stay in Pakistan is less than 183 days in tax year 2018, 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 2018 is:
Month Days
July 2017 31
August 2017 31
September 2017 30
October 2017 31
November 2017 30
December 2017 29
Total 182

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The day he spent in Pakistan on June 30, 2018, 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 2018 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 2018.
((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 2017 i.e. the year starting
from January 01, 2017 to December 31, 2017 (Special tax year 2018) is:
Month Days
July 2017 1
August 2017 31
September 2017 30
October 2017 31
November2017 30
December 2017 31
Total 154
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, 2017 would fall under tax
year 2019. Therefore, 31 days which he spent in January 2018 would not be included in tax year
2019.
As a result, Mr. Francis is a non- resident person as his total stay in tax year 2018 is less than
183 days.

45 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) 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

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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]

46 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.

47 Short Term Resident

Foreign source 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.

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48 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 Ordinance, 1984,
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
Ordinance, 1984.
(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.

49 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.
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.

50 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:
ƒ Furnishes a declaration of option in writing;
ƒ Such declaration is furnished within 3 months of the commencement of the tax year;
ƒ Such declaration shall be irrevocable; and
ƒ 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:

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ƒ 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.
ƒ 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.

51 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 person for the audit of its Income Tax affairs through computer ballot
which may be random or parametric as the Board may deem fit.
(2) The Commissioner may call for any record or documents including books of accounts maintained
by a person under the Ordinance or any other law for the time being in force for conducting audit
of the income tax affairs.
The Commissioner shall however, first record the reasons for the above action in writing and shall
also communicate those reasons to a person.
The fact that a person has been audited in a tax year 2017 shall not preclude it from being
audited again in the next and following tax years, provided that there are reasonable grounds for
conducting such audit.
(3) A Person shall be automatically selected for and if: [Section 214D]
(a) Return is not filed within due date
(b) Tax payable with the return of income has not been paid.

52 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 the said grant is not chargeable to tax. Hence cost of plant and machinery will be 50 –
20 = 30 million.

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Answers

53 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.
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 2018.

54 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.

55 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.

56 Opting out of PTR


Persons who may opt out of presumptive tax regime (PTR):
Following persons may opt out of the PTR
nd
1. Commercial importers [U/S 148(7) read with clause 56B of Part-IV of 2 Schedule]
2. Exporters / Export indenting agent [U/S 154(5)]
3. 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]

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4. 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]
5. 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]
6. Every person receiving commissions / discount against sale of petroleum products [U/S 156A read
nd
with clause 56F of Part-IV of 2 Schedule]
7. 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.

57 Associates –Define
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:
ƒ 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;
ƒ 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;

58 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.

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59 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.

60 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.

61 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.

62 Exception to Pakistan source Royalty & FTS

(i) Exceptions to the rule: [U/S 6(3)]

The following are the exceptions:


ƒ 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;
ƒ 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
ƒ 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:

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ƒ The Federal Government;


ƒ A Provincial Government;
ƒ A Local Government;
ƒ A company;
ƒ A non-profit organization or a charitable institution;
ƒ A diplomatic mission of a foreign state;
ƒ A private educational institution, a boutique, a beauty parlour, a hospital, a clinic or a
maternity home;
ƒ Individuals or association of persons paying gross rent of rupees one and a half million and
above in a year; or
ƒ Any other person notified by the Board for the purpose of this section.
(iii) Circulars issued by the Board: [U/S 206]

ƒ 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.
ƒ 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).
ƒ A Circular shall not be binding on a taxpayer.

63 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.

64 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.

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65 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;
(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.

66 Group Taxation and Pre Commencement Expenditure

(i) Group taxation: [U/S 59AA]


ƒ 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 Ordinance, 1984, computation of income and tax payable shall be made for tax
purposes.
ƒ The companies in the group shall give irrevocable option for taxation as one fiscal unit.
ƒ The group taxation shall be restricted to companies locally incorporated under the Companies
Ordinance, 1984.
ƒ The relief under group taxation would not be available to losses prior to the formation of the
group.
ƒ 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.
ƒ 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:
ƒ Pre-commencement expenditure shall be amortized on a straight-line basis at the rate of 20%.
ƒ 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.
ƒ 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.

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67 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 2018. 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 2017) to (30 June 2018) (92 days + 274 days) 366 days
Rate of default surcharge 12% pa
Amount of default surcharge
(from 01/07/2017 to 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.

68 Depreciable Asset, Eligible Depreciable Asset


Depreciable Asset: [U/S 22(15)]
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.

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Answers

Eligible depreciable asset: [U/S 23(5)]


Eligible depreciable asset means 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.

