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ICAP
Practice Kit

Certified Finance and Accounting Professional


Advanced Taxation

Note:
Updated for the Finance Act 2016
First 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, August 2016

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same condition on any acquirer.

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

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Advanced Taxation

Contents
Page

Index-Questions and Answers v

Section A Questions 1

Section B Answers 63

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

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Advanced Taxation

Index-Questions and Answers


Question Answer
page page
Chapter 1 INDIVIDUAL
1 Mr. and Mrs. Adil (Individual + AoP) 1 63
2 Mr. Khan 2 66
3 Mr. Yaqeen 3 68
4 Mr. Sohail 5 70
5 Mr. Iqbal 5 70
6 Mr. Saif 7 73
7 Mr. Pansari 9 76
Chapter 2 Company taxation
8 Big Pharma 10 77
Rainbow Limited (RL) - Foreign Controller
9 11 79
/ thin capitalization
10 Mateen and Vaqas (AoP + Company) 12 80
11 Mega Limited (ML) 13 82
12 Rose Petal Limited - Construction 14 85
Saturn Limited - Foreign Branches / Tax
13 15 86
Credit
14 Sun Limited (SL) - Group Relief 15 87
15 Pills (Pvt) Limited 17 90
Maroof Limited (ML) - Construction
16 19 93
contracts
Big Limited (BL) - Set off and surrender of
17 19 94
losses
18 Bharosa Limited (BL) 20 95
19 Khawar Associates (KA) 22 98
20 Khalis Limited (KL) 23 99

Practice Kit v The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Question Answer
page page
21 ZJ Limited 25 102
22 Desi (Pvt) Limited - Thin Capitalization 27 104
Chapter 3 sales tax
23 Olive Limited 28 106
24 Kamyab Engineering Limited (KEL) 29 108
25 Gadget Limited (GL) 30 110
26 Sunshine Limited (SL) 31 112
27 Ummeid Limited (UL) 32 114
28 Mazboot Furnishers (MF) 33 116
29 Tender Pops Limited (TPL) 35 118
30 Masawi Limited (ML) 36 119
31 Omega Limited (OL) 37 120
32 Harfun Limited (HL) 38 122
33 Razi Limited (RL) 39 124
34 Karma Limited 40 126
Chapter 4 Capital Gain
35 Mr. Parekh 42 128
36 Capital Gain 42 129
Chapter 5 Other Areas Income Tax
37 Book Author 43 131
Foreign Source Income - Returning
38 43 131
expatriate
39 Transfer of Assets 43 131
40 Employee Share Scheme 43 132
41 Bad debts, Recovery of bad debts 43 133
Herbal Trading (HT) - Disposal of
42 44 134
business
Withdrawal of approval to Non-
43 45 136
Profit/foundations (IT Rules)
44 Residential Status 45 136
45 Beetle Limited (BL) 46 138
46 Credit for sales tax registered person 47 139
Skilled (Pvt.) Limited - Taxability of Joints
47 47 139
Venture
48 Short term resident 47 140
49 Group Taxation 47 140
50 Tax avoidance scheme 47 141
51 Compulsory taxation under FTR 47 141

Practice Kit vi The Institute of Chartered Accountants of Pakistan


Index-Questions and Answers

Question Answer
page page
52 Selection of Audit 48 142
53 Khalq Limited (KL) - Government grant 48 143
54 Moon Limited (ML) - foreign payment 48 143
Mr. Pansari - dividend from exempt
55 48 143
income
Gadget Limited (GL) - payment to non-
56 49 144
resident
57 Opting out of PTR 49 144
58 Associates 49 145
59 Tax evasion and avoidance 49 145
Derivative Product, Wash Sales, Tax
60 49 146
Swap Sales
61 Methods for Cost of stock in trade 49 146
62 Salary of foreign government employee 49 146
Exception to Pakistan source Royalty &
63 50 147
FTS
64 Profit on debt 50 148
65 Tax admissible vs tax reliefs 50 148
66 Resale price method 50 148
Group Taxation and Pre commencement
67 50 149
Expenditure
Sweet Limited (SL) - Advance Tax and
68 50 150
default penalty
Depreciable Asset, Eligible Depreciable
69 51 151
Asset
70 Speculation Business 51 151
Disposal of business by AOP to Wholly
71 51 151
owned company
72 Mr. Hoshyar - Penalty 51 152
73 Advance Ruling 51 152
74 Automatic selection of audit 51 153
75 Rejection of reward to whistle-blower 52 153
76 Imputable Income, PMEX 52 153
77 Definite information 52 153
Chapter 6 Other Areas Sales Tax
78 Mr. Furqan - Returns, De-registration 53 154
79 Withholding agents 53 155
Qualification / Disqualification of
80 53 155
Representative
81 Consideration in kind - supply 53 156

Practice Kit vii The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Question Answer
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82 Stock acquired before registration 54 157
83 Inadmissible input tax 54 157
84 Recovery of tax arrears 55 158
85 Representative of non-resident 55 159
e-intermediary appointment,
86 55 159
responsibilities, cancellation
87 Representatives and personal liability 55 161
88 Service of notice-non resident 55 161
89 Registration 55 162
90 Credit note 56 162
91 Time of supply, CREST, supply chain 56 162
92 Scope of special audit (ST-Rules) 56 163
93 Joint and several liability 56 163
94 Property not liable to attachment 56 164
95 Continuance of Proceeding (death) 57 165
96 Appointment of committee - disputes 57 165
Similar supply open market price,
97 57 166
special returns
Black Listing and Suspension of
98 57 166
registration
99 Registration of retailers 57 167
100 Registration of Retailers 57 167
101 Non- active taxpayer 58 168
102 Temporary Registration 58 168
103 Taxable services 58 169
104 Mr. Munaf - Refund 58 169
Chapter 7 Other areas federal excise act.
105 Fill in the blanks 59 170
106 Applicable value and rate of duty, supply 59 170
107 Records 59 170
108 Non-fund banking services, Franchiser 59 171
109 Excess duty collected 59 171
110 Person liable to pay FED 59 172
111 Alternative Source 60 172
112 Duty drawback 60 172
Discontinued business enterprise,
113 60 173
transfer of ownership
114 Due date and duty due 60 173

Practice Kit viii The Institute of Chartered Accountants of Pakistan


Index-Questions and Answers

Question Answer
page page
115 Default surcharge, KIBOR 60 174
Conveyance, distributor, recovery of duty,
116 60 174
particular of service invoice
117 Cottage industry 61 175
118 Construed manufacturer, sales tax mode 61 175
119 Closure of business 61 176
120 Franchise 61 176
Withdrawal of Registration suspension
121 61 176
order
122 Consequences of wrong registration 61 176
(Repetition of Q106)Determination of
123 61 177
value for duty
Circumstances and Procedure of De-
124 61 177
registration

Practice Kit ix The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Practice Kit x The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional

A
Advanced Taxation

SECTION
Questions

CHAPTER 01 INDIVIDUAL

1 Mr. and Mrs. Adil


Mr. and Mrs. Adil are equal partners in Burq Enterprises (BE). The firm is engaged in
the import and supply of electric generators. It also provides project consultancy
services to various corporate customers. Following figures have been extracted from
the accounting records of the firm for the tax year 2017:
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.

Practice Kit 1 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(v) On January 01, 2017, 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.
(vi) On July 01, 2016, 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 2014 was refunded.
(vii) Mr. Adil purchased 50,000 shares of Rs. 10 each, of an unlisted public company
in July 2012 at the rate of Rs. 150 per share. In August 2013, he received bonus
shares, ranking pari passu, in the ratio of 1 bonus share for every 5 shares held.
In May 2017, 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 2017:
(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, 2017 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, 2014 at a fair market value of Rs. 2,000,000.
(c) On July 1, 2016 he was provided with an interest free loan of Rs. 2,500,000
which is repayable in lump sum in December 2017. The prescribed benchmark
rate is 10% per annum. On December 1, 2016 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, 2017. 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:

Practice Kit 2 The Institute of Chartered Accountants of Pakistan


Questions

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.

(iii) On March 1, 2017, 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, 2017, 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 years 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 2014, 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 2017
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 2017. 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 2016 after residing
for six years in Norway. On 1 July 2016 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

Practice Kit 3 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

On 1 January 2017, 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
2017:
Rupees
Basic salary (per month) 800,000
Medical allowance (per month) 80,000
Utilities allowance (per month) 100,000

On 1 January 2017, 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 2017, 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 2017, he received a loan of Rs. 5,000,000 from DPL for the purchase of a
house. The profit on loan was payable at the rate of 8% per annum. The prescribed
bench mark rate is 10% per annum.
Other information relevant to Mr. Yaqeen for the tax year 2017 is as under:
(i) On 15 April 2017, 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 2017, 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 2017, he received annual rent of Rs 600,000 from the
tenant cultivating the land.
(iv) On 1 May 2017, 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 2017.
(v) On 15 June 2017, he received insurance claim of Rs. 600,000 against theft of a
painting which was stolen on 31 May 2017. The painting was purchased by him
on 1 January 2016 for Rs. 350,000. He had paid insurance premium of Rs.
24,000 and also paid lawyers fee of Rs. 50,000 who represented him in the
settlement proceedings.
(vi) On 15 July 2016, 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 2017, 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.

Practice Kit 4 The Institute of Chartered Accountants of Pakistan


Questions

Required:
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and
net tax payable for the tax year 2017. 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 2016, 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 2017.
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 2017.

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 2017:
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 months basic salary paid on 5 June 2017.
(ii) A new company maintained car for his personal use. The car was purchased on
1 March 2017 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.

Practice Kit 5 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(iii) A reimbursement of Rs. 36,000 in respect of drivers 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 TLs parent company, Tameer Inc. which is
listed on New York Stock Exchange was granted to him in May 2016. Mr. Iqbal
exercised the option on 5 January 2017 at a price of USD 1.5 per share. The
market value of the shares at the close of business on 5 January 2017 was USD
2.5 per share. He sold 3,000 shares on 30 June 2017 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 2017 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 2017. The market value of these shares at the
close of business on 15 May 2017 was Rs. 12.5 per share.
Mr. Iqbal received additional income from the following sources, for the tax year 2017:
(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 2015.
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, watchmans salary Rs. 8,000 and interest of Rs. 15,000 on a loan
obtained for building renovation by creating first charge on the building in
favour of a scheduled bank.
Other related information is as under:
TL deducted withholding tax of Rs. 1,200,000 from Mr. Iqbals salary during tax
year 2017.
On 1 July 2016, Mr. Iqbal acquired a life insurance policy and paid a premium
of Rs. 500,000. He also contributed Rs. 1,600,000 to an approved pension
fund.
On 1 August 2016, he purchased 50,000 shares in a listed company AB
Limited at a price of Rs. 20 each. On 1 January 2017, AB Limited announced
20% right shares to existing shareholders at a price of Rs. 18 per share. On 25
January 2017, Mr. Iqbal subscribed the right issue in full.
During tax year 2016 his assessed taxable income was Rs. 3,000,000.

Practice Kit 6 The Institute of Chartered Accountants of Pakistan


Questions

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 2017.
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 2017, 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 2017.
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 2016 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 2017, 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 2017. 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 2017, RPL sold certain items of old stock to Mr. Saif for Rs.
5,000. The net realizable value of the stock in RPLs books as on 30 June 2016
and 31 December 2016 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 Saifs salary amounted to Rs. 2,100,000.
Following further information is also available:
(i) On 1 July 2016, 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 2017.
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, 2016 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 of
Rs. 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.

Practice Kit 7 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(ii) On 1 May 2017 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 2016 as dividend
in specie from Rahat (Pvt.) Limited. He holds 12,800 shares in Rahat (Pvt.)
Limited costing Rs. 35 each.
(iii) In August 2016, 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 2016 whereas 25 persons joined in January 2017 and 30 in March
2017.
Following items were included in clubs profit and loss account for the tax year
2017:
Monthly salary of Rs. 60,000 to Mr. Saif and Rs. 45,000 to his son by way
of a direct transfer of funds to their bank accounts. His son is a trainer at
the club. Withholding tax deducted from their salaries amounted to Rs.
13,000 and Rs. 4,750 respectively.
Rs. 2,750,000 against import of old fitness machines from China. The
withholding tax paid at import stage was Rs. 150,000.
Fine of Rs. 15,000 which was paid when the truck delivering the fitness
machines from the port to the club was found to be overloaded.
A fire occurred in a section of the club and repairs had to be undertaken as
follows:
Cost of replacing electrical wiring damaged by fire Rs. 85,000

Cost of a new non-removable fire protection screen installed to


prevent fire in future Rs. 200,000.
Other miscellaneous expenses amounting to Rs. 120,000.
(iv) On 15 June 2017, Mr. Saif donated a plot of land to Pakistan Sports Board. He
had purchased this plot in tax year 2002 at a price of Rs. 300,000. However, at
the time of donation, a broker had given him an offer of Rs. 500,000 for the said
plot.
Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made there under,
compute the taxable income and income tax payable by or refundable to Mr. Saif for
the tax year 2017.
Note: Show all relevant exemptions, exclusions and disallowances.

Practice Kit 8 The Institute of Chartered Accountants of Pakistan


Questions

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
2017.
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 at the 1st day of tax year 2016 at a cost of Rs. 3,000,000.
However, the current market value of the car is Rs. 3,500,000.
(ii) A special payment of Rs. 75,000 in lieu of leave was made available to him.
Mr. Pansari, however, voluntarily waived his right to receive such payment.
(iii) Free provision of two cans of olive oil per month. The market value of each can
was Rs. 500.
(iv) In July 2015, he was granted an employee stock option to purchase up to
15,000 shares in SLs 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 2016 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 2015 and 2016 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 SLs
associated company Nice (Pvt) Limited held in July 2016.
(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 2017.
Note: Show all relevant exemptions, exclusions and disallowances.

Practice Kit 9 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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
companys profit and loss account and the related details for the period ending June
30, 2017 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 1,400
year)

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.

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Questions

Other income includes: Rs. in 000


Profit from Qatar branch 2,700
Loss from Oman branch (3,400)
Tax depreciation for the year was Rs. 6.00 million. There was also a carried forward
tax loss of Rs. 6.10 million and an unadjusted foreign tax credit of Rs. 0.12 million
from tax year 2016. 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 2017. Tax rate
applicable to the company is 31%.

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, 2016, 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 the 6th day of the next quarter.
On September 15, 2016, RL received another loan of US$ 1.0 million from FRS
Limited for the same project at an interest rate of 10% per annum. Interest is to be
paid monthly in arrears by the 3rd day of each following month.
On May 15, 2017, RL received a third loan of US$ 3.8 million from ATX Gmbh at an
interest rate of 8% per annum. Interest is to be paid quarterly in arrears by the 4 th 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 2018.
The following information is available in respect of RL at June 30, 2017.
Rs. in million
Assets 2,900
Liabilities 2,670
Net profit after taxation for the year 150
Interim dividend paid during the year 100

Practice Kit 11 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Assume that the dollar rupee parity during the year ended June 30, 2017 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, 2017.

