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TAXATION Suggested Answers Intermediate Examination Spring 2013

Ans. 1

Mr. Creative Computation of taxable income and tax thereon Income from salary Basic salary Free furnished accommodation (higher of fair market value i.e. Rs. 1,800,000 or 45% of basic salary i.e. Rs. 1,620,000) Utility allowance (Rs. 3,600,000 15%) Conveyance allowance (5% of the cost) Medical allowance (Rs. 3,600,000 12%) Less: Exempt up to 10% of basic salary Total salary income Income from property Rent of house for first six months of the tax year (Rs. 50,000 6) Rent of house for remaining six months (Higher of fair market value i.e. Rs. 330,000 or actual rent i.e. Rs. 288,000) Previously adjustable deposit charged to tax (Rs. 300,000 2 10) Total property income - Separate block of income Capital gain Gain on sale of shares (W-1) Gain on sale of mutual funds (holding period is more than one year) Total income Less: Donations allowed under 2nd Schedule of the ITO-2001 Taxable income Taxable income Less: Property income - Separate block of income Taxable income chargeable at normal rate Tax chargeable at normal rate Tax on first Rs. 2,500,000 Tax on balance Rs. 3,744,500 @ 20% Tax on property income Tax on first Rs. 400,000 Tax on balance Rs. 230,000 @ 7.5% Rupees 3,600,000 1,800,000 540,000 80,000 432,000 (360,000) 72,000 6,092,000

300,000 330,000 630,000

202,500 6,924,500 (50,000) 6,874,500 6,874,500 (630,000) 6,244,500

420,000 748,900 1,168,900 12,500 17,250 29,750 1,198,650

Tax credits Investment in voluntary pension fund (lower of 20% of taxable income i.e. Rs. 1,362,900 or contribution made i.e. Rs. 600,000) [Rs. 600,000 1,198,650 6,874,500] Investment in open end mutual fund (lower of 20% of taxable income i.e. Rs. 1,362,900 or contribution made i.e. Rs. 1,100,000 or Rs. 1,000,000) [Rs. 1,000,000 1,198,650 6,874,500] Tax credit allowed last year, added back Net tax liability Less: Tax deducted at source - u/s 149 Tax payable

(104,617) (174,362) 40,000 959,671 (737,000) 222,671

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TAXATION Suggested Answers Intermediate Examination Spring 2013

W-1: Gain on sale of shares Cost per share (Rs. 2,800,000 (20,000 + 8,000)) No. of bonus shares sold (8,000 75%) Total sale proceeds (Rs. 145 6,000) Cost of bonus shares (6,000 100) Gain on sale of shares Less: 25% exempt (holding period is more than one year)

Rupees 100 6,000 870,000 (600,000) 270,000 (67,500) 202,500

Ans.2

(a)

Any notice required to be served on a resident individual shall be treated as properly served on the individual if: personally served on: the individual; or the representative of the individual in the case of an individual under a legal disability. sent by registered post or courier service to the persons registered office; or address for service of notices (under the ITO-2001) in Pakistan; or to any office or place of business of the individual in Pakistan or to the individuals usual or last known address in Pakistan if the individual does not have any office or address of the individual, the notice sent by registered post. served in the manner prescribed for service of a summon under the Code of Civil Procedure, 1908. Where either of the following requirements of filing the return is not complied with, the return is regarded as incomplete for tax purposes: (ii) A return of income shall be in the prescribed form and shall be accompanied by such annexure, statements or documents as may be prescribed. It shall fully state all the relevant particulars or information as specified in the form of return; and It shall be signed by the person, being an individual, or the persons representative. It shall be accompanied with evidence of payment of tax as per return of income. It shall be accompanied with a wealth statement as required u/s 116.

(b)

(i)

The Commissioner may further amend the assessment where: A) the Commissioner have definite information on the basis of audit or otherwise and he is satisfied that: any income chargeable to tax has escaped assessment; total income has been under-assessed, or assessed at too low rate, or has been the subject of excessive relief or refund; or any amount under a head of income has been mis-classified. the Commissioner considers that the assessment order is erroneous in so far as it is prejudicial to the interest of revenue.

