TAXATION

Suggested Answers
Intermediate Examinations – Autumn 2009
Ans.1 Mr. Zulfiqar
Computation of Taxable Income
for Tax Year 2009
Rupees
Income from salary
- Basic salary for nine months (Rs. 280,000 x 9) 2,520,000

- Medical allowance (Rs. 45,000 x 9) 405,000

Less: Exempt up to 10% of basic salary (252,000) 153,000

- Utilities allowance - fully taxable (Rs. 45,000 x 9) 405,000

- Cost of living allowance - fully taxable (Rs. 25,000 x 9) 225,000

- Rent free accommodation [(45% x Rs. 2,520,000) = Rs. 1,134,000] or

market value [Rs. 120,000 x 9 = Rs. 1,080,000] whichever is higher 1,134,000

- Tax borne by the employer 200,000

- Gratuity (Rs. 2,660,000 - Rs. 75,000) 2,585,000

- Pension received - taxable lower of the following

• from MPL (Rs. 50,000 x 3) 150,000
• from multinational company (Rs. 12,000 x 12) 144,000 144,000

Taxable income 7,366,000

Computation of tax liability

Tax liability - Income from salary (lower of the following)
- Tax liability at applicable rate i.e. @ 19% 1,399,540
- Tax liability at marginal relief formula (W-1) 2,531,350 1,399,540

Less: Tax credit for investment in shares restricted to Rs. 300,000

300,000 x 19% (57,000)

Less: Tax credit relating to mark up on housing loan

250,000 x 19% (47,500)

Tax liability - Income from property

Tax liability = 12,500 + [(Rs. 600,000 - 400,000) x 10%)] 32,500
Total tax liability 1,327,540

W-1: Tax liability under marginal relief formula Rupees

Maximum amount taxable in last bracket 4,550,000

Tax on above (Rs. 4,550,000 x 18.5%) 841,750

60% of incremental amount (60% x (7,366,000 - 4,550,000)) 1,689,600
Tax liability under marginal relief formula 2,531,350

Inherited plot
Immovable property is not covered by the definition of “capital asset” and, therefore, gain on disposal
of the same is not chargeable to tax.

Loss on sale of a painting

Under the ITO-2001, loss on sale of painting is not allowed as adjustment against any head of income.
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 TAXATION
Suggested Answers
Intermediate Examinations – Autumn 2009

Ans.2 (a) (i) If the company is private limited company

Tax implications on shareholders
The term dividend includes any payment by a private limited company by way of loan to its
shareholder for the individual benefit of shareholder to the extent of accumulated profits.
Accordingly, amount received by the shareholder shall be construed as dividend in the hands
of the shareholder and taxable under the provisions of the ITO-2001.
Tax implications on private limited company
Being a resident company, it is responsible to deduct withholding tax on the payment of
dividend at the rates specified in the First Schedule.

(ii) If the company is an unlisted public company, the payment made to the shareholders will
not be construed as dividend. So no tax implication on the company or the shareholder.

(b) Rules relevant to foreign tax credit are as follows:

(i) The amount of tax credit available to a resident taxpayer will be lesser of:
 Income tax paid abroad; and
 Pakistan tax payable on foreign-sourced income.
(ii) For calculating foreign tax credit, the amount of Pakistan tax on foreign-sourced income is
arrived at by using the average rate of tax applicable to taxpayer in Pakistan for the relevant
tax year.
(iii) Tax credit is not allowed for tax paid outside Pakistan on foreign-sourced income which is
not chargeable to tax or is exempt from tax in Pakistan.
(iv) The amount of tax credit is calculated separately for taxable income under each head of
income.
(v) Foreign tax credit is given only if foreign income tax is paid within two (02) years after the
end of the tax year in which related foreign income was derived. Credit is not given if
foreign tax is paid after the period of two (02) years.
(vi) While determining tax liability for a tax year, the amount of foreign tax credit is reduced
from the gross tax liability before reduction for any other tax credits, such as, those relating
to donations, investments and income tax paid in Pakistan.
(vii) In case credit for foreign tax is not fully utilized in the year it is generated, the excess
amount is neither refundable nor can it be carried to another tax year.

Ans.3 (a) A tangible movable or immovable asset will be considered a depreciable asset when all the
following conditions are met:
 It has a normal useful life exceeding one year;
 It is likely to lose value as a result of normal wear and tear, or obsolescence; and
 It is used wholly or partly by the person in deriving income from business chargeable to tax.

(b) Rs. in million

(i) Sale proceeds (equivalent to cost) 100
Less: Cost of land and WDV of building (100 - 10) (90)
Gain on disposal 10

(ii) Cost (equivalent to sale proceeds) 25

Less: WDV of plant (18)
Gain on disposal 7

(iii) Sale proceeds 2.50

Less: WDV at beginning of the year (2.40)
Less: Depreciation not allowed in tax year 2008 [(2.40 ÷ 0.80) – 2.40] x 40% (0.24)
Loss on disposal (0.14)

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 TAXATION
Suggested Answers
Intermediate Examinations – Autumn 2009

Ans.4 (a) • The Commissioner or the Commissioner (Appeals) or the Appellate Tribunal may, by an order
in writing, amend any order passed by him or it to rectify any apparent mistake:
o on his or its own motion; or
o brought to his or its notice by a taxpayer.

• If the result of any rectification is likely to adversely affect the taxpayer in any manner, an
order will not be rectified unless the taxpayer is given a reasonable opportunity of being heard.

• Where a mistake apparent from record is brought to the notice of the designated tax authorities
and he or it does not take a corrective order before expiry of the financial year next following
the date on which the mistake was brought to his notice, the mistake will be considered to have
been rectified.