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:
Mateen 60%
Vaqas 40%
Further, in case of incorporation of a limited liability company they would distribute
60% of the after tax profits as dividends.
Following are the expected results of their twelve months' operation:

Rupees
Sales 10,500,000
Cost of sales (4,410,000)
Gross profit 6,090,000
Salaries and wages (3,165,000)
Rent and rates (582,000)
Travelling and entertainment (273,000)
Depreciation (975,000)
Profit before taxation 1,095,000

Salaries and wages include salaries of Rs. 1,100,000 and Rs. 970,000 to be paid to
Mateen and Vaqas respectively.
Depreciation relates to delivery vehicles. In the first year, tax depreciation allowance
on these vehicles is estimated at Rs. 1,462,500.
Required:
Under the provisions of Income Tax Ordinance, 2001 advice Mateen and Vaqas on
the preferable structure of their business, whether it should be a partnership or a
limited liability company, in terms of the amount of tax payable, for the tax year 2017
assuming that they have no other sources of income.

Practice Kit 12 The Institute of Chartered Accountants of Pakistan


Questions

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
2017:

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

Additional information:
(i) In July 2016, 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 2017.
(iv) Other charges include a donation of Rs. 13 million paid to a university established
under provincial law by the Government of Punjab.
(v) Other income includes the following:
An amount of Rs. 27 million earned from consultancy services provided to the
UAE Government. The gross receipts from such services were Rs. 90 million.
No tax was paid by the company in UAE on such income.
A royalty of Rs. 50 million which was received from Solar Pte Limited, a
company based in Singapore, for providing scientific and commercial
knowledge under an agreement. Withholding tax of Rs. 10 million was
deducted by Solar Pte Limited from such payment. This amount is included in
other charges.

Practice Kit 13 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 2010, 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 2016 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 2017.
(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.

12 Rose Petal Limited - Construction


Rose Petal Limited (RPL) is engaged in the construction business for the past many
years. In April 2014, 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 2014 and be completed on
30 June 2017.
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
2015 3,000,000 3,105,000
2016 3,000,000 2,632,500
2017 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.

Practice Kit 14 The Institute of Chartered Accountants of Pakistan


Questions

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
companys records for the year ended 31 March 2017:

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

SLs 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 Ministers 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 2017. Give brief reasons for the treatment
of the items excluded from computation or for which no expense deduction is allowed.

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 2017:
(i) SL VL ML
Rs. in 000
Sales 17,000 6,000 3,500
Profit/(loss) before taxation 3,700 (1,400) 1,300

Practice Kit 15 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(ii) The above profit/(loss) for each company has been arrived at after
inclusion/adjustment of the following:
In case of SL:
Rs. 1,000,000 paid by SL towards a scientific research conducted in
Belgium. The research helped SL in improving the quality of its products.
Income of Rs. 150,000 on account of profit on debt.
Gain of Rs. 100,000 on sale of machinery to VL. The cost of machinery was
Rs. 300,000 and its tax written down value at the time of transfer to VL was
Rs. 200,000.
In case of VL:
Rs. 80,000 written off against a loan provided to an employee.
Sales promotion expenses of Rs. 600,000 paid by VL to Moon Advertisers.
The benefits are expected to extend to three years.
A loss of Rs. 500,000 on disposal of shares in a private company. These
shares were acquired by VL on 31 March 2015.
In case of ML:
Net income of Rs. 600,000 from a goods transportation business. ML started
this business during the year and earned gross revenue of Rs. 1,500,000.
Withholding tax of Rs. 30,000 was deducted by customers from MLs gross
receipts.
A gain of Rs. 400,000 on disposal of shares in a private company. These
shares were acquired by ML on 01 April 2015.
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 2016 were Rs. 4,500,000, Rs. 4,200,000 and Rs. Nil respectively.
(vi) Tax depreciation on all assets, other than plant and machinery and delivery
truck, of SL, VL and ML amounted to Rs. 495,000, Rs. 330,000 and Rs. 135,000
respectively.
(vii) The assessed losses brought forward from tax year 2016 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

Practice Kit 16 The Institute of Chartered Accountants of Pakistan


Questions

(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 2017.
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 PPLs profit and loss account for the year ended 31 December 2016:

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 companys local sales.
(iii) On 1 January 2016, 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

Practice Kit 17 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Swat, a project fully approved by the Federal Government. The principal


repayment is due to commence from July 2017. Mark-up on above loan,
included in financial charges, amounted to Rs. 1,020,000. PPLs equity at the
beginning of the year amounted to Rs. 4,000,000.

(iv) On 15 June 2016, Capsule plc., under a group scheme, awarded its own
shares to some of the senior employees of PPL. As the shares were vested
immediately, PPL recognised an expense of Rs. 1,758,000 at a grant date fair
value of the award, with a credit recognised in equity. The expense is included
in other charges.

(v) Administrative and selling expenses include the following:

Rs. 800,000 paid against professional books purchased from a website of a


company in UK. No tax was withheld by PPL from such payment.

Rs. 200,000 paid as donation to a hospital established under a private trust.

Rs. 600,000 payable as rent to the landlord for PPLs parking area.
Withholding tax has not been deducted from this amount.

(vi) On 1 July 2016, 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 2016,
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 2015 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 2016 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 2017. Give reasons for the treatment of items in (iii)
and (vii) above. Also explain the treatment of items not appearing in your computation.

Practice Kit 18 The Institute of Chartered Accountants of Pakistan


Questions

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 2015, 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 2015 and was completed in November
2016. ML received following amounts after deduction of 7% withholding tax:

Months Feb. 2016 May 2016 Sep. 2016 Dec. 2016


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 2016 and 2017 were Rs. 33,000,000
and Rs. 27,000,000 respectively.
Required:
Under the provisions of Income Tax Ordinance, 2001 calculate MLs taxable income
and withholding tax credit, if any, for the tax years 2016 and 2017.

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 ZLs records for the year ended 30 September
2016:
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 ZLs 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 2015 and 2016 amounted to Rs.
130,000 and Rs. 200,000 respectively. ZLs tax assessment has been finalized
up to tax year 2015.
(iii) Capital losses brought forward from assessment years 2010 and 2011 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 2015 amounted
to Rs. 100,000.

Practice Kit 19 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(vi) One of BLs 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 2017 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 ZLs
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 2015 BL was
enlisted on Karachi and Lahore Stock Exchanges. Following is an extract from BLs
un-audited summarised profit and loss account for the year ended 30 September
2016:
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
Additional information:
(i) Sales include insurance compensation of Rs. 5,000,000 received from Big
Insurance Limited against the loss of one of BLs factory buildings which was
destroyed by fire due to short circuit. This building was constructed in July 2014
at a cost of Rs. 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 2015 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 2016 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 BLs books as part of
administrative expenses. The amount of lease rent received from Mr. Marvi is
included in sales.

Practice Kit 20 The Institute of Chartered Accountants of Pakistan


Questions

(ii) Cost of sales includes the following:


A compensation of Rs. 100,000 payable annually to a former employee,
who was injured and permanently disabled while on duty.
A penalty of Rs. 25,000 on failure to deposit income tax withheld from the
salaries of factory staff.
Accounting depreciation of Rs. 870,000.
(iii) Administrative and selling expenses include the following:
Impairment loss of Rs. 200,000 on BLs investment in ABC (Pvt.) Limited.
The loss occurred due to considerable decrease in the breakup value of
these shares as compared to their book value.
Legal fees of Rs. 50,000 and Rs. 125,000 which were paid in connection
with the filing of statements with Karachi and Lahore Stock Exchanges and
increase in BLs authorized capital respectively.
Scientific research expenditure of Rs. 400,000 which was incurred in
Cannes, France. The research has helped BL in improving the quality of its
products.
Rs. 480,000 which was incurred in relation to an advertising campaign
launched prior to the introduction of a new product line in an effort to
enhance public awareness.
A donation of Rs. 300,000 was paid to a fund which is listed in the second
schedule of the Income Tax Ordinance, 2001 for the promotion of science
and technology in Pakistan.
Workers Welfare Fund of Rs. 98,000 and accounting depreciation of
Rs. 1,100,000.
(iv) Financial charges include a profit of Rs. 180,000 earned from saving accounts
maintained with banks.
(v) Other income includes sale proceeds of Rs. 700,000 from sale of shares in
Nafa (Pvt.) Limited. BL purchased these shares in June 2015 at a cost of Rs.
230,000.
(vi) The tax written down values of BLs assets on 1 October 2015 were:

Building (excluding the building destroyed by fire) Rs. 3,270,000


Plant and machinery Rs. 3,400,000 Motor vehicles Rs. 1,500,000
Furniture Rs. 2,380,000 Computers Rs. 1,100,000

(vii) Tax paid u/s 147 amounted to Rs. 260,000 whereas tax deducted by banks u/s
151 from profit on debt amounted to Rs. 18,000.
Required:
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
2017.
Note: Show all relevant exemptions, exclusions and disallowances.

Practice Kit 21 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 2017.

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:
An amount of Rs. 573,000 (net of tax) received from Mr. Iqbal. He is
registered for sales tax purposes. The rate of withholding tax is 4.5% of the
gross receipts.
Goods worth Rs. 825,000 sold to SP Limited (SPL). SPL deducted tax of
Rs. 37,125 from the payment against this sale.
The rest of the sales were made to individual customers having turnover of
less than fifty million rupees.
(ii) Cost of sales includes Rs. 20,000 paid to SPL as a penalty for late delivery of
goods.
(iii) Operating expenses include the following:
Salaries of Rs. 50,000 paid to part time sales staff working exclusively on
SPLs assignment. The rest of the expenses were common to all the
customers.
A donation of Rs. 60,000 to an educational institution established by the
Provincial Government.
Zakat of Rs. 10,000 under the Zakat and Ushr Ordinance, 1980.
(iv) KA also received a dividend of Rs. 36,000 (net of tax) from a private company.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute KAs taxable income for tax year 2017. Give reasons for the treatment of the
amounts of donation and dividend as mentioned above.

Practice Kit 22 The Institute of Chartered Accountants of Pakistan


Questions

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 KLs records for the year ended 31 December 2016:
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 years 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.

Practice Kit 23 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(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 KLs 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 KLs 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.
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 KLs design, patent and scientific
knowledge. This amount was directly transferred into KLs 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, at a
price of Rs. 120 per share. KL purchased these shares in May 2013 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 2017.
Note: Ignore WWF, Minimum Tax and Alternative Corporate Tax.
Show all relevant exemptions, exclusions, reclassification and
disallowances.

Practice Kit 24 The Institute of Chartered Accountants of Pakistan


Questions

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 ZJLs un-audited financial statements for the year ended 30
September 2016.
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 NGOs operating welfare
hospitals in KPK province. A discount of 25% was allowed to the NGO on their
purchases.
Cost of sales includes:
(i) Cost of opening and closing stock-in-trade of Rs. 25,690,000 and 29,200,000
respectively comprising of raw and packing materials, work-in-process and
finished goods. ZJL computes the cost of stock-in-trade using marginal cost
method. The values of opening and closing stock-in-trade under absorption cost
method were Rs. 28,460,000 and Rs. 32,350,000 respectively.
(ii) Accounting depreciation of Rs. 2,210,000.
Administrative and selling expenses include:
(i) Withholding tax of Rs. 600,000 i.e. 20% of purchase price, paid in
August 2016 (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 2015 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 companys policy the
vehicles are sold at their book values.

Practice Kit 25 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(ii) Net profit of Rs. 20,000,000 from ZJLs 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 2013, ZJL acquired 200,000 shares in ML at Rs. 50
per share constituting 55% interest in ML. On 1 August 2016, 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 2016, 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 2016, 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 2015 and 2016 were as
follows:
2016 2015
------- 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 2017
and amount of tax to be carried forward along with the amount of default surcharge, if
any.
Note:
Your computation should commence with the profit before tax figure of Rs.
46,500,000.
Ignore WWF and WPPF.
Show all relevant exemptions, exclusions and disallowances.

Practice Kit 26 The Institute of Chartered Accountants of Pakistan


Questions

22 Desi (Pvt.) Limited - Thin Capitalization

Desi (Pvt.) Limited (DPL), a resident company, is 70% owned by Mega Inc. USA
(MI).On 15 March 2016, 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 2016. 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 2016, 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 2017.
On 31 August 2016, DPL wrote-off Rs. 1.0 million in respect of a debt owed by one of
MIs associates who was based in Australia. The outstanding debt balance in DPLs
books at the end of 30 September 2016 was Rs. 4.0 million.
Following information has been extracted from DPLs records for the year ended 30
September 2016.
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 2017.

Practice Kit 27 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 2017 following activities were carried out by the company:

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

Following information is also available:


(i) In order to meet the high consumer demand, OL purchased new machinery 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.
(v) Sales tax withheld by customers amounted to Rs. 238,000.
(vi) Sales tax credit of Rs. 325,000 was brought forward from previous month.
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 2017. Show computation wherever
necessary.
(a) Sales tax liability and net sales tax payable with return also compute the
amount of withholding tax, if any.

Practice Kit 28 The Institute of Chartered Accountants of Pakistan


Questions

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
2016.

Rs. in 000
Purchases:
Local:
Components from registered suppliers 70,700
Components from un-registered suppliers 15,250
Import of finished goods (inclusive of custom duty and FED) 10,000
Supplies:
Manufactured goods:
Local taxable supplies to registered persons 40,000
Local taxable supplies to un-registered persons 24,000
Exempt goods 11,000
Export to Malaysia 13,000
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 companys
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 2015. 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, 2016.
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.

Practice Kit 29 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 GLs records for the month
of May 2017.
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. 5,400
900,000)
Gift items for customers - carpets, fancy watches etc. 700
Supplies:
Electric switch-gears and electric motors to diplomatic mission in 1,900
Islamabad
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.
(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 2017.
(a) Sales tax payable/refundable.

Practice Kit 30 The Institute of Chartered Accountants of Pakistan


Questions

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 SLs records for the month of November 2016:
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 5,000
each)
Supply of 25,000 units of Beta to Export Processing Zone for further 625
processing

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 2016 was Rs. 1,000,000.
(iii) SL provided 50,000 units of Beta to its employees free of charge.
(iv) In November 2016, 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 2017. Sales tax paid on this machinery amounted to Rs. 3,000,000.
(v) Input tax of Rs. 500,000 was inadvertently not adjusted in the return for the
month of October 2016.
(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 2016.

