Ans-1
Name of Taxpayer : Mr. Ahmed
National Tax Number : xxxxxxx
Tax Year Ended : June 30, 2010
Tax Year : 2011
Personal Status Individual - Salaried
Residential Status : Resident
Marks
Rs.
Basic salary 329,640 (0.5)
House rent 148,344 (0.5)
Bonus 54,940 (0.5)
Utilities 32,964 (0.5)
Medical allowance (N-6) 18,000 (0.5)
Cost of living allowance 49,452 (0.5)
Leave encashment 29,668 (0.5)
Company car allowance (5% of Car Value ) (N-1) 60,000 (0.5)
Wages paid to the driver (N-8) 72,000 (0.5)
Interest free loan (500,000 x 13%) (N-9) 65,000 (0.5)
Total salary income 860,008
Capital gain (25,000 x 75%) (N-7) 18,750 (0.5)
Total income 878,758
Less : Zakat paid (N-3) (100,000) (0.5)
Donation (N-4) (50,000) (0.5)
Taxable income 728,758 (0.5)
Tax liability before adjustment (7.50% on Rs.728,758) 54,657 (1.0)
Tax credit for shares purchased (N-2) (5,466) (0.5)
Tax liability 49,191 (1.0)
Notes: (1.0)
N-1 Car is being used for official and personal purposes. Under such a case 5% of the fair value of the car
shall be included in the taxable income:
1,200,000 x 0.05 = Rs.60,000
N-2- Tax credit for purchase of shares: Tax credit = (A/B)xC
A = Tax before any tax credit (1.0)
B = Taxable income
C = Lesser of:
(i) Amount of investment (cost of acquisition shares i.e., Rs.250,000)
(ii) Rs.300,000
(iii) 10% of taxable income i.e., Rs.728,758
Therefore, tax credit=(54,657/723,758)x72,876 = 5,466
N-3 Zakat paid to an approved institution is deductible from taxable income. (1.0)
N-4 Donation paid to an approved institution specified in Clause (61) of Part-1 of Second Schedule is (1.0)
deductible from taxable income.
N-5- No treatment for donation to un-approved institution. (1.0)
N-6:
Medical allowance is exempt up to 10% of basic salary:
Rs.
Basic salary paid (27,470 x 12) 329,640
10% of basic(329,640 x 10%) 32,964
Medical allowance paid (4,247 x 12) (50,964)
Taxable medical allowance 18,000
N-7: (1.0)
Capital gain on shares of private limited company is taxable @ 75% of the gain if shares are retained for
more than one year.
N-8: (1.0)
Wages paid to domestic servant provided by the employer is fully taxable.
N-9: (1.0)
If interest free is provided by the employer, the amount of interest calculated @ benchmark rate (13% for
tax year 2011) shall be taxable.
Ans-2
Mr. Qamar shall be entitled to a tax credit in respect of any sum paid in the tax year as a donation to -
(i) Any board of education or any university in Pakistan established under a Federal or a Provincial law;
(ii) Any educational institution hospital or relief fund established to run in Pakistan by Federal
Government or a Provincial Government or a local authority; or
(iii) Any non-profit organization.
The amount of Mr. Qamar’s tax credit allowed for the tax year shall be computed according to the following
formula, namely:-
(A / B) × C
A is the amount of tax assessed to him for the tax year before allowance of any tax credit
B is his taxable income for the tax year; and
C is the lesser of –
(i) the total amount of donations
(ii) thirty per cent of the taxable income of the person for the year
The benefit of a cash donation shall be allowed only if it is paid by a crossed cheque.
Ans.3
a) How an undertaking can be classified as an Industrial Taking under the Income Tax Ordinance (2001).
Ans:(Sec-{2(29B)} (05)
b) The law requires that notice, order or requisition should be served by the tax authorities to a person
for certain purposes. under the following cases, when it shall be considered that the notice has been
served; (04)
i) Resident individual & Non resident individual Ans:{Sec(218(1)&(1a)}
ii) Any other person Ans:{Sec-218(2)}
Ans.4
Mr Shahid Accounting year ended 30 June 2010 Tax year 2010
(a) Computation of taxable income
RS.
Taxable capital gain on:
Sale of antique vase (Note 1) 2.0
412,500
Sale of shares of KLM (Pvt) Ltd (Note 2) 2.0
40,000
Total taxable gains for the year 452,500
Set off of brought forward losses (Note 3) 2.0
(90,000)
Taxable income 342,500
Notes
Note 1
Computation of capital gain on the vase is as under:
Rs. Rs.