• An order can be rectified for mistakes within five years from the date of the order.

(b) A person has been audited in a year shall not preclude the person from being audited again in the
next year where there are reasonable grounds for such audits, particularly having regard to the
following factors:
− The person’s history of compliance or non-compliance with this Ordinance;
− The amount of tax payable by the person;
− The class of business conducted by the person;
− Any other matter which in the opinion of the Commissioner is material for determination of
correct income.

So, the company may be selected for the second consecutive year for the audit.

Ans.5 (a) Since his stay in Pakistan during the tax year 2009 was not more than 183 days, he is considered
to be non-resident for this year.

However, he will stay more than 183 days during the tax year 2010, he will be treated as resident
for the year 2010.

(b) Amount in Taxable/ Taxable

Nature of income
Rupees exempt amount
Tax Year 2009
Pakistan source income 5,750,000 Taxable 5,750,000
Foreign source income 12,000,000 Exempt - Note 1
Taxable income 5,750,000

Tax Year 2010

Pakistan source income 17,250,000 Taxable 17,250,000
Foreign source income 3,000,000 Exempt - Note 2
Taxable income 17,250,000

Note 1
Since he is non-resident for the tax year 2009, only his Pakistan source income is taxable.

Note 2
Foreign source income of Mr. Abdullah is exempt from tax because:
• he is a resident individual in Pakistan solely by reason of the individual’s employment;
• he is present in Pakistan for a period or periods not exceeding three years. and
• his foreign source income was not received in Pakistan.

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 TAXATION
Suggested Answers
Intermediate Examinations – Autumn 2009

Ans.6 (a) Mr. Zia is the legal representative of his father within the meaning of the ITO-2001. He is liable
for:
• any tax that his father would have become liable for if he had not died; and
• any tax payable in respect of the income of his father’s estate.

However, Mr. Zia’s liability shall be limited to the extent to which his father’s estate is capable of
meeting the liability.

Any proceedings taken against his father before his death shall be treated as taken against him and
may be continued against him from the stage at which the proceedings stood on the date of his
father’s death.

Furthermore, any proceedings which could have been taken his father if he had survived may be
taken against him.

(b) Prescribed persons for the purpose of payment for supply of goods are as follows:
• The Federal Government.
• A company.
• An association of person constituted by law or under law.
• Foreign contractor or consultant.
• A consortium of joint venture.
• An association of person having annual turnover of fifty million rupees or above.

Ans.7 (a) The following registered persons shall apply for deregistration:
• Who ceases to carry on his business
• Whose supplies become exempt from tax

A registered person whose total taxable turnover during the last twelve months remain below the
limit may apply for deregistration.

The local Registration Office may de-register a person if that person fails to file tax return for six
continuous months.

(b) Procedure of de-registration

• The application for deregistration should be made to the Local Registration Office.
• Local registration office may recommend the same, to the Central Registration Office.
• The applicant shall have to discharge any liability that may be outstanding by filing a final
return.
• After making any necessary inquiries the person shall be deregistered.

(c) S. # Registration Reasons

required
(i) Yes All wholesalers must register irrespective of their total turnover.
(ii) No A retailer requires registration when his annual turnover exceeds Rs. 5
million.
(iii) Yes All importers must register irrespective of their total turnover.
(iv) No Since he has no input tax to claim, he will not opt for registration.
(v) Yes All distributors must register irrespective of their total turnover.
(vi) No A manufacturer being a cottage industry is not required to be registered if
its turnover is below Rs. 5 million in last twelve tax periods.

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 TAXATION
Suggested Answers
Intermediate Examinations – Autumn 2009

Ans.8 (a) (i) Where the buyer has claimed input tax credit in respect of supplies which have been
returned or whose value has changed, he shall reduce or increase the amount of input tax
by the corresponding amount as mentioned in Debit or Credit note, in the return for the
period in which the respective note was issued.

(ii) Where the supplier has already accounted for the output tax in the sales tax return for the
supplies against which debit note was issued subsequently, he may increase or reduce the
amount of output tax by the period in which the respective note was issued.

(iii) In case of return of supplies by an unregistered person, the adjustment as mentioned in (ii)
above can be made against the Credit Note issued by the supplier.

(iv) The adjustment which lead to reduction in output tax or increase in input tax can only be
made if the corresponding Debit or Credit Note is issued within 120 days of the relevant
supply. However, the Collector may extend the period of 120 days by a further 180 days, at
the written request of the supplier.

(v) Where the goods relating to a returned or cancelled supply are subsequently supplied with
or without carrying out any repairs, the supplier shall charge sales tax thereon in the normal
manner and account for it in this return for the period in which these goods were supplied.

(b) Mr. Asif

Computation of Sales Tax Liability
for the Tax Period August 2009

Rupees
Total output tax (W-1) 1,280,000
Allowable input tax (W-2) 1,152,000
Sales tax payable with return 128,000

Amount to be carried forward (Rs. 1,158,095 (A) – Rs. 1,152,000 (B)) 6,095

W-1: OUTPUT TAX

Supplies to registered person (Rs. 5,000,000 x 16%) 800,000
Supplies to unregistered person (Rs. 3,000,000 x 16%) 480,000
Export supplies -
Exempt supplies -
Total Output Tax 1,280,000

W-2: INPUT TAX

A - Total Input Tax
Purchase from registered person (Rs. 8m x 16%) x 19m / 21m 1,158,095
Purchase from unregistered person -
1,158,095
B - Maximum input tax credit allowed
Maximum input tax credit allowed Rs. 1,280,000 x 90% 1,152,000

Allowable input tax (Lower of A and B) 1,152,000

(THE END)

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