Practice Kit 31 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 ULs records for the month of May 2017.

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

Additional information:
(i) Raw materials purchased from a registered supplier in April 2017 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 2017 return.
(ii) On scrutiny of the companys previous sales tax returns, the internal auditor has
pointed out that input tax on raw materials of Rs. 200,000 purchased in October
2016 from a local registered supplier has not been claimed / adjusted by UL.
(iii) UL under misapprehension collected additional sales tax of Rs. 64,000 from one
of its customers. 70% of the goods on which additional sales tax was collected
are still lying with the customer as unsold stock.
(iv) Taxable supplies to registered persons include the following:
Goods worth Rs. 500,000 supplied to AB Limited which is registered as an
exporter with the Large Taxpayer Unit.
Supplies of Rs. 2,000,000 to a domestic airline for regular maintenance of
an aircraft weighing 8,500 kilograms.
(v) Raw materials purchased from local registered suppliers include an invoice of
Rs. 100,000 which was issued in the name of a director of UL.
All the above amounts are exclusive of sales tax, wherever applicable. Sales tax is
payable at the rate of 17%. The value of imported raw material is inclusive of custom
duty and federal excise duty. However, other goods are not subject to duty under the
Federal Excise Act, 2005.

Practice Kit 32 The Institute of Chartered Accountants of Pakistan


Questions

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 2017.
Give brief reasons for the treatment of:
Goods destroyed by fire;
The input tax not claimed in the return for the month of October 2016; 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 2016 and the
certificate of registration was issued on 7 November 2016.

Following information has been extracted from MFs records for the month of
November 2016:
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 33 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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:

15 August Rs. 50,000 (import)

10 September Rs. 25,000 (local)

4 October Rs. 50,000 (local)

(iii) Rent was payable to Dir Furnishers, a local vendor.

(iv) Insurance expense includes Rs. 25,000 paid against fire and theft insurance
whereas Rs. 5,000 relates to staffs 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 2015.

(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 2016.

(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.

Practice Kit 34 The Institute of Chartered Accountants of Pakistan


Questions

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 TPLs records for the month of May 2017:

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

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 2017.

Practice Kit 35 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 MLs records for the month of November
2016:

3 Rupees
Purchases:
Raw material:
From local registered suppliers 5,000,000
From local un-registered suppliers 1,000,000
Import 800,000
Supplies:
Taxable supplies to 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.
(ii) Juices worth Rs. 100,000 were provided to the workers at the companys
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) 20% of the taxable supplies to registered persons were made to private limited
companies and public sector organizations whereas the rest of the supplies were
made to wholesalers / retailers.
(v) ML had no outstanding liability against purchases at the end of November 2016.
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
2016.

Practice Kit 36 The Institute of Chartered Accountants of Pakistan


Questions

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 2017. Following information has been extracted from OLs
records for the month of May 2017:
(i) Taxable purchases of Rs. 100,000 were made from an unregistered supplier.
(ii) Invoices issued by OLs 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) OLs 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 aircrafts 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 buyers premises the goods are still lying at OLs 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. All the suppliers were withholding tax agents.
(vii) OLs 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 2017. 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
2017.
(xi) OL procured tyres and tubes of Rs. 850,000 from a distributor for trading
purposes.
All the above figures are exclusive of sales tax, wherever applicable. Sales tax
(other than services) is payable at the rate of 17%.
Required:
In the light of the provisions of Sales Tax Act, 1990 / relevant provincial laws and
Rules made thereunder, compute the sales tax payable by or refundable to OL for
filing the sales tax return for the tax period May 2017.

Practice Kit 37 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 HLs records for the
month of November 2016.
(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 HLs 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 2016.

Practice Kit 38 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 RLs records for the month of May
2017:
Rs. in 000
Purchases:
Raw material:
From local registered suppliers 8,000
From local un-registered suppliers 2,000
Import 900
Import of foam from China 1,200

Supplies:
Local:
Taxable supplies to registered persons 7,200
Taxable supplies to un-registered
persons 3,500
Exempt goods 250
Sale of foam imported from China 1,500
Export to Malta 600
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:
Shampoo worth Rs. 700,000 supplied to a registered exporter Baramad
Limited.
Tiles of Rs. 650,000 supplied to Raja (Pvt.) Limited. These tiles were
purchased directly from the manufacturer in April 2017.
(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 2017 from an importer for Rs. 325,000
against payment of sales tax at the rate of 17%.

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Certified Finance and Accounting Professional- Advanced Taxation

(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 2017, there was no outstanding liability against items
mentioned in (ii), (iii) and (iv) above.
All the above figures are exclusive of sales tax, wherever applicable. Except for the
item specified under Eight Schedule, sales tax is payable at the rate of 17%.
Required:
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 2017. 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 KLs records for
November 2016.

Rupees
Purchases:
Raw material:
From local registered suppliers 12,000,000
From local un-registered suppliers (Third Schedule items) 3,000,000
Import 5,000,000
Supplies:
Taxable supplies to registered persons 9,500,000
Taxable supplies to un-registered persons 6,500,000
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 2016. 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 of fat filled milk, specified against S. No. 12 of the
Fifth Schedule. KL has complied with all the requirements of Chapter XIV of the
Sales Tax Special Procedure Rules, 2007 in this regard.
(iii) Taxable supplies to registered persons include the following:

Practice Kit 40 The Institute of Chartered Accountants of Pakistan


Questions

A forward transaction on Pakistan Mercantile Exchange Limited for the


supply of goods worth Rs. 600,000 to a large trading house in Karachi.
Supply of Confectionery, chocolates and candies worth Rs. 2,500,000 to a
retail outlet in Islamabad. These goods are designated as specified goods
under Chapter XIII of the Sales Tax Special Procedure Rules, 2007.
The rest of the products were supplied to trusts/non-profit organizations.
KL did not receive any payment during the month against any of these
supplies.
(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 2016, 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 2016, TCP removed 30 metric tons of sugar from KLs
premises for the purpose of export to Oman. The remaining 20 metric tons of
sugar were removed on 20 November 2016 and were supplied to wholesalers
in the local market.
(vi) KL delivered fertilizers, covered under Third Schedule, to Small Bank Limited
under a Murabaha financing arrangement at a price of Rs. 1,584,000. The
amount was receivable in equal monthly instalments over a period of one year.
The retail price of the fertilizer in the market at the time of delivery was Rs.
1,320,000.
(vii) KL supplied 400 kg of a special brand of tea, covered under Third Schedule, to
FM Enterprises at a wholesale price of Rs. 500 per kg. In October 2016 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 2016.
(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 2016.
Also compute the amount of withholding tax, if any.
Note: Show all relevant exemptions, exclusions and disallowances.

Practice Kit 41 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 Rate No. of Rate
shares shares
31-03-2016 1,400 20 - -
15-09-2016 700 22 - -
01-04-2017 900 18 - -
01-05-2017 - - 600 17
07-05-2017 - - 800 19
21-05-2017 - - 700 18
31-05-2017 500 23 400 25
31-05-2017 - - 1,000 27
Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made there under,
calculate the amount of capital gain / loss and tax thereon, if any, on the above
transactions. Ignore incidental expenses on cost of acquisition of securities.

36 Capital Gain
Under the provisions of Income Tax Ordinance, 2001 and Rules made there under,
compute the taxable income or explain the tax treatment, wherever applicable, in each
of the following cases:
(i) Hamid held 2,000 shares in Beta Limited (BL) which he had acquired on 1 July
2016 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 2017 at Rs. 40 per
share and deposited them into CDC account. On the same date i.e. 1 January
2017, PL declared 25% bonus shares with 1 April 2017 as the date of
entitlement. On 31 March 2017, the market value of these shares was Rs. 50
each. On 15 April 2017 Bari disposed of 50 shares in PL at Rs. 40 each. The
bonus shares were credited to Baris account on 15 May 2017. He sold the
remaining shares including bonus shares on 18 May 2017 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 42 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 2017 on account of royalty.

38 Foreign Source Income - Returning expats


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 2015 and joined a clearing house of his
brother Ikram. In March 2017 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 2014, under an employee share scheme. Mr. Hayat had the option to transfer
the shares in tax year 2016 or thereafter. The market value of shares at the time of
issue was Rs. 12 per share. In 2016 the share attained a market value of Rs. 20;
however, Mr. Hayat sold the shares in May 2017 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.

Practice Kit 43 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(b) Barn Limited (BL) wrote off a debt amounting to Rs. 500,000 in June 2014. 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 2014. In tax year 2017, 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

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, 2017, 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, 2017

Capital and Liabilities Rupees Assets Rupees

Owners 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, 2017 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, 2017 is Rs. 4 million.

Practice Kit 44 The Institute of Chartered Accountants of Pakistan


Questions

(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
HTs patents and fixed assets as at April 30, 2017:

Rupees
Cost Tax WDV FMV
Fixed assets 7,000,000 3,000,000 5,200,000
Patents 5,000,000 2,500,000 2,300,000
Required:
(a) Any transaction that is related to disposal of assets becomes the subject matter
of gain or loss. Advise Mr. Adnan about the conditions, which are required to be
fulfilled under the Income Tax Ordinance, 2001 if he wishes to avoid recording
any gain or loss on the disposal of his business to MPL.
(b) Advise the necessary changes, if any, required to be made by Mr. Adnan in his
proposed scheme of transfer in order for it to be in compliance with the
conditions identified in part (a) above.
(c) Calculate the following, assuming the conditions in (a) above have been fully
complied with.
(i) Number and the value of shares to be received by Mr. Adnan from MPL.
(ii) MPLs cost of acquisition of assets.
(iii) Mr. Adnans 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:
Advice 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, 2017 under the given circumstances.
(i) Mr. Mubeen came to Pakistan for the first time on a special assignment from his
company on April 01, 2016 and left the country on September 30, 2016.

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Certified Finance and Accounting Professional- Advanced Taxation

(ii) Mr. Rana, who had never travelled abroad in his life, got a job in Canada. He
went to Canada on December 29, 2016 to assume his responsibilities as a CFO.
In June, 2017 his company sent him to India on a training workshop. On June
30, 2017 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, 2016 to June 30, 2017.
(iv) Mr. Francis, a sugar dealer in Brazil, came to Pakistan on July 31, 2016. 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, 2017. 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 2017, 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 BLs
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.
(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 companys 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 2013. 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 Commissioners contention with regard to each of the above
situation is valid.

Practice Kit 46 The Institute of Chartered Accountants of Pakistan


Questions

46 Credit for sales tax registered person


Describe the benefits available under the Income Tax Ordinance, 2001 to persons
who are registered under the Sales Tax Act, 1990. Also state the conditions which
such persons are required to fulfill in order to be eligible for claiming such benefits.

47 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 Ordinance 2001, 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 venturers profit / loss from such venture.

48 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.

49 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.

50 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?

51 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.

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Certified Finance and Accounting Professional- Advanced Taxation

(ii) The tax implication in each of the following cases while determining chargeable
income of the branch office in Pakistan.
Head office expenditure
Compensation for management services performed by the branch

52 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 2016. Also state whether
a person can again be selected for audit in tax year 2017 if nothing was found during
its audit in the tax year 2016.

53 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 2016. 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, 2017. 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 2017. Discuss the tax
treatment under the provisions of Income Tax Ordinance, 2001.

54 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 2017 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 2017 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

55 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 2017. 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 48 The Institute of Chartered Accountants of Pakistan


Questions

56 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 2017, 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. GLs 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.

57 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.

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

59 Tax evasion and avoidance


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

60 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

61 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.

62 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 49 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

63 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.

64 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.

65 Tax admissible vs tax reliefs


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

66 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 arms
length result. Briefly describe those steps under the resale price method as provided
in the Income Tax Rules, 2002.

67 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

68 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. SLs income year ends on 30 September each year. In
tax year 2017, 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 2017 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 50 The Institute of Chartered Accountants of Pakistan


Questions

69 Depreciable Asset, Eligible Depreciable Asset

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

70 Speculation Business

In tax year 2017, 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.

71 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 2017, 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 MTEs business to
TPL under the provisions of the Income Tax Ordinance, 2001.

72 Mr. Hoshyar - Penalty

Mr. Hoshyar, a non-salaried individual, filed his return of income for tax year 2017 on
27 November 2017 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.

73 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.

74 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 51 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

75 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.

76 Imputable Income, PMEX


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

(i) Imputable income.


(ii) Pakistan Mercantile Exchange

77 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 52 The Institute of Chartered Accountants of Pakistan


Questions

CHAPTER 06 OTHER AREAS -SALES TAX

78 Mr. Furqan - Returns, De-registration


Mr. Furqan intended to commence a manufacturing business and obtained the sales
tax registration in November 2016. 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 2017, he received a notice from the department of
Inland Revenue directing him to furnish the return by May 15, 2017.
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.

79 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.

80 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.

81 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.

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82 Stock acquired before registration


Ms. Hina started her business on January 12, 2017 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.
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, 2017 and was registered with effect from May 2,
2017. Following was the position of her unsold stock of coffee and dates at April 25,
2017:

Sales Tax paid


S. No. Description Date of purchase
(Rs.)
(i) 25 kg of coffee imported January 15, 2017 23,750
(ii) 125 packets of dates purchased February 2, 2017 12,325
(iii) 42 kg of coffee imported February 25, 2017 39,900
(iv) 458 packets of dates purchased March 28, 2017 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 2017.

83 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.

Practice Kit 54 The Institute of Chartered Accountants of Pakistan


Questions

84 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.

85 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.

86 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

87 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.

88 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?

89 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 2017 is Rs. 4,500,000 and the amount of his annual utility bills for the
same period is Rs. 800,000.

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Certified Finance and Accounting Professional- Advanced Taxation

(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.

90 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 ALs customers, who had bought 50 kg of a special blend of tea on 4
December 2016. Finance manager issued the credit note on 5 June 2017.
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 2017.

91 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

92 Scope of special audit

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.

93 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

94 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.

Practice Kit 56 The Institute of Chartered Accountants of Pakistan


Questions

95 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.

96 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.

97 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

98 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.

99 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.

100 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.

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101 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.

102 Temporary registration


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

103 Taxable services


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

104 Mr. Munaf - Refund


On 15 September 2016 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 2016)

Practice Kit 58 The Institute of Chartered Accountants of Pakistan


Questions

CHAPTER 07 OTHER AREAS FEDERAL EXCISE ACT.

105 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.

106 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

107 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.

108 Non-fund banking services, franchiser

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

109 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.

110 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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111 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.

112 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.

113 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:
Discontinued business enterprise.
Transfer of ownership of a business to another person as an ongoing concern

114 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 persons
registration.

115 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:

116 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

Practice Kit 60 The Institute of Chartered Accountants of Pakistan


Questions

117 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.

118 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.

119 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.