Consideration received 800,000
Less cost
(i) Purchase price of vase [in 2001] 250,000
2
(ii) The commission paid Rs. 75,000 is not allowable as it was
paid in cash [s.37(4)(b)] ,,,,,,,,0,
Total cost (250,000)
Capital gain 550,000
The taxable gain will be reduced to 75% [Rs. 412,500] as the vase was sold after one year.
Note 2
Although the shares were purchased for Rs. 80,000 (Rs. 10 per share) the taxation officer treated the
transaction as a non-arm's length transaction and determined the sale price in the hands of Mr Shahid's
brother as Rs. 15 per share, thus Rs. 120,000 will be taken as the purchase price to Mr Shahid [s.78]. Since the
period of holding was less than a year the full gain is taxable.
Rs.
Consideration received 8,000 shares at Rs. 20 per share 160,000
Cost of the shares (120,000)
Taxable capital gain 40,000
Note 3
(i) Business loss Rs. 100,000
The brought forward business loss can be set off only against the business income of the succeeding six tax
years. Hence it is inadmissible as there is no business income. [ss.56 & 58]
(ii) The loss under the head 'Income from other sources' cannot be brought forward for tax purposes.
[s.57]
(iii) Capital losses
(a) Since the capital gains on listed shares are not taxable, any capital loss on their disposal is
also not allowable. [s.38(2)]
(b) The capital loss (Rs. 90,000) on account of the sale of shares in a private limited company
can be carried forward for up to six succeeding tax years after the year in which it is determined
and set off against future capital gains. The loss for the tax year 2007 can therefore be claimed
against the capital gains of the tax year 2010. [s.59]
Capital gains or losses not included in the computation of capital gains
1. Disposal of car 1.0
Although on the basis of the given cost of the car and the fair market value at the date of disposal
of the car, there is a loss of Rs. 200,000, the loss is not recognised as the car is for personal use
and does not fall within the definition of a capital asset. [s.37(5)]
2. Sale of shares in Innovation Ltd 1.0
A gain on account of the sale of shares in a public company [as defined in s.2(47)] is exempt from
tax [Clause (110) of part I of the Second Schedule to the Income Tax Ordinance, 2001]. A company
whose shares are listed on any registered stock exchange in Pakistan is a public company. [Listing
on all stock exchanges is not the requirement.] Therefore the capital gain of Rs. 300,000
computed as below is exempt from tax.
Rs.
Consideration received from sale of 5,000 shares 800,000
Cost [deemed under s.37(4A)] at Rs. 100 per share (500,000)
Exempt capital gain 300,000
3. Capital loss on sale of necklace 1-0
Although there was a loss of Rs. 150,000 [Rs. 100,000 - Rs. 250,000], a capital loss is not allowable
on jewellery. [s.38(5)(b)]
4. Sale of farm house 1-0
The definition of a capital asset does not include an immovable property. Therefore, no capital
gain arises on the sale of the farm house. [s.37(5)(c)]
5. Taxable gain on sale of plant 1-5
No gain or loss shall be recognised where the disposal of an asset is by reason of the compulsory , ,1,8
acquisition of the asset under any law where the consideration received for disposal is reinvested
by the recipient in an asset of a like kind within one year of the disposal. All the conditions in this
case are fulfilled. Therefore, no gain or loss is recognised. [s.79(1)(d)]
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Q.6
(a) The person deducting or collecting the tax at source shall deposit the amount to the Govt. treasury
within the prescribed period. If the required person makes default, then how the Income Tax
Ordinance (2001) will treat him? Ans:(Sec-161,165) (05)
(b) A company shall also pay advance tax even in the absence of last assessed income. Then how will you
compute the advance tax liability of the Company.Ans:(Sec-147(A)) (03)
Q.7
(a)
i. A taxpayer can be represented by the following authorized representatives:
☺ A relative of the taxpayer;
☺ A full-time current employee of the taxpayer;
☺ any officer of a scheduled bank with which the taxpayer maintains a current account or has other
regular dealings
☺ Any legal practitioner entitled to practice in any Civil Court in Pakistan;
☺ Any accountant; or
☺ Any income tax practitioner.
ii. Following persons shall not be entitled to represent a taxpayer in a proceeding against any Income
Tax Authority:
☺ A person removed or dismissed from service of the Income Tax Department (ITD).
☺ A person who has resigned from his service in the ITD and was employed in the ITD for two or more
years, shall not be entitled to represent a taxpayer before the expiry of two years from the date of
his resignation.