B)

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TAXATION Suggested Answers Intermediate Examination Spring 2013

Ans.3

(a)

An Association of Persons shall be a resident association of persons for a tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year.
Foreign sourced income NonCapital Other Speculation speculation gains sources business business -------------------------------------------Rupees----------------------------------------2,500,000 500,000 (1,000,000) 750,000 1,250,000 (250,000) (1,500,000) 250,000 (1,000,000) (750,000) 1,250,000 2,500,000 750,000 1,000,000 2,500,000 250,000 1,250,000 Pakistan sourced income

(b)

Income for the year c/f losses Income after b/f loss c/f losses Balance income Income tax on Pak source income Proportionate Pak income tax (a) Foreign tax credit [Amount paid or (a), whichever is lower] Income tax payable

722,500

72,250 (722,500 2,500,000 250,000) 722,500 (72,250) -

361,250 (722,500 2,500,000 1,250,000) (187,500) 173,750

896,250

Unadjusted foreign tax credit cannot be refunded, carried back to preceding year or carried forward to the following year.

Ans.4

(a)

The company should apply in writing to the Commissioner for change in tax year from normal to special. The Commissioner should grant permission only if he is satisfied that the company has a compelling need to use special tax year. While giving the permission, the Commissioner may impose conditions as he may deem fit.

(b)

Dividend includes: any distribution by a company of accumulated profits to its shareholders if such distribution entails the release by the company to its shareholders of all or any part of the assets including money of the company; any distribution to its shareholders by way of debentures, debenture-stock or deposit certificate in any form, whether with or without profit, to the extent to which the company possesses accumulated profits. any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation. any distribution by a company to its shareholders on the reduction of its capital, to the extent to which the company possesses accumulated profits, whether such accumulated profits have been capitalized or not. any payment by a private company or trust of any sum by way of advance or loan to a shareholder or any payment by any such company or trust on behalf, or for the individuals benefit of any such shareholder, to the extent to which the company or trust, in either case, possesses accumulated profits; remittance of after tax profit of a branch of a foreign company operating in pakistan; A tax shall be imposed at the rate specified in the First Schedule on every person who receives a dividend from a company or treated as dividend as per above.
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TAXATION Suggested Answers Intermediate Examination Spring 2013

The tax imposed shall be computed by applying the relevant rate of tax to the gross amount of the dividend. Tax imposed shall be final tax on non-corporate taxpayers. The tax payable by a person shall not be reduced by any tax credits allowed under ITO-2001. (i) A company shall account for income chargeable to tax under the head Income from Business on an accrual basis. Under the method, the company shall derive income when it is due to the company and shall incur expenditures when it is payable by the company. A person other than a company may account for his income either on cash or accrual basis of accounting. Under cash basis of accounting, income shall be derived when it is received and expenditure shall be incurred when it is paid. An AOP who accounts for income on an accrual basis, shall compute income arising from a long term contract on the basis of percentage of completion method. The percentage of completion of a long-term contract in a tax year shall be determined by comparing the total cost allocated to the contract and incurred before the end of the year with the estimated total contract cost as determined at the commencement of the contract. (b) A person may apply in writing for a change in the persons method of accounting to the Commissioner. The Commissioner may, by notice in writing, approve such an application but only if satisfied that the change is necessary to clearly reflect the persons income chargeable to tax under the head Income from Business. If a persons method of accounting has changed, the person shall make adjustments to items of income, deduction, or credit, or to any other items affected by the change so that no item is omitted and no item is taken into account more than once. Value of goods means the value of the goods as determined under the Customs Act, 1969 as if the goods were subject to ad volorem duty increased by the customsduty, federal excise duty and sales tax, if any, payable in respect of the import of goods. Following are the exceptions to the rule that tax collected at import stage is the final tax: Import of the following, by an industrial undertaking for its own use: (a) raw materials (b) plant (c) machinery (d) equipment (e) parts Import of fertilizer by manufacturer of fertilizer. Import of cars in CBU condition by manufacturer of cars. Import by large import house on fulfillment of certain conditions. Import of edible oil and packing material which shall be considered as minimum tax.
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Ans.5

(a)

(ii) (iii)

Ans.6

(a)

(b)