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

121 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 persons registration.

122 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.

123 (Repetition of Q106)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.

124 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 61 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Practice Kit 62 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional

B
Advanced Taxation

SECTION
Answers

CHAPTER 01 INDIVIDUAL

1 Mr. and Mrs. Adil


BURQ ENTERPRISES
Personal status: Association of Persons
Residential status: Resident
Tax Year: 2017
Income year ending: June 30, 2017
Computation of taxable income and tax liability
Consultancy
Trading
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 (W-3) (7,800) 0
Other Income (W-4)
(allocated on the basis of sales ratio) 450 50
Net Income 70,820 47,109
Scheme of taxation FTR Minimum
Rate of tax 6% of the value
of goods
Tax liability 24,780 15,707
Less: Tax deducted at source (24,780) ( 5,500)
Net tax payable 0 10,208

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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 (1,200)
of 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 64 The Institute of Chartered Accountants of Pakistan


Answers

MR. ADIL
Personal status: Individual
Residential status: Resident
Tax Year: 2017
Income year ending: June 30, 2017
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
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 120,000
adjusted only against capital gain 15,100,675
There is no tax liability under normal tax regime
and separate block of income

W-6: Partner Divisible income Rupees

Mr. Adil Mrs. Adil Total

Salary Paid and return on capital 6,000,000 7,200,000 13,200,000


(Mrs. Adil)

Balance Taxable Income 16,954,500 16,954,500 33,909,000


(47,109,000 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.

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Certified Finance and Accounting Professional- Advanced Taxation

W-7: Loss on sale of bonus shares

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

Total number of original shares 50,000

Bonus issue in the ratio of 1:5 10,000

Total number of shares(Including bonus shares) 60,000

Cost per share (7,500,000+ 1,500,000)/60,000 150

Number of bonus shares sold (10,000 x 80%) 8,000

Consideration received for bonus shares (Rs.135 x 8,000) 1,080,000


Rs.

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 2017
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 945
whichever is higher) (Rule 4)
Company maintained car (2.0 million 5% 1/2) 50
Interest free loan [(2.5 million) 10% x 6/12] 125
Interest on amount of loan utilized for the purchase of asset -
[ Sec.13(8) ]
Amount of loan waived by TL (2.5 million 25%) 625
Compensation under redundancy scheme 4,000
Unapproved gratuity (2.0 million 75K exempt under clause 13 of 1,925

Practice Kit 66 The Institute of Chartered Accountants of Pakistan


Answers

Part I of Second Schedule) [Note]


Car purchased (1.5 million 1.0 million) [ Sec. 13(11)] 500
Total Salary Income 10,570
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 2011 300
(100,000 3)
Total Property Income 900

Capital Gain
Sale of share of a listed company 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)
11,070
Less: Donation paid to an un-approved trust (inadmissible deduction) -
Taxable income 11,070
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 11,070
Less: Capital gain (Separate Block Income) (500)
Less: Redundancy payment (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) (4,000)
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
(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

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Certified Finance and Accounting Professional- Advanced Taxation

3 Mr. Yaqeen
Personal status: Individual
Residential status: Resident
Computation of income tax liability For the tax year 2017
Income from Salary: Rs. 000
From KKUH:
Basic salary (500 x 6) 3,000
Medical allowance (60 x 6) 360
Less: exempt up to 10% of basic salary (300)
60
Leave fare assistance 240
From DPL:
Basic Salary (800 x 6) 4,800
Medical allowance (80 x 6)[exempt being 10% of basic salary] -
Utilities allowance (100 x 6) 600
Amount received as consideration for joining DPL 3,000
Assets received for use at home (200 x 15% /2) 15
Perquisite in the form of concessional loan (10%-8% x 5,000 x (3/12)) 25
Total income under the head salary 11,740

Capital Gain:
Gain on disposal of painting (W-1) 176
Less: 1/4th of gain is exempt due to sale after one year (44)
Net gain on disposal of painting 132
Sale of shares in ABL(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
12.5% on dividend in specie (20,000 x 25 x 12.5%) 62.5
2,961.1

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.

Practice Kit 68 The Institute of Chartered Accountants of Pakistan


Answers

The gain is calculated as follows: Rs. 000


Consideration received 600
Less: Cost of acquisition:
Purchase price (350)
Insurance premium (24)
Lawyers fees (50)
(424)
176
W-2 Gain on sale of shares in ABL:
Any dividend in specie derived in the form of shares in a company is taxable as
dividend income due to omission of clause (103B) Part I of 2nd Schedule from Tax year
2014 & onwards.
Calculation of dividend income and tax thereon in Tax year 2017 Rs. 000
Dividend income (20,000 x 25) 500
Tax @ 12.5% 62.5
Computation of capital gain in Tax year 2017:
Consideration received 425
Less: Cost of the dividend in specie (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 2ndSchedule]
(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 2017.
[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 64A]

Practice Kit 69 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

4 Mr. Sohail

Personal Status: Individual


Residential Status: Resident
Computation of taxable income
For the tax year 2017
Rupees
Income from property:
Rent received from Mr. Baqir for 9 months (1,200,000 x 9 /12) 900,000
Less: Amount for the services of two guards for 9 months (15,000 x 9) (135,000)

Rent chargeable to tax (RCT) 765,000


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

5 Mr. Iqbal

Personal Status: Individual


Residential Status: Resident
Computation of income tax liability
For the tax year 2017
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 drivers 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

Practice Kit 70 The Institute of Chartered Accountants of Pakistan


Answers

Income from property:


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

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
Investment in life insurance [500,000 1,540,849
7,396,164] (Note-3 u/s 62) (104,165)
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%) (187,498)
(291,663)

Practice Kit 71 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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
from salary (1,200,000)
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:
The time the restriction is removed; or
The time the employee actually disposes of the shares.
Since neither of these events occurred before 30 June 2017 no amount is
taxable as salary of Mr. Iqbal for the tax year 2017.
(3) According to Section 62(1) of the Income Tax Ordinance, 2001 a resident
person who has invested in new shares 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
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 (122365) 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%) 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.

Practice Kit 72 The Institute of Chartered Accountants of Pakistan


Answers

6 Mr. Saif

Personal Status: Individual


Residential Status: Resident
Computation of income tax liability
For the tax year 2017
Income from Salary: Rupees
Basic Salary (600,00012) 7,200,000
Guaranteed bonus (relates to tax year 2018) -
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.)
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.
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

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Certified Finance and Accounting Professional- Advanced Taxation

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 (less than 30% of
taxable income) (500,000)
Taxable income 13,097,125

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. on
6,097,125) 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
from salary (2,100,000 + 13,000 ) (2,113,000)
on air tickets (10,000)
on import stage (150,000)
Net tax payable 983,292

Practice Kit 74 The Institute of Chartered Accountants of Pakistan


Answers

Notes
Items not included in computation:
(a) Bonus in July 2017: Salary is taxable on receipt basis hence it will be taxed in
Tax year 2018.
(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 2017 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
Donation to pak board: In case of donation to institution mentioned in 2nd 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 final tax regime.
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

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.
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- 2017 127,500 1,753,125

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

Practice Kit 75 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

7 Mr. Pansari
Personal Status: Individual
Residential Status: Resident
Computation of Taxable Income and Income Tax Liability
For the tax year 2017
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
Gain on sales of shares of Trio Limited (6,000 x (8.5 5 ) x 102) 2,142,000
Brought forward capital loss on sale of Ghareeb (Pvt.) Limited [N-7] (25,000)
2,117,000
Income from other sources
Royalty received from K Publishing [N-6] 2,000,000

Total taxable income 12,186,000


Notes:
(1) In the absence of information it has been assumed that conveyance allowance has
not been for the discharge of official performance, therefore the conveyance
allowance shall be included in the taxable salary income of the employee.
(2) Current market value of company owned car is not relevant for the computation of
conveyance for business and private use. [Rule 5]
(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 persons 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 76 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 2017
Rs. in 000
Accounting profit before taxation 17,150
Add: Inadmissible expenses:
Accounting depreciation recorded in:
Cost of sales 3,200
Administrative expenses 800
Provision for slow moving stock 1,300
Demurrage -
Royalty -
Damages paid to distributors on breach of -
contract
Provision for bad debts 1,100
Small items of office equipments charged off 1,400
Unrealized exchange loss 1,350
Interest on foreign debt (u/s 152(3) no approval 1,300
from 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 700
forward 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 6,000
office equipment given in question)
Bad debts written off (W1) 300
(6,300)
Taxable income 22,350
Less: brought forward tax loss (6,100)
Taxable income 16,250
WWF (W2) (350)
Net taxable income 15,900

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Tax @ 31% 4,929


Higher of [MTL u/s 113 or 31% on taxable
income or 17 % of accounting profit) 960 or
4,929 Or (Rs. 17,150 x 17%)= 2,915.50
WWF 350
5,279
Less: Tax deduction at source:
Taxes paid in Qatar (since 2,700 x (225)
31%=837therefore 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 Liability 154
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.

Practice Kit 78 The Institute of Chartered Accountants of Pakistan


Answers

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.
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 30,2017:
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, 2017(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 30.06.2017) 357
Foreign debt from ATX
$ 3.8 million x 85 (on 30.06.2017) 323
680
Calculation of foreign equity share:
Effective share of BP and ATX in the equity of RL (0.7 x 180 126
million)
Maximum allowable debt for BP and ATX is 126 3 million = 378
Interest relating to the above amount would be allowed as deductible profit.

Practice Kit 79 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

Computation of allowable profit on debt


Profit on debt paid/accrued for BP Rupees
(10-08-2016 to 14-05-2017)
Total interest expenses (357 million 12% 277/365) 32,511,452

Profit on debt paid/accrued for BP and ATX


(15-05-2016to 30-06-2017):
BP part of loan: 357/680 X 378 million x 47/365 x 12% 3,066,460

Profit on debt paid/accrued for BP and ATX Gmbh


(15-05-2016to 30-06-2017):
ATX part of loan: 323/680 X 378 million x 47/ 365 x 8% 1,849,611

Profit on debt paid/accrued for FRS in tax year 2017:


85,000,000 x 10% x 289/365 (fully deductible) 6,730,137
44,157,660
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
A 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

Practice Kit 80 The Institute of Chartered Accountants of Pakistan


Answers

An AOP is liable to pay tax separately from its members and where an AOP has
paid tax, the amount received by members (including salaries) out of the income
of AOP is exempt from tax. Since both Mateen and Vaqas have no other income
except for the share in AOP, no tax is payable by them separately.
(ii) Company (Public/Private) 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 @ 31% 188,325
Profit after tax 419,175
Calculation of Dividend:
Accounting profit before tax 1,095,000
Less: Tax (as calculated above) ( 188,325)
Profit after tax 906,675
Dividend on Rs. 906,675 @ 60% ( 544,005)
Profit retained after dividend 362,670

Total tax payable by the business:


On company profits [Higher of 1% of turnover, Alternate 188,325
corporate tax or NTR]
Add: Tax payable on salaries by -
Mateen (1,100,000)[14,500 + 10%(1,100,000 750,000)] 49,500
Vaqas (970,000)[14,500 + 10%(970,000 750,000)] 36,500
Tax payable on dividend:
Mateen (544,005 x 60% = 326,403 X 12.5%) 40,800
Vaqas (544,005 x 40% = 217,602 X 12.5%) 27,200
Total tax payable in case of a company (B) 342,325

(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

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Certified Finance and Accounting Professional- Advanced Taxation

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
Total tax payable by the business:
On company profits (1% of sales or ACT 1,095,000 x 17%) 186,150
Add: Tax payable on salaries by -
Mateen (1,100,000)[14,500 + 10%(1,100,000 750,000) 49,500
Vaqas (970,000)[14,500 + 10%(970,000 750,000) 36,500
Tax payable on dividend:
Mateen (545,310 x 60% =327,186 x 12.5%) 40,898
Vaqas (545,310 x 40% =218,124 x 12.5%) 27,266
Total tax payable in case of a company (C) 340,314
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. 340,314). Even as normal limited liability company the tax impact is Rs.
342,325 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 2017
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

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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 (4.8/3 x 3/12) (400)
( 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 @ 31% or higher of 1% of 1,100,000 or
17% of [Rs. 152,500 (less exempt & covered under FTR) 22,025
50,000 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] (4,030)
x 31% 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 First Schedule]
Higher of A & B 12,795 (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 [@ 1% 900
(U/C 3 of Part-II of 2nd Schedule) of gross receipt of Rs. 90
million]
Total tax payable 13,695

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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 6,830
Note:

Since the amount of tax payable on taxable income is higher than the
turnover tax, alternative corporate tax, the company would pay normal tax on
its income.

Nothing would be deducted from payments to non-resident against import of plant


and machinery since the title was transferred outside Pakistan.

(b) Incidence of further tax liability:

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 2017. Therefore, ML is exposed to the levy of default surcharge
under section 205 (1B).

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Answers

12 Rose Petal Limited - Construction


Personal Status: Company
Residential Status: Resident
Taxable income:

Tax Year Rupees

2015 (2,250,000 x 46%) 1,035,000

2016 (2,250,000 x 39%) 877,500

2017 (2,250,000 x 15%) 337,500

Working:

Taxable Income (estimated profit) x (percentage of contract Rupees


completed)

Estimated Profit (Total contract price Total costs) (9,000,000 2,250,000


6,750,000)

Percentage of contract completed = Contract costs incurred


Total contract costs

Tax Year

3,105,000
2015 46%
6,750,000

2,632,500
2016 39%
6,750,000

1,012,500
2017 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]

Practice Kit 85 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

13 Saturn Limited - Foreign Branches / Tax Credit


Personal Status: Company
Computation of taxable income and income tax liability
For the tax year 2017
Amount in Rupees
Pakistan source Foreign source
Total
income income
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):Inadmissi
ble 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)
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
31% export 31% 31%
proceeds
Tax liability 1,333,000 35,000 248,000 - 11.616,000
Less: Foreign tax
credit (lesser of
foreign tax paid or
Pakistan tax payable
on such income)
[Note-(iv)] - - (248,000) - (248,000)
Less: Taxes paid
during the year (1,600,000) (70,000) - - (1,670,000)
Net tax payable /
(refundable) (267,000) (35,000) - - (302,000)

Practice Kit 86 The Institute of Chartered Accountants of Pakistan


Answers

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 Ministers Relief Fund is exempt from tax and is allowed
as a direct deduction from taxable income. [Clause 61 of Part I of 2nd 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. 248,000 and NIL respectively, the tax credit allowed would be restricted to
Rs. 248,000 and NIL. Further, the excess amount of Rs. 2,000 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]

14 Sun Limited (SL) - Group Relief

Personal Status: Company


Residential Status: Resident
Computation of income tax liability
For the tax year 2017
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/S 97] (100) - -
Profit on debt assessable separately (150) - (300)
Total business income / (loss) before tax 5,210 440 700

Practice Kit 87 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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
Less: 1/4th 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
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 [@31% or 1% of
turnover whichever is higher or 17% ACT on
accounting profit before tax] [N-1] 781.2 60 221
Less: Tax deduction at source:
Advance tax paid u/s 147,148 and 153 (789) (275) (30)

Practice Kit 88 The Institute of Chartered Accountants of Pakistan


Answers

Motor vehicle tax paid under u/s 234 (final tax) - - (40)
Net tax payable / (refundable) 7.80 (215) 151
N-1
1% MTL U/S 113 170 60 35
17% ATC U/S 113C 629 - 221
31% NTR 781.2 - 84.01
Notes:
N-1: Since normal liability under transport business is more than tax 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

Depreciati
Opening Addition /
Assets Total Rate on 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.