☺ A person who retired from ITD shall not be entitled to represent a taxpayer up to one year, if he had
made or approved any order of assessment, refund or appeal within one year of the date of
retirement.
☺ An insolvent person.
☺ A person who has been convicted of an offence in relation to any income tax proceedings for such
period as the Commissioner determines.
(b)
i. Where the Commissioner is of the view that Mr. is required to file the return of income but has failed
to do so, the Commissioner is empowered to issue a notice requiring him to furnish the return of
income. However, he can issue such notice in respect of the last five tax years and therefore issuance
of notice for tax year 2003 cannot be justified. Moreover, he should have allowed a minimum of 30
days for filing the return.
ii. The Commissioner may extend the timeframe for furnishing the return, if he is satisfied that the
applicant is unable to furnish the return of income by the due date because of:
■ his absence from Pakistan;
■ sickness or other misadventure; or
■ any other reasonable cause
However, an extension of time shall not exceed 15 days from the due date for furnishing the return of income
unless there are exceptional circumstances justifying a longer extension of time.
Ans.8
(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.
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Ans-9
Zubair Enterprises Ltd
(a)
Sales tax payable/(refundable) for June 2010
Output tax Rs.
On sale of taxable goods in Pakistan (Note 1)
Rs. 45,000,000 x 16% 7,200,000 0.5
On sale of goods exported to Saudi Arabia
Rs. 18,000,000 x 0% 0 0.5
On goods given to the Chief Executive free of cost (Note 2)
Rs. 100,000 x 16% 16,000 0.5
Total output tax 7,216,000
Input tax
Purchases of raw material for manufacturing goods (see working) 6,494,400 1.5
On purchase of new machinery (Note 3)
(10,000,000 x 16/116 x 1/12) 114,943 0.5
Total input tax 6,609,343
Tax payable/(refundable)
Output tax 7,216,000
Input tax (6,609,343)
Input tax pertaining to November, 2009 (Note 4) 0
Tax payable 606,657 0.5
Working:
A registered person is not allowed to adjust input tax for a tax period in excess of 90% of the output tax for
that tax period. [s.8B]
Rs.
On payment for purchases of raw material for manufacturing goods
(exports as well as local supplies) [Rs. 58,000,000 x 16/116] 8,000,000
Restricted to 90% of output tax for June 2010 (90% of Rs. 7,216,000) 6,494,400
Tutorial note: the balance of Rs. 1,505,600 (8,000,000 - 6,494,400) would be allowed as input tax
adjustment/refund in August 2010, the second month following the end of the financial year ending on 30
June 2010, subject to the fulfilment of certain conditions.
Marks
Explanations:
Note 1
Total supplies other than exports are Rs. 45,000,000. The value of a supply can be reduced by a trade
discount only if:
(i) the trade discount is in conformity with the normal business practices; and
(ii) is shown on the sales tax invoices.
In the instant case the second condition is not fulfilled; therefore, the value of the supply is not 1.0
reduced for the purposes of charging sales tax. [s.2(46)(b)]
Note 2
The goods given to the chief executive are not exempt but fall within the definition of a supply and 0.5
are liable to payment of sales tax.
Note 3
The input tax on the Rs. 10,000,000 paid for the acquisition of the machinery is adjustable in 12 equal 0.5
monthly instalments starting from the month in which the machine is acquired. [First proviso to s.8B]
Note 4
The input tax of Rs. 100,000 pertaining to the raw material purchased in November 2009 cannot be 1.0
claimed in June 2010 as it is older than six months and so ineligible for adjustment. It could only have
been claimed up to May 2010. [First proviso to s.7(1)]
7
(b) Tax liability on behalf of a supplier of goods
A registered person receiving a supply from another registered person can be held liable to pay tax on 1.5
the supplies received where the person receiving the supplies has knowledge or reasonable grounds
5
to suspect that the person making the supplies has not paid tax in respect of:
- current supplies;
- previous supplies; or
- subsequent supplies.
The above liability shall be joint and several with the person making supplies. [s.8A]
Zubair Enterprises Ltd (ZEL) should avoid dealing with this supplier as it is exposing ZEL to the risk of a 0.5
tax liability to the extent of any non-payment of tax on the supplies made to ZEL.
However, the Federal Bureau of Revenue (FBR) can notify in the Official Gazette certain transactions 1.0
on which this liability will not arise. If the transactions made by ZEL with the supplier are included in
such notification, there would be no liability on ZEL on this basis.
3
10
Ans.10 (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.
6