TAXATION Suggested Answers Intermediate Examination Spring 2013

(c)

Mr. Brilliant:

He is not liable to pay advance tax because his taxable income excluding property income and dividend income is below Rs. 500,000. Miss Educated: She is not liable to pay advance tax during the year because her income assessed, although more than Rs. 500,000, is from sources that are outside the ambit of advance tax. Motivated & Co.: The firm is liable to pay advance tax as the ITO-2001 requires that an AOP must pay advance tax irrespective of the quantum of income declared / assessed. Confident The company is liable to pay advance tax as the ITO-2001 Services requires that a company must pay advance tax irrespective of Limited: the quantum of income declared / assessed. Under the Sales Tax Act, 1990, a manufacturer is a person who engages, whether exclusively or not, in the manufacture of goods whether or not the raw material of which the goods are manufactured are owned by him; and shall include: (i) A person who by any process or operation assembles, mixes, cuts, dilutes, bottles, packages, repackages or prepares goods by any other manner; (ii) An assignee or trustee in bankruptcy, liquidator, executor, or curator, of any manufacturer, or producer and any persons who disposes of his assets in any fiduciary capacity; and (iii) Any person, firm or company which owns, holds, claims or uses any patents, proprietary, or other right to goods being manufactured, whether in his or its name, or on his or its behalf, as the case may be, whether or not such person, firm or company sells, distributes, consigns, or otherwise disposes of goods. Provided that for the purpose of refund, only such person shall be treated as manufacturer-cum-exporter who owns or has his own manufacturing facility to manufacture or produce the goods exported or to be exported.

Ans.7

(a)

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TAXATION Suggested Answers Intermediate Examination Spring 2013

Ans.7

(b)

Mr. Clever Computation of Sales Tax Payable / Refundable For the tax period February 2013 Taxable Value Sales Tax @ 16% 6,478,400 480,000 6,958,400 (2,423,360) 4,535,040 410,000 4,945,040

Sales Tax Credit (Input Tax) Local purchases: - From registered persons (Rs. 40,550,000 - Rs. 60,000) - From unregistered persons Fixed assets (Machine) Input tax attributable to both taxable and zero rated supplies Less: Unadjustable input tax (W-1) Input tax for the month (+) Previous month credit brought forward Accumulated credit Sales Tax Debit (Output Tax) Local supplies - To registered persons - To unregistered persons Zero rated supplies - Local Zero rated supplies - Exports Output tax for the month Less: Sales return Debit for the month Admissible credit (90% of Rs. 4,657,600 or input tax excluding Fixed Assets i.e. Rs. 4,632,207 whichever is lower) Input tax on fixed assets (30,410,00046,660,000480,000) Sales tax payable Input tax to be carried forward (Rs. 4,191,840 - Rs. 4,632,207) Refund claim (Zero rated supplies) (W-1)

40,490,000 5,000,000 3,000,000

26,860,000 3,550,000 1,250,000 15,000,000 (1,300,000)

4,297,600 568,000 4,865,600 (208,000) 4,657,600 (4,191,840) (312,833) 152,927 (440,367) 2,423,360 Rupees 46,660,000 16,250,000

W-1 : Apportionment of input tax Total supplies (Rs. 26,860,000 + Rs. 3,550,000 + Rs. 1,250,000 + 15,000,000) Zero rated supplies (Rs. 1,250,000 + Rs. 15,000,000) Input tax related to zero rated supplies (Rs. 16,250,000 46,660,000 Rs. 6,958,400)

2,423,360

Ans.8

(a)

Under the following situations, a registered person is liable to be deregistered: (i) When he ceases to carry on his business (ii) When goods supplied by him become exempt from tax (iii) When his total taxable turnover during the last twelve months remain below the specified limit (iv) When he fails to file sales tax return for six continuous months

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TAXATION Suggested Answers Intermediate Examination Spring 2013

(b)

Procedure of de-registration (i) The application for cancellation of registration should be made to the Local Registration Office. (ii) Local registration office may recommend the same, to the Central Registration Office. (iii) The applicant shall have to discharge any liability that may be outstanding by filing a final return. (iv) After making any necessary inquiries the person shall be deregistered. (THE END)

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