Practice Kit 89 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

15 Pills (Pvt) Limited

Personal Status: Company


Residential Status: Resident
Computation of taxable income
Tax year 2017
(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 24 72 96
Professional books 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)
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)

Practice Kit 90 The Institute of Chartered Accountants of Pakistan


Answers

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% 31%
Gross tax liability
Minimum tax liability 27,000 x 1% = 270 whichever
is higher 78.3 683
Add: Tax payable on deemed dividend @ 12.5%
(Note iii)
Less: Taxes paid u/s 154 and sec. 147 (78.3) (400)
Tax payable with return - 283

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 2017,
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 @12.5%. Liability of
shareholder cannot be added in company liability. Hence there shall not be any
addition in liability.
(iv) Donation of Rs. 200,000: A donation is not business expenditure. However,
donations to institutions, approved by the Commissioner and FBR are eligible
for tax reliefs. Since the hospital to which donation was made is not run by the
Federal or Provincial or a Local Government, it cannot be claimed as admissible
deduction and no tax credit would be allowed against the same.
(v) Foreign withholding tax of Rs. 1,170,000: [U/S 103]
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.

Practice Kit 91 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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
PPLs equity at the beginning of the year 4,000
Share of Capsule plc. in the equity of PPL (0.6 x 4 million) 2,400

Debt allowable as per thin capitalization rule


2,400 x 3 7,200

Total amount of interest expense on foreign debt (8,500 x 12%) 1,020


Less: Deductible interest expense on allowable foreign debt
(7,200 x 12%) (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 92 The Institute of Chartered Accountants of Pakistan


Answers

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 2016 Rupees
Estimated Profit percentage of completion [40,000,00055%] 22,000,000
Withholding tax credit available
Income received: February 2016 12,622,000
May 2016 15,760,000
28,382,000
Withholding tax paid (28,382,000 7 93) 2,136,280
Tax year 2017 Rupees
Taxable Profit 18,000,000
Estimated Profit percentage of completion [40,000,00045%]
Withholding tax credit available
Income received: September 2016 35,000,000
December 2016 30,118,000
65,118,000
Withholding tax paid (65,118,000 7 93) 4,901,354
Working:
Taxable income = (estimated profit) (percentage of contract
completed)
Estimated profit = (total contract price total costs)
(100,000,000 60,000,000) = 40,000,000

30 June 2016 [33,000,000 60,000,000] 55%


30 June 2017 [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 thats 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 6% of contract receipts. [clause 56D part IV of 2nd
Schedule]

Practice Kit 93 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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


Zeta Limited
Computation of taxable income
For the tax year 2017
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 2015 (130)
Less: B/f un-assessed business loss tax year 2016 -
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 2010 -
Less: B/f capital loss tax year 2011 (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 94 The Institute of Chartered Accountants of Pakistan


Answers

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 2016 cannot be set-off against the business
income of 2017. [Section 56]
(2) Capital loss brought forward from tax year 2010 cannot be set off against
capital gains of tax year 2017 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 2015 can only be set-off
against income from speculation business chargeable to tax in tax year 2017.
Since in tax year 2017, 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. 2015.
[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
1
For the tax year 2017
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 (Y
inadmissible)

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Certified Finance and Accounting Professional- Advanced Taxation

Scientific research incurred in Canes 400,000


Advertising expenses in relation to a new product 480,000
Donation to an approved fund 300,000
WWF 98,000
Accounting depreciation charged to Adm. expenses (for the year) 1,100,000
Profit on debt (Bank profit)- (covered under the head income from
other sources) (180,000)
Sale proceeds from sale of shares (700,000)
Total business income / (loss) before depreciation/amortization (2,114,000)
Less: Tax depreciation W-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:
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%) (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 [1,498,500 20%] (299,700)
Income before WWF 1,198,800
Less: WWF (needs computation) W-2 (23,976)
Taxable income for the year 1,174,824

Practice Kit 96 The Institute of Chartered Accountants of Pakistan


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Computation of net tax liability:


Tax on taxable income [@ 31% or 1% 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% = Rs. 185,500)
In view of the accounting loss for the year ACT cannot be
calculated
tax on taxable income @ 31% is higher 364,195
Tax credit @ 20% of tax payable for enlistment on SE
(310,241 x 20%) (72,839)
291,356
Add: WWF 23,976
Total tax liability 315,332
Less: Tax deduction at source:
Advance tax paid u/s 147 and 151 (260,000+18,000) (278,000)
Balance tax payable 37,332

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- 470,000
230,000)
Accounting loss for the year (677,000)
2% of taxable income i.e. (1,198,800 2%) is higher 23,976

Practice Kit 97 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 2017
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 SPLs 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 tax W-1 936,000
Totalincome 326,000
Less: Zakat paid (10,000)
Taxable income- NTR 316,000
Working notes: W-1 [U/S 67 read with Rule 13]
Computation of common expenditure attributable to income under final tax regime:
The common expenditure amounting to Rs. 1,560,000 incurred in deriving income
from all the customers is allocated in proportion to the gross amount received from
each category of customers to the total gross receipts from all customers.
Total cost of sales 1,230,000
Total operating expenses 470,000
1,700,000
Less: Expenses related to income under final tax regime
Penalty paid to SPL for late delivery of goods (20,000)
Salary paid to staff working on SPL assignment (50,000)
Less: Inadmissible expenses:
Donation paid to educational institution (60,000)
Zakat paid (10,000)
Common expenses 1,560,000

Practice Kit 98 The Institute of Chartered Accountants of Pakistan


Answers

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 12.5% on the gross amount of the
dividend irrespective of the status of the company paying the dividend. Rs. 5,143
being the amount of tax deducted at source (12.5% 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 KAs taxable income.

20 Khalis Limited (KL)


Computation of taxable income and income tax liability
For the tax year 2017
Rupees 000
Local Export Comm-
Export Total
sale 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%
(17/117164,034) (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%

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Certified Finance and Accounting Professional- Advanced Taxation

Less: Cost of sales:


(W-1)
Freight - - (500) - (500)
Common expenditure
[allocated on sales ratio] (106,608) (130,236) (8,007) - (244,850)
Gross profit 33,592 41,015 2,008 4,300 80,916
G.P ratio [Rule 13(3)(b)] 41.52% 50.69% 2.48% 5.31% 100%
Administrative and selling
expenses: (W-2)
Allocation of common
expenses [G.P ratio] (25,333) (30,929) (1,513) (3,240) (61,015)
Cost of acquiring a contract
[800/10] (80) - - - (80)
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 31% 1% 1% 12%

Tax for the year (N-3) 2,438.77 1,695.58 105.15 516 4,755.50
Less: paid u/s 147 (3,450.00) - - - (3,450.00)
Paid u/s 153 - - - - -
Paid u/s 154(3c)
[169,558 x 1%]*1 - (1,695.58) - - (1,695.58)
Paid u/s 233 - - - (432) (432)
Tax payable / (refundable) (1,011.2
for tax year 3) - 105.15 84 (822.08)
CGTon shares W-4 A 191.25
Total tax refundable (630.83)
1
* (175,95185%=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.

Practice Kit 100 The Institute of Chartered Accountants of Pakistan


Answers

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
Less: Inadmissible expenses:
Clearing and forwarding expenses (485)
Legal expenses -
Advertising expensesunsuccessful marketing campaign -
Cost of acquiring a business contract (800)
Contribution to foreign pension fund (assumed unapproved by (2,000)
SECP)
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 191.25
more than 24 months, gain on sale of these shares would be charged
to tax @ 7.5%. [ Rs. 2,550x7.5% ]

Practice Kit 101 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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.

21 ZJ Limited
Personal Status: Company
Residential Status: Resident
Computation of Taxable Income and Income Tax Liability
For the tax year 2017
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 [25,69028,460] (2,770)
Adjustment of closing stock-absorption cost method [32,35029,200] 3,150
Accounting depreciation (cost of sales) 2,210
Withholding tax collected on a plot of land 600
Exp. to increase software featuresintangible 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 2014 & 2015 [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 (1,80010) (180)
Unabsorbed depreciation from tax year 2015 (2,550)
Total business income for the year A 13,620
Capital Gain:
Gain on disposal of plot (10,0003,000)[Separate block of income] 7,000
Gain on sale of securities in ML [(8550 100,000) + (7850 100 K)]
U/R 13P(d) related to negotiated deal transactions 6,300
Separate block of income
B 13,300

Practice Kit 102 The Institute of Chartered Accountants of Pakistan


Answers

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
Computation of net tax liability:
Tax regime [as opt out of PTR] NTR
Tax on taxable income [14,870 @ 31%] (i) 4,610
Minimum tax [199,000 1%] (ii) W-1 1,990
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 [22,30017%] (v) W-2 3,791
Tax charged would be higher of (i), (ii), (iii) (iv) or (v) above 4,610
Tax on Plot [7,000 10%] holding period 5 years 700
Tax on sale of securities [6,300 7.5%] holding period > 24 months < 4 years 473
Gross tax payable 5,783
Add: default surcharge:
90% of gross tax payable for the year [5,783 90%] 5,204.7
Less: Taxes paid u/s 147, 148, 153 and 154 [1,000+1,200+1,050+300] (3,550)
Amount of shortfall during 2016 1,654.7
Period of default from 1st April 2016 to 31st January 2017 (assuming
paid with return on 31 January 2017) = 306 days
Amount of default surcharge @12% [1,654.7 12% 306 365] 168.3
Tax liability including default surcharge 5,951
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 2,401
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 2015) 1,400
Default surcharge on late payment of WHT (assuming paid with
return on 31 January 2016 i.e. 153 days late) [1,400 12%
153 365] 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

Practice Kit 103 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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: ZJLs share in AOPs gross sales [30,000 35%] 10,500
Less export sale minimum tax separately calculated (30,000)
Adjusted turnover 199,000

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 2016:
Rs. in million
Total equity at the beginning of the year:
Net assets as at 30 September 2016 (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
Foreign Debt attracting the provisions of thin capitalization: (interest exempt
from tax-2nd Schedule Clause 72)
Loan received on 15 March 2016 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 2016 168
Thin capitalization ratio = Foreign debt Foreign equity 3
Thin capitalization ratio for DPL = 315 million 86 million 3 = 1.2209

Practice Kit 104 The Institute of Chartered Accountants of Pakistan


Answers

Rupees
Interest paid/accrued for DPL in tax year 2017:
Debt where thin capit. rule is applicable (315 million 11% 200365) 18,986,301
Interest paid/accrued for DPL in tax year 2017:
Debt where thin capit. rule is not applicable 3,369,205
(168 million 6% 122365)
Deductible profit on debt for the tax year 2017:
For BP loan = 18,986,3011.2209 15,551,070
Profit on debt paid/accrued for DPL in tax year 2017:
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 105 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

CHAPTER 03 SALES TAX

23 Olive Limited

Computation of Net Sales Tax Liability


For the tax period May 2017
Rs. in
000
SALES TAX CREDIT (INPUT TAX) Gross Taxable
Sales Tax
Value Value
Domestic Purchases(excluding fixed assets) 6,000 6,000
@17% 1,020
Imports excluding fixed assets including 3%
VAT on commercial imports @ (17+3)20% 8,000 8,000 1,600
Imports excluding fixed assets-domestic 15,000 15,000
consumption 2,550
Fixed Assets (Machinery) 1,200 1,200 204
Fixed Assets (Vehicle) - Inadmissible 1,500 0 0

(-) Inadmissible input- exempt supplies- (W-1) (1,078)


Input Tax for the month 4,296
(+) Previous month credit brought forward 325
Accumulated credit 4,621
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
Less: Sales Tax deducted by withholding
agent (238)
Debit for the month 4,862
Sales tax withheld by the return filer as
withholding agent (W-2) 295.8
Admissible credit (4,417(4,621-204) or 90%
of 5,100) whichever is lower) Note 3 4,417
Add: Input on fixed asset 204
Sales Tax payable (4,862-4,417-204)+
315.8(WHT) 556.8
Refund claim (input consumed in export)-
(W-1) 539

Practice Kit 106 The Institute of Chartered Accountants of Pakistan


Answers

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.
N-2: Sales tax @ 16% [serial # 3, 2nd 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: From July 01, 2016 sales tax input paid on services shall not be allowed under
the Sales Tax Act, 1990. So whether advertisement is exempt or not input tax shall not
be allowed.
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 15,000 15,000 2,550
consumption
Fixed Assets 1,200 1,200 204

Residual input tax TOTAL 3,774


Rupees
Total sales other than sales out of imports 28,000
Exempt supplies 4,000
Inadmissible input tax (3,774 / 28,000 x 4,000) (A) 539
Sales tax refundable (3,774 / 28,000 x 4,000) (C) 539
Inadmissible input 1,078

W-2: Computation of sales tax withheld by a return filer as withholding agent


Rs. in 000
Tax withheld from suppliers (given) 6,000 x 17% x 20% 204
Tax withheld from purchase of fixed assets (Machinery) (1,200 x 17% x 40.80
20%)

Tax withheld from purchase of vehicles (1,500 x 17/100 x 20%) 51


Total 295.8
Tax withheld from clearing agent (100% WHT payable to PRA) 20
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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Certified Finance and Accounting Professional- Advanced Taxation

24 Kamyab Engineering
Computation of Sales Tax Payable / Refundable
For the tax period November 2016
Rs. in 000
Taxable Value Sales Tax
Sales Tax Credit (Input Tax)
Domestic purchases:
From registered persons 70,700 12,019
From unregistered persons - -
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 Octobers
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 - -
Supplies of imported goods (W-3) 12,460 2,118
Output tax for the month 12,998
Less: WH Tax deducted by WH Agents RPs (40,000
x 17% x 20%) 1,360
11,638
Sales tax payable ( 11,638-10,799) (A) 839
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 70,700 x 17% x 20% 2,404
(C) WHT on uniform (85,000 x 20%) 17
(A)+ (B) + (C) 3,740

Practice Kit 108 The Institute of Chartered Accountants of Pakistan


Answers

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)]
Workings:
W-1:
Input tax on imports 2,000
Less: on private use (100,000 x 20%) (20)
(1,980)
W-2: Apportionment of input tax
Gross Taxable
Sales tax
value Value
Domestic purchases from registered persons 70,700 70,700 12,019
Electricity bills - - 60
Gas bills 21
Mobile Phone bills 26
Residual input tax Total 12,126

Total sales of manufactured goods 88,000


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 (2102 x 2,040) (40)
Value of commercial imports 12,460

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Certified Finance and Accounting Professional- Advanced Taxation

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%).