69 Speculation Business
Speculation business[U/S 19(2)]
Speculation business means 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.

70 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:
x The consideration received by the association for the disposal is a share or shares in the
company (other than redeemable shares);
x the association must own all the issued shares in the company immediately after the disposal;
x 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;
x the company must undertake to discharge any liability in respect of the assets disposed of to
the company;
x 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;
x 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
x the company must not be exempt from tax for the tax year in which the disposal takes place.

71 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

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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 be Rs. 126,034.
(ii) Penalty where declared income in the return was below taxable limit:
A person who fails to furnish a return of income where his declared income is below the taxable
limit as required under section 114 within the due date, such person shall pay a penalty of
twenty thousand rupees.

72 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.

73 Automatic Selection of Audit


Automatic selection for audit: [U/S 214D(1)]
A person, for a tax year, shall automatically be selected for audit of its income tax affairs under the
following circumstances:
ƒ If the return is not filed within the date it is required to be filed as specified in section 118, or, as
the case may be, not filed within the time extended by the Board under section 214A or further
extended for a period not exceeding thirty days by the Commissioner under section 119; or
ƒ If the tax payable for a tax year on due date for furnishing the taxpayer’s return of income has not
been paid.

74 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:
ƒ The information provided is of no value;
The information is not supported by any evidence;
ƒ The Board already had the information;
ƒ The information was available in public records; or
ƒ No collection of taxes is made from the information provided from which the Board can pay the
reward.

75 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.

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Answers

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 Ordinance, 1984 and is licensed and regulated by the
Securities and Exchange Commission of Pakistan.

76 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.

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CHAPTER 06 – OTHER AREAS-SALES TAX

77 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.

78 Withholding agents
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;
(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.

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Answers

79 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.

80 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:
ƒ Name and registration number of the recipient (i.e. TL);
ƒ Name and registration number of the supplier (i.e. FL);
ƒ Number and date of the original sales tax invoice;
ƒ The reason of issuance of the Debit Note; and
ƒ 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.

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81 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.
(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 2018.

Rs.
In case of locally purchased packed dates: 41,325
(458 packets of dates purchased on March 28, 2018)
In case of imported coffee: 39,900
(42 kg of coffee imported on February 25,2018)
81,225

82 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]

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Answers

83 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 (V of 1908), a Civil Court has for the purpose of recovery of an amount due under a decree.
Where any amount of tax is due from any person, the officer of Inland Revenue may:-
(i) Deduct the amount from any money owing to person from whom such amount is recoverable and
which may be at the disposal or in the control of such officer or any officer of Income Tax,
Customs or Federal Excise Department;
(ii) Require by a notice in writing any person who holds or may subsequently hold any money for or
on account of the person from whom tax may be recoverable to pay to such officer the amount
specified in the notice;
(iii) Stop removal of any goods from the business premises of such person till such time the amount
of tax is paid or recovered in full;
(iv) Require by a notice in writing any person to stop clearance of imported goods or manufactured
goods or attach bank accounts;
(v) Seal the business premises till such time the amount of tax is paid or recovered in full;
(vi) Attach and sell or sell without attachment any movable or immovable property of the registered
person from whom tax is due; and
(vii) Recover such amount by attachment and sale of any moveable or immovable property of the
guarantor, person, company, bank or financial institution where a guarantor or any other person,
company, bank or financial institution fails to make payment under such guarantee, bond or
instrument.
Provided that the Commissioner Inland Revenue or any officer of Inland Revenue shall not issue
notice under this section or the rules made there under 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.

84 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.

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85 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.
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 the Board; 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.

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Answers

86 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.

87 Service of Notice-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;
or
(iii) Served on the person in the manner prescribed for service of a summons under the code of Civil
Procedure, 1908(Act V of 1908)
(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.

88 Registration
Requirement of registration:
(i) Manufacturers other than those classified as cottage industry are required to be registered under
the Sales Tax Rules 2006. Cottage industries are those whose annual turnover from taxable
supplies made in any tax period during the last twelve months ending any tax period does not
exceed Rs. 10,000,000 or whose annual utility bills for the same period does not exceed Rs.
800,000. Therefore, in this case since the manufacturer is a cottage industry, it is not required to
be registered and pay any sales tax.
(ii) Since a distributor is required to be registered with Inland Revenue Department irrespective of
his turnover, therefore, in this case the distributor would register with the Inland Revenue
Department and pay sales tax of Rs. 510,000 on his turnover of Rs. 3,000,000.
(iii) Since an importer is required to be registered with Inland Revenue Department irrespective of his
turnover, therefore, in this case the importer would be required to register himself with the Inland
Revenue Department. Sales tax at import stage would be paid on the basis of import value.
However, the amount of output tax would be Rs. 2,040,000 (Rs. 12Million x 17%). In case of
commercial importer, Value Addition Tax @ 3% would also be paid.