25 Gadget Limited (GL).

Computation of Net Sales Tax Liability


For the Tax Period May 2017
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:
On banking services In Islamabad [ICT section 3 (3)]
8,800 1,275
Less: Purchases returned 900 (153)
Input tax attributable to both taxable and zero rated goods 1,122
Less: un-adjustable input tax ( export and zero rated)
W-1 (533.685)
Input tax for the month 588.315
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

Practice Kit 110 The Institute of Chartered Accountants of Pakistan


Answers

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
Sales Tax payable (1,190 -588.315) 601.685
Sales tax withheld (2.5+5.4+0.5) x 17% x 20% + 0.112 N-1 397.6
Sales tax payable (601.685+397.6) 999.285
Refund claim (input on export and zero rated supplies) W-1 533.685
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:
On banking services
L/C opening charges 500 -
Safe custody fee 100 -
Total 1,275
Less: Purchase return (153)
Total input on purchase of manufactured goods 1,122
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 x 1,122,000) 533.685

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.
N-2: From July 1, 2016 sales tax input paid on services shall not be allowed under the
Sales Tax Act, 1990.

Practice Kit 111 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

26 Sunshine Limited (SL)


Computation of Net Sales Tax Liability
For the tax period November 2016
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.
SALES TAX DEBIT (OUTPUT TAX)
Domestic Supplies of Alpha to registered persons 15,000 17,000 2,890.00
(add 2,000 difference of open market price)
Domestic Supplies of Alpha to un-registered 3,000 3,000
persons 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
[3rd 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) 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
Sales tax withholding on sales
(578.00)
(17,000,000 x 17% x 20)
Input tax on fixed asset
(3,000.00)
(complete adjustment allowed)
Balance input to be carry forward 1,054.11

Practice Kit 112 The Institute of Chartered Accountants of Pakistan


Answers

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 60
and must be paid to FBR. 3,000 x 2%
Withheld on purchases 25,000 x 17% x 20% 850
Sales tax payable 910
Total inadmissible/ adjustable input tax (A)+(B)+(C) 2,587
W-1
Alpha Value of
supply
Taxable local registered 15,000
Taxable associate (4,000 2,000) 2,000
Taxable unregistered 3,000
(A) 20,000
Beta
250,000 x 25 Taxable 6,250
50,000 x 25 Taxable 1,250
25,000 x 25 Zero rated 625
(B) 8,125
Total (A + B) 28,125

Input apportionment relating to zero rated (625/28,125)x2,200 48.89


W-2
Gamma Value Input
Tax
Local exempt supplies 18,000 1,836
Export - Zero rated 7,000 714
25,000 2,550

Complete input tax will be disallowed. However refund of Rs. 714 can be claimed in
respect of zero rated.
Note:
Sales tax withholding is not applicable on 3rd schedule items.

Practice Kit 113 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

27 Ummeid Limited (UL)

Computation of Net Sales Tax Liability


For the tax period May 2017
Gross Taxable
Sales Tax
SALES TAX CREDIT (INPUT TAX) Value Value
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. 2015 [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
Sales tax to be with held by
Withholding Agents (Rs. 18,000,000 x
17% x 20%) (612,000)
3,978,000
Admissible credit (2,763,562 or 90% of 4,590,000 whichever is lower) ( 2,763,562)
Sales Tax payable 1,214,438
Sales tax to be withheld as Withholding agent:
From registered suppliers (24,900,000 x 17% x 20%) 846,600
From unregistered suppliers (assumed they are required to be
registered)- (10,000,000 x 1%) 100,000
Add: Input tax on goods destroyed by fire 170,000
Add: Excess tax collected- incidence passed on to consumers [Note-3] 19,200
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 2,530,238
Return of excess tax collected- incidence not passed on to consumers 44,800
Refund claim (input consumed in export) 1,279,428

Practice Kit 114 The Institute of Chartered Accountants of Pakistan


Answers

(W-1)
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
Gross Taxable
W-1: Apportionment of input tax Sales Tax
Value 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.

Practice Kit 115 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 2016; UL therefore cannot
adjust the amount of input tax of Rs. 32,000 from its output tax for the month of
May 2016.
This amount can now only be adjusted with the permission of Federal
Government or the Board subject to such conditions as it may deem fit.
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 2016
Gross Taxable
Sales Tax
SALES TAX CREDIT (INPUT TAX) Value Value
Domestic Purchases:
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 61,850
input(A+B) W-1 (12,370)
Input Tax for the month 49,480
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

Practice Kit 116 The Institute of Chartered Accountants of Pakistan


Answers

Less: Admissible credit (90% of 95,200 or input tax excluding Fixed


Assets whichever is lower) (49,480)
Less: Input Tax on Fixed Assets W-1 (40,800)
Sales Tax payable 8,680
Sale Tax withholding W-2 45,603
Total sales tax payable 54,283

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 61,850
Fixed Assets 51,000
Residual input tax TOTAL 112,850
Export (140/700 x61,850) - inadmissible 12,370
Fixed Asset(140/700 x 51,000) -inadmissible 10,200
Allowable input on fixed Asset (51,000-10,200) Rs. 40,800
W-2
Sales Tax withholding on purchases
Material 250,000x17%x20% 8,500
Stationary 5,000x17%x20% 170
Shoes 6,250x17%x20% 213
Car 780,000x17%x20% 26,520
Machinery 300,000x17%x20% 10,200
N-1 45,603
Rupees
Total sales 700,000
Export supplies 140,000
Refundable input tax on export (140,000112,850/700,000)A 22,570
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.
N-2: From July 1, 2016 sales tax input paid on services shall not be allowed under
the Sales Tax Act, 1990.
(a) 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.

Practice Kit 117 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 2016 i.e. not more than 30 days prior to application for registration and
input tax paid at import stage on goods imported in August 2016 i.e. not more
than 90 days prior to application for registration can be claimed by MF with its
November 2016 return. However, he cannot claim input tax on local purchases of
Rs. 25,000 on 10th Sep as period of 30 days has lapsed.

29 Tender Pops Limited (TPL)

Computation of Net Sales Tax Liability


For the tax period May 2017
Gross Taxable
Sales Tax
SALES TAX CREDIT (INPUT TAX) Value Value
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
500,000
(350/0.7) 350,000 85,000
Domestic Supplies to un-registered
persons 8,000,000 8,000,000 1,360,000
Local third sch. Items to wholesalers 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
Less: Withholding Tax on supplies to RPs (3,170+85+76) x 20% 666,400

Practice Kit 118 The Institute of Chartered Accountants of Pakistan


Answers

6,456,600
Admissible credit (90% of 7,123,000 or input tax whichever is lower) ( 5,975,000)
WHT from raw material purchases (20(m) x 17% x 20%) 680,000
Sales Tax payable (6,456,600 - 5,975,000) + 680,000 1,161,600
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 2016
Taxable Sales Tax Amount of
SALES TAX CREDIT (INPUT TAX) Value Rate Sales Tax
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 ( 194,906)
Input Tax for the month 791,094

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 19% 403,750
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
1,215,500
Less: Sales Tax deducted by withholding agent (4,675,000 20%
17% 5) (31,790)
Debit for the month 1,183,710
Sales tax withheld as withholding agent from registered suppliers
(5,000,000 17% 5) 170,000
Sales tax withheld as withholding agent from un-registered suppliers N-1 10,200
Sales tax withheld as withholding agent from advertising services
(500,000 16%) 80,000

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Certified Finance and Accounting Professional- Advanced Taxation

Admissible credit ( lower of 791,094or 90% of 1,215,500) 791,094


Sales tax payable (1,183,710 791,094) + (170,000 + 10,200+80,000)
[80,000 to be paid to provincial board] 652,816
Add 2% further tax on unregistered (2,125,000 x 2%) = 42,500 695,316
Refund claim (input consumed in zero rated supplies) (W-1) 194,906
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
Note: From July 1, 2016 sales tax input paid on services shall not be allowed under
the Sales Tax Act, 1990.
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

Residual input tax TOTAL 986,000

Rupees
Total sales 8,600,000
Supplies to duty free shop 1,020,000
Export supplies 680,000
Refundable input tax (986,000 1,700,0008,600,000) 194,906

31 Omega Limited (OL)

Computation of Net Sales Tax Liability


For the tax period May 2017
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
Imports made ten days before the start of
business 5,000

Practice Kit 120 The Institute of Chartered Accountants of Pakistan


Answers

Purchases from registered corporate 725,000 17%


suppliers 123,250
Advance against purchases to a registered 75,000
supplier N.2 -
Purchase of tyres and tubes [R.58T(5) of 850,000
STSPR, 2007] -
Input Tax for the month 128,250
SALES TAX DEBIT (OUTPUT TAX)
Toll services to AOP N.3 45,000 0% -
Supply of finished cloth to Asia Airways 500,000 17%
N.3 85,000
Goods sold to Small Corporation 250,000 17% 42,500
Sale of furniture to un-registered school 125,000 17%
N.4 21,250
Stock of unsold furniture N.4 200,000 - -
Supply of tooth brushes in villages and 400,000 17% 68,000
towns
Govt. Grant on tooth brushes 150,000 - -
N.5
Sale of sugar to Sweet (Pvt.) Ltd. 240,000 8% 19,200
N.6
Output tax for the month 235,950
Less: Sales Tax deducted by Aisa Airways (500,000 17% /5) (17,000)
Debit for the month 218,950
Sales tax withheld from un-registered supplier (100,000 )1% N.1 1,000
Sales tax withheld from advance paid to Pearl Limited (75,000
17/100/5) 2,550
Sales tax withheld from registered corporate suppliers (Rs. 725,000 x
17% x 20%) (SRO 485(I)/2015 Dt: 30/06/2015) 24,650
Admissible credit (lower of 128,250or 90% of 235,950) 128,250
Sales tax payable (218,950128,250) + (1,000+2,550+24,650) 118,900
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.

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Certified Finance and Accounting Professional- Advanced Taxation

N.3 Supplies of goods, useable as industrial inputs, to registered or unregistered


persons of the five sectors (including textile), is charged to tax at the rate of
0%, whereas supplies to persons not belonging to the said five sectors shall be
charged to tax at the rate of 17% (SRO 491).
N.4 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 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.

32 Harfun Limited (HL)

Computation of Net Sales Tax Liability


For the tax period November 2016
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 450,000 17%
distributors 76,500
Mineral water purchased for Annual dinner 158,000 inadmissible -
Preservatives purchased from a cottage 589,000 exempt
industry -
Mango and banana purchased from 1,500,000 17%
registered 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 -

Practice Kit 122 The Institute of Chartered Accountants of Pakistan


Answers

Acquisition of mixing machine on finance 2,500,000 17%


lease 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. 1,904,000 17%
680/box 323,680
Sale of light energy saver lamps 500,000 exempt -
Sale of locally produced squashes 13,800,000 17% 2,346,000
Output tax for the month 2,669,680
Sales tax withheld from AOP (8,750,000 17% /5) 297,500
Sales tax withheld from distributors of packing material (450,000
17%/10) 7,650
Sales tax withheld from registered person (agricultural
produce)(1,500,000 17%/5) 51,000
Sales tax withheld from wholesalers (1,050,000 17%/10) 17,850
WHT on purchase of fiscal cash register and office equipment (650,000
x 17% x 20%) + (375,000 x 17/117 x 20%) 34,850
Sales tax withheld on delivery trucks (2,340,000 17%/5) 79,560
488,410
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
Sales tax payable with return
(297,500+7,650+51,000+17,850+34,850+79,560) 488,410
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.
Squashes are third schedule item. Sales tax withholding is not applicable on 3rd
Schedule items.

Practice Kit 123 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

33 Razi Limited (RL)

RAZI LIMITED (SL)


Computation of Net Sales Tax Liability
For the tax period May 2017
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
SALES TAX 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
WH Tax on RP Supplies (994,500 x 20%) (198.9)
Output tax for the month 1,322.60
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 255
(1,500 x 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

Practice Kit 124 The Institute of Chartered Accountants of Pakistan


Answers

Add: RP as WH agent on purchases from


registered persons [(7,700,000 x 17% +
(300,000 x 5%) x 20%] 264.80
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 363.65
Refund claim (input consumed in export)
(W1) 179.158
Refund claim on machinery (input consumed
in export) (W1) (C) 12.683
Gross Taxable
W-1: Apportionment of input tax Sales Tax
Value Value
Residual input tax ----- Rs. in 000 -----
Domestic Purchases registered suppliers 7,700 7,700 1,309.00
Import (90% rule applicable wide SRO 647(I)/2007
dated 27 June 2007) 900 900 153.00
Tissue paper used as packing material 675 675 114.75
Waste paper purchased at reduce rate of 5% 300 300 15.00
Residual input tax TOTAL 1,591.75

Residual input tax against Machinery 1,000 1,000 100


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

(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 125 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 2016
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 inadmissible
suppliers 2,050,000 -
Import of raw material [5,000,000 3,000,000 17%
2,000,000] 510,000
Import of raw material for fat filled milk 2,000,000 0% 0
Special Tea purchased from STL 420,000 17%
[600 kg Rs. 700] 71,400
2,621,400
(-)Inadmissible/un-adjustable input W-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 5,500,000 17%
purchase from Cottage Ind. exempt) 935,000
Taxable supplies to un-registered -end 1,000,000 17%
consumers 170,000
Forward transaction on PMEX [SRO 445/12 600,000 N/A
June 2004] -
Supply of confectionery, chocolates and
candies 2,500,000 17% 425,000
Federal Excise Duty on sugar under
Sales Tax Mode: (Rule 26 sales tax
special procedure Rules, 2007)
Supplied to TCP for export purposes 1,350,000 0% 0
Supplied to TCP for local market 900,000 8% 72,000
Supply of Fertilizers-Murabaha [SRO 445/12
June 2004] 1,584,000 N/A -
Supply of Tea to FM Ent. [400 kg Rs. 280,000 17%
700] 47,600
Output tax for the month 2,737,600

Practice Kit 126 The Institute of Chartered Accountants of Pakistan


Answers

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
Less: Sales tax deducted by withholding agent [1,088,000 1/5] (217,600)
Accumulated debit for the month 2,358,500
Sales tax withheld from registered suppliers (2,040,000 1/5) 408,000
Sales tax withheld from un-registered suppliers (2,050,000 1%)
[WHT applicable despite 3rd schedule item since unregistered] 20,500
Further tax on supplies to cottage Ind. [5,500,000 2%]
(As the limit for a cottage industry has been enhanced from Rs. 5
million to Rs. 10 million therefore further tax on supplies will not be
charged, because they are not required to be registered under the
Sales Tax Act, 1990.) 0
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 2,167,043or 90% of 2,576,100 = 2,318,490 2,167,043
Sales tax payable (2,358,500 2,167,043) + (408,000+ 20,500++50,000) 669,957
Sales tax refundable on zero rated supplies 173,566
W-1: Apportionment of input tax Taxable
Rate Sales Tax
Value
Raw material from local registered suppliers 12,000,000 17% 2,040,000
Import [5,000,000 2,000,000] -domestic 3,000,000 17% 510,000
consumption
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 2,184,000
supplied to 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) 280,079
2,550,000 19,834,000]
Refundable input tax- zero rated [1,350,000 2,550,000 173,566
19,834,000]
Inadmissible/un-adjustable input tax 454,357

Practice Kit 127 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** 01-5-17 07-5-17 21-5-17 31-5-17 31-5-17 31-5-17
Shares
31-3-16 1,400 20 28,000 600 800
15-9-16 700 22 15,400 700
01-4-17 900 18 16,200 400 500
31-5-17 500 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 12.5% 12.5% 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.

Practice Kit 128 The Institute of Chartered Accountants of Pakistan


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, 2016.

CGT

(ii) Purchases / Acquisitions Disposal

No. of 15 April 18 May


Date Price Cost* Total
shares 2017 2017

1-Jan-17 100 40 4,000 50 50

Bonus shares issued @ 25%


1-Jan-17 (Date of entitlement 1-04-17)
(Date of credit 15-5-2017) 75 75

1-Apr-17 100 *40 4,000

15-May-17 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.

Practice Kit 129 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

(iii) Taxable Income of Anjum No. of Price Amount


shares

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 130 The Institute of Chartered Accountants of Pakistan


Answers

CHAPTER 05 OTHER-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 2017 to
preceding two tax years 2016 and 2015.

38 Foreign Source Income - Returning expats

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 2016, the foreign source income derived
in the tax year 2017 would be exempt from tax.

39 Transfer of Assets

Transfers of assets:[Section 90(4),(5)]

Any income arising from any asset transferred by a person directly or indirectly to the
persons 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.

Practice Kit 131 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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
no amount shall be chargeable to tax to the employee under the head
Salary until the earlier of
The time the employee has a free right to transfer the shares; or
The time the employee disposes of the shares; and
The amount chargeable to tax to the employee shall be the fair market value
of the shares at the time the employee has a free right to transfer the shares
or disposes of the shares, as the case may be, as reduced by any
consideration given by the employee for the shares including any amount
given as consideration for the grant of a right or option to acquire the shares.
The cost of the shares to the employee shall be the sum of
The consideration, if any, given by the employee for the shares;
The consideration, if any, given by the employee for the grant of any right or
option to acquire the shares; and
The amount chargeable to tax under the head Salary.
(ii) Tax Year 2015:
In tax year 2015 no income would be added to Mr. Hayats salary as he did not
have a right to transfer the shares.
Tax Year 2016:
In tax year 2016, 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 2017:
In tax year 2017, following amount would be added to Mr. Hayats income.

Consideration received on sale of shares 210,000


Less: Cost of shares (amount charged in 2016 to income) (120,000)
Gain on sale to be taxed as income 90,000

As holding > 1 year only 75% amount is taxable (assuming 67,500


Unlisted Company shares)

Practice Kit 132 The Institute of Chartered Accountants of Pakistan


Answers

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:

Previously included in the persons income from business chargeable to


tax; or

In respect of money lent by a financial institution in deriving income


from business chargeable to tax;

(ii) The debt or part of the debt is written off in the accounts of the person in
the tax year; and

(iii) There are reasonable grounds for believing that the debt is irrecoverable.

The amount of the deduction allowed to a person for a tax year shall not exceed
the amount of the debt written off in the accounts of the person in the tax year.

(b) (i) Recovery of Rs. 200,000:

Rupees

Total Amount written off in the accounts 500,000

Less: Amount allowed as deduction in tax year 2014 (350,000)

Excess Amount disallowed 150,000

Less: Amount recovered (200,000)

Excess Amount to be included in income of BL (50,000)

(ii) Recovery of Rs. 120,000:

Rupees

Total amount written off in the accounts 500,000

Less: amount allowed as deduction in tax year 2014 (350,000)

Excess amount disallowed 150,000

Less: amount recovered (120,000)

Short fall to be allowed as bad debt deduction 30,000

Practice Kit 133 The Institute of Chartered Accountants of Pakistan


Certified Finance and Accounting Professional- Advanced Taxation

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 transferors 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.

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(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
MPLs 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. Adnans 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

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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;
(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 before the 30th of September following every three Tax
Years, Commissioner of Income Tax shall issue a show cause notice for
withdrawal of approval to the concerned organization as stated above;
(viii) Failed to file statements of deduction of income tax under section 165 of
the Income Tax Ordinance, 2001 read with rule 44.

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, 2017
under the given circumstances.
For the tax year ended June 30, 2017, the relevant period is July 01, 2016 to
June 30, 2017. Therefore, the stay of Mr. Mubeen for the purpose of tax year
2017 is:
Month Days
July 2016 31
August 2016 31
September 2016 30
Total 92

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Since his stay in Pakistan is less than 183 days in tax year 2017, 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 2017 is:
Month Days
July 2016 31
August 2016 31
September 2016 30
October 2016 31
November 2016 30
December 2016 29
30 June 2017 1
Total 183
The day he spent in Pakistan on June 30, 2017, while in transit, would be
counted as day of his presence in Pakistan.
Therefore, Mr. Rana is a resident person as his total stay in tax year 2017 is
equal to183 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 2017.
((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 2016i.e. the year starting from January 01,
2016 to December 31, 2016(Special tax year 2017) is:

Month Days
July 2016 1
August 2016 31
September 2016 30
October 2016 31
November2016 30
December 2016 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, 2016 would fall under tax year 2018. Therefore, 31 days which
he spent in January 2017 would not be included in tax year 2017.
As a result, Mr. Francis is a non- resident person as his total stay in tax year
2017 is less than 183 days.

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45 Beetle Limited (BL)

(i) The Commissioners 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 Commissioners contention with regard to cost of goods manufactured is,
therefore, incorrect unless he can prove otherwise, as discussed above.[Section
67]
(iii) Any property with respect to which the person is entitled to depreciation is not
covered under the definition of Capital asset, therefore, any gain on sale of
such property would not be considered as a capital gain. However, such gain
would be treated as income from business and would be charged to tax
accordingly. The amount of gain is calculated as follows:
Rs. in million
Sale proceed of immovable property 120
Less: Tax WDV
Cost of immovable property ( consideration received) 120
Tax depreciation charged ( Rs. 90m Rs. 70m) (20)
Tax WDV 100
Tax gain on disposal 20

Therefore, the gain of Rs. 20 million would be offered to tax as income from
business instead of Rs. 50 million as shown in the financial statements.[Section
37(5) &22(13)(b)
(iv) Where a person has been allowed a deduction for any expenditure incurred in
deriving income from business and the person has not paid the liability or a part
of the liability to which the deduction relates within three years of the end of the
tax year in which the deduction was allowed, the unpaid amount should be
chargeable to tax under the head business income in the first tax year following
the expiry of three years period.
The Commissioners 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 persons
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 Commissioners
contention is correct. [Section 29]

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Answers

46 Credit for Sales Tax Registered Person

Tax credit to a person registered under the Sales Tax Act, 1990: [Section 65A]
A registered manufacturer under the Sales Tax Act, 1990 shall be entitled to a tax
credit of three percent of tax payable for a tax year. Subject to the following conditions:
(i) Ninety percent of its sales during the said tax year are to persons who are
registered under the Sales Tax Act, 1990.
(ii) The person shall provide complete details of the persons to whom the sales
were made.
(iii) The income is not covered under final tax or minimum tax.
(iv) Any unadjusted tax credit for the tax year shall not be carried forward to the next
year.

47 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 ECPLs 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.

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48 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.

49 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.

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Answers

50 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 persons
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.

51 Compulsory Taxation under FTR

(i) Compulsory taxation under Final Tax Regime: [U/C 41 PART-IV Of 2nd
Schedule]
Taxes withheld from the payments made to a non-resident person on the
execution of a construction contract constitute final tax on the income from such
contracts only when such person opts to be taxed under Presumptive Tax
Regime.
Provided that the non-resident person:
Furnishes a declaration of option in writing;
Such declaration is furnished within 3 months of the commencement of the
tax year;
Such declaration shall be irrevocable; and
Shall remain in force for 3 years.
(ii) Taxation of a permanent establishment in Pakistan of a non-resident
person:
The tax implication in each of the following cases, while determining the
chargeable income of the permanent establishment, would be:
Head office expenditure: [U/S 105(2)]
In computing the income of a permanent establishment in Pakistan of a non-
resident person chargeable to tax under the head Income from Business for
a tax year:
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-residents total head office expenditure bears
to its worldwide turnover.

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Certified Finance and Accounting Professional- Advanced Taxation

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.

Profit payable on debt to finance the operations of the branch: [U/S


105(4)(a)]

In computing the income of a permanent establishment in Pakistan of a non-


resident person chargeable under the head Income from Business:

52 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 2016 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.

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Answers

53 Khalq Limited (KL) Government Grant

Government grant: [Clause 102A of Part I of 2nd 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.

54 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-residents 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. 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 Banks
regulations.
In view of above, US$ 30,000 is a deductible expense for the tax year 2017.

55 Mr. Pansari Dividend from Exempt Income

(a) Dividend received from exempt income: [Clause 105B of Part I of 2nd
Schedule]

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.

However, keeping in view provision of clause 105B part I of 2nd Schedule the
benefit of the RFLs 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.

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56 Gadget Limited (GL) Payment to Non-resident

Payment to non-resident and deductibility of an expense: [U/S 101(4)]

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.

GL is also required to deduct withholding tax at the specified rate 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 the specified rate.

In view of the above, GL after deducting withholding tax from the payment of Rs. 10
million can claim it as deductible expenditure.

57 Opting out of PTR

Persons who may opt out of presumptive tax regime (PTR):


Following persons may opt out of the PTR
1. Commercial importers [U/S 148(7) read with clause 56B of Part-IV of 2nd
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 with clause 56C of Part-IV of 2nd Schedule]
4. Resident persons receiving payment from prescribed persons for contract receipts.
[U/S 153(3) read with clause 56D of Part-IV of 2nd 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 specified services) [U/S 153(2) read with clause
56E of Part-IV of 2nd Schedule]
6. Every person receiving commissions / discount against sale of petroleum products
[U/S 156A read with clause 56F of Part-IV of 2nd Schedule]
7. Every person (as Agent) receiving commission from specified persons [U/S 233(3)
read with clause 56G of Part-IV of 2nd 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 certain
percentage of the tax already deducted or collected, in each of the above respective
case.

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Answers

58 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:

A member of an association of persons and the association:

Where the member, either alone or together with an associate or associates under
another application of this section, controls fifty per cent or more of the rights to
income or capital of the association;

A shareholder in a company and the company:

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;

59 Tax Evasion and Avoidance

Tax evasion:

It refers to all attempts to minimise a taxpayers 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 taxpayers 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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60 Derivative Product, Wash Sales, Tax Swap Sales [Rule 13F]

(i) Derivative products

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.

(ii) Wash Sales

Where capital loss realized on sale of specific security by an investor in


preceded or followed in one months 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.

61 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 persons 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 persons cost of stock-in-trade on the
absorption-cost-method.

62 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.

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Answers

63 Exception to Pakistan source Royalty & FTS

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

The following are the exceptions:


Any royalty where the property or right giving rise to the royalty is effectively
connected with a permanent establishment in Pakistan of the non-resident
person;
Any fee for technical services where the services giving rise to the fee are
rendered through a permanent establishment in Pakistan of the non-resident
person; or
Any royalty or fee for technical services that is exempt from tax under this
Ordinance.
(ii) Prescribed Person: [U/S 155(3)]

The prescribed person with reference to deduction of tax from rent of


immovable property means:
The Federal Government;

A Provincial Government;

A Local Government;

A company;

A non-profit organization or a charitable institution;

A diplomatic mission of a foreign state;

A private educational institution, a boutique, a beauty parlour, a hospital, a


clinic or a maternity home;
Individuals or association of persons paying gross rent of rupees one and a
half million and above in a year; or
Any other person notified by the Board for the purpose of this section.

(iii) Circulars issued by the Board: [U/S 206]

To achieve consistency in the administration of the Income Tax Ordinance


and to provide guidance to taxpayers and officers of the Board, the Board
may issue circulars setting out the Board's interpretation of the Ordinance.
A circular issued by the Board shall be binding on all Income Tax Authorities
and other persons employed in the execution of the Ordinance, under the
control of the said Board other than Commissioners of Income Tax
(Appeals).
A Circular shall not be binding on a taxpayer.

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64 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.

65 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.
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.

66 Resale Price Method


Resale price method: [UR 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.

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Answers

67 Group Taxation and Pre Commencement Expenditure

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


Holding companies and subsidiary companies of 100% owned group may opt
to be taxed as one fiscal unit. In such cases, besides consolidated group
accounts as required under the Companies Ordinance, 1984, computation of
income and tax payable shall be made for tax purposes.
The companies in the group shall give irrevocable option for taxation as one
fiscal unit.
The group taxation shall be restricted to companies locally incorporated under
the Companies Ordinance, 1984.
The relief under group taxation would not be available to losses prior to the
formation of the group.
The option of group taxation shall be available to those group companies
which comply with such corporate governance requirements and group
designation rules or regulations as may be specified by the Securities and
Exchange Commission of Pakistan from time to time and are designated as
companies entitled to avail group taxation.
Group taxation may be regulated through rules as may be made by the
Board.
(ii) Pre-commencement expenditure: [U/S 25(5) read with Part III of the Third
Schedule]
Pre-commencement expenditure means any expenditure incurred before the
commencement of a business wholly and exclusively to derive income
chargeable to tax, including the cost of feasibility studies, construction of
prototypes, and trial production activities, but shall not include any expenditure
which is incurred in acquiring land, or which is depreciated or amortised under
section 22 or 24.
A person shall be allowed a deduction for any pre-commencement expenditure
in accordance with the following:
Pre-commencement expenditure shall be amortized on a straight-line basis at
the rate of 20%.
The total deductions allowed in the current tax year and all previous tax years
in respect of an amount of pre-commencement expenditure shall not exceed
the amount of the expenditure.
No deduction shall be allowed in the manner as mentioned above, where a
deduction has been allowed under another section of the Income Tax
Ordinance, 2001 for the entire amount of the pre-commencement expenditure
in the tax year in which it is incurred.