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(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.

89 Credit Note
Adjustment of output tax:
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 2017, the 180 days would expire on 2 June 2018. Therefore,
AL cannot issue the credit note after 2 June 2018 unless the collector, at AL’s request, giving reasons in
writing, extend the period of 180 days by a further 180 days.

90 Time of Supply, CREST, Supply Chain


(i) Time of supply: [U/S 2(44)]
Time of supply, in relation to,-
ƒ a supply of goods, other than under hire purchase agreement, means the time at which the
goods are delivered or made available to the recipient of the supply or the time when any
payment is received by the supplier in respect of that supply, whichever is earlier;
ƒ A supply of goods under a hire purchase agreement, means the time at which the
agreement is entered into; and
ƒ 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,
x For the supply in a tax period, it shall be accounted for the return for that tax period
x 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.

91 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-

ƒ All taxable supplies in the tax period as revealed by the records and tax invoices; and

ƒ 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.

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Answers

92 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—
ƒ Taxable supply made by a registered person shall be charged to tax at such rate as is in
force at the time of supply;
ƒ 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.

93 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;
(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.

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94 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.

95 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;
(iii) The quantum of input tax admissible in terms of sub-section (3) of section 7;
(iv) Relaxation of any procedural or technical irregularities and condonation of any prescribed time
limitation; and
(v) 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
thirty days 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:
ƒ An officer of Inland Revenue not below the rank of a Commissioner and
ƒ Two persons from the notified panel consisting of:
ƒ retired Judges not below District and Sessions Judge,
ƒ chartered or cost accountants,
ƒ advocates,
ƒ representatives of trade bodies or associations, or
ƒ any other reputable taxpayers

96 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
ƒ 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

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ƒ 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.

97 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
Board with the approval of Minister incharge of 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.

98 Registration of Retailers [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
(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.

99 Registration of Retailers-S3(9), R-6


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%

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100 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:
ƒ Who is blacklisted or whose registration is suspended or is blocked;
ƒ Who fails to file the return by the due date for two consecutive tax periods;
ƒ 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
ƒ 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:
ƒ File goods declaration for import or export;
ƒ Issue sale tax invoices;
ƒ Claim input tax or refund; or
ƒ Avail any concession under the Sales Tax Act or Rules made thereunder.
ƒ No person, including government departments, autonomous bodies and public sector
organisations, shall make any purchases from a non-active tax payer.
ƒ 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.

101 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.

102 Taxable Services


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:
ƒ By a registered person from his registered office or place of business in /Punjab.
ƒ 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.

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103 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 15-9-2017] [U/S 10(1)] 29-10-2017
Number of days delayed [30-10-2017 to 30-11-2017] 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

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CHAPTER 07 – OTHER AREAS FEDERAL EXCISE ACT


104 Fill in the blanks
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)]

105 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.
ƒ In the case of goods, on the date on which the goods are supplied for export or for home
consumption;
ƒ In the case of services, on the date on which the services are provided or rendered; and
ƒ 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.

106 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;

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(vii) Records of imports and exports; and


(viii) Such other records as may be specified by the Board.

107 Non-fund Banking Services, Franchiser


(i) Non-fund banking services: [U/S 2(16a)]
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.

108 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.

109 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;
(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.

110 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.

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111 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.

112 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.

113 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 FBR with the approval of the Minister Incharge of
the Federal Government 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;
ƒ A registered person is found to have issued false invoices; or
ƒ Evaded duty; or
ƒ Has committed any offence or irregularity to evade duty; or
ƒ 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.

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114 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 KIBOR plus three 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.

115 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.

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116 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.

117 Construed Manufacturer, Sales Tax Mode


(i) Manufacturer: [U/S 2(16)(b)(i)]
Following person(s) are construed to be included in the word ‘manufacturer’:
ƒ Any person who employs hired labour in the production or manufacture of goods; or
ƒ Any person who engages in the production or manufacture of goods on his own account if
such goods are intended for sale: and
ƒ 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.

118 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.

119 Franchise
Franchise: [U/S 2(12a)]
Franchise means an authority given by franchiser under which the franchisee is contractually or
otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in
respect of goods or to provide service or to undertake any process identified with franchiser against a
fee or consideration including royalty or technical fee, whether or not a trade mark, service mark, trade
name, logo, brand name or any such representation or symbol, as the case may be, is involved.

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120 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.

121 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.

122 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.

123 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.

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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.

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