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68 Sweet Limited (SL) Advance Tax and Default Penalty

Incidence of further tax liability: [U/S 147 and 205(1B)]

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.

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 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 2016.
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 April 2016) to (30 June 2017) (91 days +
365 days) 456 days

Rate of default surcharge 12% pa

Amount of default surcharge


(from 01/04/2016 to 30/06/2017) 6,250,000 x 12% x 456/366 =
Rupees 936,986

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Answers

69 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.

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.

70 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.

71 Disposal of Business by AOP to Wholly Owned Company

Disposal of business by association of persons to wholly-owned company.[U/S


96(1)]
(1) Where a resident association of persons disposes of a business of the association
to a resident company, no gain or loss shall be taken to arise on the disposal if the
following conditions are satisfied, namely:
The consideration received by the association for the disposal is a share or
shares in the company (other than redeemable shares);
the association must own all the issued shares in the company immediately
after the disposal;

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each member of the association must have an interest in the shares in the
same proportion to the members interest in the business assets immediately
before the disposal;
the company must undertake to discharge any liability in respect of the assets
disposed of to the company;
any liability in respect of the assets disposed of to the company must not
exceed the associations cost of the asset at the time of the disposal;
the fair market value of the share or shares received by the association for the
disposal must be substantially the same as the fair market value of the assets
disposed of to the company, as reduced by any liability that the company has
undertaken to discharge in respect of the assets; and
the company must not be exempt from tax for the tax year in which the
disposal takes place.

72 Mr. Hoshyar - Penalty


(i) Offences and penalties: [U/S 182(1)]
Where a person fails to furnish a return of income that must be submitted by him,
within the due date. Such person shall pay a penalty equal to 0.1% of the tax
payable in respect of that tax year for each day of default subject to a maximum
penalty of 50% of the tax payable provided if the penalty is less than Rs. 20,000
or no tax is payable such person shall pay a penalty of Rs. 20,000. Therefore,
Mr. Hushyar will be liable for penalty as calculated below:

Tax payable Rs. 2,173,000


No. of days of default (31+27) 58
Rate of penalty for each day of default 0.1%
Amount of penalty (2,173,000 x 0.1% x 58) Rs. 126,034
Maximum amount of penalty is 50% of tax payable Rs. 1,086,500
Minimum amount of penalty R 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.

73 Advance Ruling

Advance Ruling: [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.

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74 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:
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
If the tax payable for a tax year on due date for furnishing the taxpayers return of
income has not been paid.

75 Rejection of Reward to Whistle-Blower

Rejection of reward to Whistleblowers: [U/S 227B(3)]


The claim for reward by the whistleblower shall be rejected, if:
The information provided is of no value;
The Board already had the information;
The information was available in public records; or
No collection of taxes is made from the information provided from which the
Board can pay the reward.

76 Imputable Income, Pakistan Mercantile Exchange

Imputable income: [U/S 2(28A)]


Imputable income in relation to an amount subject to final tax means the income which
would have resulted in the same tax, had this amount not been subject to final tax.
Pakistan Mercantile Exchange : [U/S 2(42A)]
PMEX is the abbreviation for Pakistan Mercantile Exchange Limited a futures
commodity exchange company incorporated under the Companies Ordinance, 1984
and is licensed and regulated by the Securities and Exchange Commission of
Pakistan.

77 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-SALES TAX-RULES

78 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:

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.

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79 Withholding agents

Withholding agents:

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.

80 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.

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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.

81 Consideration in Kind-Supply

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:

Tameer Limited (TL) would follow the following procedure:

(i) TL shall issue a Debit Note (in duplicate) in respect of Iron Bars supplied to it by
Folad Limited (FL), indicating the quantity being returned, its value determined
on the basis of the value of Iron Bars as shown in the tax invoice issued by FL
and the amount of related sales tax paid thereon, as well as the following,
namely:

Name and registration number of the recipient (i.e. TL);

Name and registration number of the supplier (i.e. FL);

Number and date of the original sales tax invoice;

The reason of issuance of the Debit Note; and

Signature and seal of the authorized person issuing the note.

(ii) The original copy of the debit note shall be sent to FL and the duplicate copy shall
be retained by TL for record.

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Answers

82 Stock Acquired Before Registration

(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 2017.

In case of locally purchased packed dates: 41,325

(458 packets of dates purchased on March 28, 2017)

In case of imported coffee: 39,900

(42 kg of coffee imported on February 25, 2017)

81,225

83 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.

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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,
Sales Tax Special Procedure Rules, 2007]

84 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.

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Answers

85 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.

86 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 Board, after receipt of the recommendations from the e-declaration


Administrator, may appoint the applicant as an e-intermediary and issue him a
unique user identifier, subject to such conditions, restrictions and limitations, as
may be prescribed.

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(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

(a) Failed to comply with any of the conditions prescribed by the


Board; or

(b) Acted in contravention of any of the provisions of the Act or


these rules; or

(c) Failed to take adequate measures for security and


confidentiality of the Unique User Identifier; or

(d) 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

87 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.

88 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 persons 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)

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89 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%).
(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.

90 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 2015, the 180 days would expire on 2 June
2016. Therefore, AL cannot issue the credit note after 2 June 2016 unless the
collector, at ALs request, giving reasons in writing, extend the period of 180 days by a
further 180 days.

91 Time of Supply, CREST, Supply Chain

(i) Time of supply: [U/S 2(44)]

Time of supply, in relation to,-

a supply of goods, other than under hire purchase agreement, means the
time at which the goods are delivered or made available to the recipient of
the supply or the time when any payment is received by the supplier in
respect of that supply, whichever is earlier;

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Answers

A supply of goods under a hire purchase agreement, means the time at


which the agreement is entered into; and

Services, means the time at which the services are rendered or provided;
Provided that in respect of any of the above cases, where any part payment
is received,
For the supply in a tax period, it shall be accounted for the return for that
tax period
In respect of exempt supply, it shall be accounted for in the return for the
tax period during which the exemption is withdrawn from such supply.
(ii) CREST: [U/S 2(5AC)]

Crest means the computerized program for analyzing 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.

92 Scope of Special Audit (ST-Rules)

Scope of special audit: [U/R 42 of Sales Tax Rules, 2006]


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

(i) Whether the records, tax invoices and monthly returns have been maintained,
issued or furnished correctly by the registered person; and

(ii) Whether the monthly returns furnished by the registered person correctly reflect
that-

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

All input tax, output tax and the net amount of sales tax payable or
refundable, as the case may be, are in accordance with the provisions of the
Sales Tax Act and are duly substantiated by the records required to be
maintained for the purpose.

93 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;

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Provided that the Board may by notification in the official gazette, exempt any
transaction or transactions from the provision of this section.

(ii) Change in the rate of tax [U/S 5]

If there is a change in the rate of tax

Taxable supply made by a registered person shall be charged to tax at such


rate as is in force at the time of supply;

Imported goods shall be charged to tax at such rate as is in force;

In case the goods are entered for home consumption, on the date on
which a goods declaration is presented under section 79 of the
Customs Act, 1969; and

In case the goods are cleared from warehouse, on the date on which a
goods declaration for clearance of such goods is presented under
section 104 of the Customs Act, 1969;

Provided that where a goods declaration is presented in advance of the


arrival of the conveyance by which the goods are imported, the tax shall be
charged as is in force on the date on which the manifest of the conveyance
is delivered:

Provided further that if the tax is not paid within seven days of the
presenting of the goods declaration under section 104 of the Customs Act
the tax shall be charged at the rate as is in force on the date on which tax is
actually paid.

94 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;

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(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.

95 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.

96 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.

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Composition of the committee: [U/S 47A(2)]


The committee appointed by the Board for the resolution of dispute would consist of
the following:
An officer of Inland Revenue not below the rank of an Additional Commissioner
and
Two persons from the notified panel consisting of:
retired Judges not below District and Sessions Judge,
chartered or cost accountants,
advocates,
representatives of trade bodies or associations, or
any other reputable taxpayers

97 Similar Supply Open Market Price, Special Returns

(i) Similar Supply: [U/S 2(31)]

Similar supply in relation to the open market price of goods means any other
supply of goods which closely or substantially resembles the characteristics,
quantity, components and materials of the aforementioned goods.

(ii) Special Returns: [U/S 27]

In addition to the return specified under section 26

A person registered under the Sales Tax Act, 1990 shall furnish special
return within such date and in such form indicating information such as
quantity manufactured or produced, purchases made, goods supplied or
payment of arrears made, etc., for such period as the Board may, by a
notification in official gazette, specify; and

The Commissioner may require any person whether, registered or not, to


furnish a return whether on his own behalf or as an agent or trustee in a
prescribed form and such person shall furnish the return not later than the
date specified in this regard.

98 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.

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(ii) Exemption of tax not levied or short levied as a result of general practice
[U/S 65]
Notwithstanding anything contained in the Sales Tax Act, 1990 if in respect of
any supply the Federal Government is satisfied that inadvertently and as a
general practice:
(a) Tax has not been charged in any area on any supply which was otherwise
taxable, or according to the said practice the amount charged was less than
the amount that should have actually been charged;
(b) The registered person did not recover any tax prior to the date it was
discovered that the supply was liable to tax; and
(c) The registered person started paying the tax from the date when it was found
that the supply was chargeable to tax;
It may, by a notification in the official Gazette, direct that the tax not levied or
short levied as a result of that inadvertent practice, shall not be required to be
paid for the period prior to the discovery of such inadvertent practice.

99 Registration of Retailers

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.

100 Registration of Retailers

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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101 Non- Active Taxpayer

Non-active tax payer: [U/S 2(1)]

A registered person who falls in any of the following categories is regarded as a non-
active tax payer:

Who is blacklisted or whose registration is suspended or is blocked;

Who fails to file the return by the due date for two consecutive tax periods;

Who fails to file an Income Tax return u/s 114 or statement under section 115, of
the Income Tax Ordinance, 2001, by the due date; and

Who fails to file two consecutive monthly or an annual withholding tax statement
under section 165 of the Income Tax Ordinance, 2001.

Consequences faced by Non-active taxpayer:

A non-active taxpayer shall not be entitled to:

File goods declaration for import or export;

Issue sale tax invoices;

Claim input tax or refund; or

Avail any concession under the Sales Tax Act or Rules made there under.

No person, including government departments, autonomous bodies and public


sector organisations, shall make any purchases from a non-active tax payer.

In case of entry of an invoice issued by a non-active taxpayer by any registered


buyer in Annexure-A of his return, a message shall appear to the effect that the
supplier is a non-active taxpayer and no input tax credit shall be admissible
against such invoice.

102 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.

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103 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:

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


In the course of an economic activity, including its commencement or termination
of the activity.
Explanation:

The above deals with services provided by registered persons, regardless of whether
those services are provided to resident persons or non-resident persons.

104 Mr. Munaf - Refund

Computation of refund: [U/S 10]

Rupees

Amount of refund 75,000

Add: Additional amount due to delayed refund: 658


W.1

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 15-9-2016] [U/S 29-10-2016
10(1)]

Number of days delayed [30-10-2016 to 30-11-2016] 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-FED ETC-RULES

105 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)]

106 Applicable Value and Rate of Duty, Supply


Applicable value and rate of duty: [U/S 10]
The value and the rate of duty applicable to any goods or services shall be the value,
retail price, tariff value and the rate of duty in force.
In the case of goods, on the date on which the goods are supplied for export or for
home consumption;
In the case of services, on the date on which the services are provided or
rendered; and
In the case of goods produced or manufactured outside the areas to which this
Act has been applied and brought to such areas for a sale or consumption
therein, the date on which the goods are brought to those areas.
Supply: [U/S 2(23a)]
Supply includes sale, lease or other disposition of goods and shall include such
transaction as the Federal Government may notify in the official Gazette from time to
time.

107 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:

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(i) Records of clearances and sales made indicating the description, quantity and
value of goods, name and address of the person to whom sales were made
and the amount of the duty charged;
(ii) Records of goods purchased showing the description, quantity and value of
goods, name, address and registration number of the supplier and the amount
of the duty, if any, on purchases;
(iii) Records of goods cleared and sold without payment of duty;
(iv) Records of invoices, bills, accounts, agreements, contracts, orders and other
allied business matters;
(v) Record relating to gate passes, inward or outward, and transport receipts;
(vi) Records of production, stocks and inventory;
(vii) Records of imports and exports; and
(viii) Such other records as may be specified by the Board.

108 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.

109 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.

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110 Person liable to 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.

111 Alternative Source

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

112 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.

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113 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.

114 Due Date and Duty Due

(i) Due date: [Section 2(8a)]


In relation to furnishing a return under the FEA, 2005, means the 15th day of the
month following the end of the month, or such other date as 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;
A registered person is found to have issued false invoices; or
Evaded duty; or
Has committed any offence or irregularity to evade duty; or
Avoid his obligations under the Act or the Rules
He may, after confirming the facts and veracity of the information and giving
opportunity to such person to clarify his position, suspend his registration.

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115 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.
(i) KIBOR: [U/S 2(15a)]
It means Karachi Inter-Bank Offered Rate prevalent on the first day of each
quarter of the financial year.

116 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 there under, 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
there under:

Provided that no penalty under this Act or rules made there under 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;

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(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.

117 Cottage Industry

Registration: [U/S 13]


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.

118 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:
Any person who employs hired labour in the production or manufacture of
goods; or
Any person who engages in the production or manufacture of goods on his
own account if such goods are intended for sale: and
Any person who, whether or not he carries out any process of manufacture
himself or through his employees or any other person, gets any process of
manufacture carried out on his behalf by any person who is not in his
employment.
Provided that any person so dealing in goods shall be deemed to
have manufactured for all purposes of this Federal Excise Duty Act, such
goods in which he deals in any capacity whatever;
(ii) Sales tax mode: [U/S 2(21a)]
Sales tax mode means the manner of collection and payment under the Sales
Tax Act, 1990, and rules made there under, 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 there under shall, mutatis mutandis, apply to the excise duty so
chargeable.

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119 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 from the
Commissioner concerned is obtained.

120 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.

121 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.

122 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 there under, subject to the conditions, limitations and restrictions
prescribed under section 11 of the Act.

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123 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.

124 Circumstances and Procedure of De-registration


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

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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.

Practice Kit 178 The Institute of Chartered Accountants of Pakistan