module c by kumeil


                                             Suggested Answers
                                  Intermediate Examinations – Autumn 2010

A.1                                            Mr. Zameer Ansari
                                    Computation of taxable income and tax thereon
                                               For the tax year 2010
      Income from salary
        Basic salary (Rs. 200,000 x 12)                                                           2,400,000
        Medical allowance (Rs. 30,000 x 12)                                                         360,000
        Utilities allowance (Rs. 10,000 x 12)                                                       120,000
        School fees (Rs. 15,000 x 12)                                                               180,000
        Rent free furnished accommodation (Rs. 2,400,000 x 45%)                                   1,080,000
        Car used for business purposes only                                                          -
        Car used for personal as well as business purposes (Rs. 1,800,000x5%                         90,000
        Payment to an approved pension fund                                                          -
        Leave encashment (on receipt basis)                                                          -
      Income from property
      Rental income                                                                                 264,000
      Less: Repair charges                                                                           -
      Add: Un-adjustable security deposits {132,000 (W-1) x 1/10}                                    13,200
      Capital gain
       Gain on sale of shares 15,000X (Rs. 48 – Rs. 42) x 75%                                         67,500
      Income from other sources
      Profit on bank deposit (under FTR)                                             Rs.750,000      -
      Total income                                                                                4,574,700
      Less: Zakat                                                                                 (250,000)
      Taxable income                                                                              4,324,700
      Less: Income to be taxed at separate rate
            Income from property                                                                  (277,200)
      Taxable income subject to normal tax rate                                                   4,047,500

      Computation of tax liability
      (A) Tax on Rs. 4,047,500 @ 18.5%                                                              748,788
      (B) Tax based on marginal relief formula                                      (W-2)           947,875

      Tax liability on income from salary (lower of A and B)                                        748,788
      Tax liability on income from property (Rs. 277,200 - 150,000) x 5%)                             6,360
      Tax liability on income from other sources (FTR)                                               75,000
      Total tax liability                                                                           830,148
      Less: Tax deducted at source
              On salary income                                                                    (650,000)
              On profit on debt                                                                    (75,000)
      Tax payable                                                                                   105,148
      W-1: Un-adjustable security deposits
      Received from new tenants                                                                    150,000
      Amount charged to tax in 2008 & 2009 (Rs. 90,000 x 2/10)                                     (18,000)
      W-2: Tax computation under marginal relief formula
      Maximum amount taxable in previous bracket                                                  3,550,000

      Tax on above (Rs. 3,550,000 x 17.5%)                                                          699,125
      50% of incremental amount (50% x (Rs. 4,047,500 - Rs. 3,550,000)                              248,750
      Tax liability under marginal relief                                                           947,875

                                                                                                  Page 1 of 6
                                              Suggested Answers
                                   Intermediate Examinations – Autumn 2010

A.2   (a)   The department may proceed to recover from the taxpayer the said amount by one or more of the
            following modes namely:

            (i)    attachment and sale of any moveable and immovable property of the taxpayer;
            (ii) appointment of a receiver for the management of the movable or immovable property of the
                  taxpayer; and
            (iii) arrest the taxpayer and his detention in prison for a period not exceeding six months.

      (b) An assessment order shall only be amended or amended assessment order shall only be further
          amended by the Commissioner of Income Tax, where on the basis of definite information acquired
          through an audit or otherwise, he is satisfied that:

            (i) any income chargeable to tax has escaped assessment; or
            (ii) total income has been under-assessed, or assessed at too low a rate, or has been the subject of
                  excessive relief or refund; or
            (iii) any amount under a head of income has been mis-classified.

            Further, the Commissioner may amend, or further amend, an assessment order, if he considers that the
            assessment order is erroneous in so far it is prejudicial to the interest of revenue.

A.3   (a)   When a person intends to make a payment to a non-resident person without deduction of tax, the
            person shall, before making the payment, furnish to the Commissioner a notice in writing setting out

            (i) the name and address of the non-resident person; and
            (ii) the nature and amount of the payment.

            The Commissioner on receipt of notice shall within thirty days, either

            (i) pass an order accepting the contention; or
            (ii) on reasonable ground to believe that non-resident person is chargeable to tax, make an order in
                 writing, directing the person making the payment to deduct tax from the payment at the specified

            The above procedure is not applicable to payment to non-resident on account of:

            (i)  import of goods where title to the goods passes outside Pakistan and is supported by import
            (ii) educational expenses remitted in accordance with the regulation of State Bank of Pakistan.

      (b) Following are the provisions regarding claiming foreign tax credit available to a resident taxpayer:
          (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)  The Pakistan tax payable in respect of foreign source income derived by a taxpayer in a tax year
                  shall be computed by applying the average rate of Pakistan income tax applicable to the
                  taxpayer for the year against the taxpayer’s net foreign source income for that year.
            (iii) The amount of tax credit is calculated separately for taxable income under each head of income.
            (iv) 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.
            (v) 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.

                                                                                                        Page 2 of 6
                                               Suggested Answers
                                    Intermediate Examinations – Autumn 2010

            (vi) 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.
            (vii) 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.

      (c)   (i)    Employee’s average rate of tax
                   The average rate of tax of an employee for a tax year is the ratio which is computed by dividing
                   the amount of tax to the taxable salary income of the tax year. It shall be computed in
                   accordance with the following formula:
                   A is the tax that would be payable if the amount referred to in component B of the formula
                       were the employee’s taxable income for that year; and
                   B is the employee’s estimated income under the head “salary” for that year.

            (ii)   Every employer shall, at the time of deducting tax on salary income, consider the following:

                      tax withheld from the employee under other heads during the tax year;
                      Any excess deduction or deficiency arising out of any previous deduction;
                      Failure to make deduction during the year;
                      Adjustment of admissible tax credits in respect of:
                        Amount given to charitable institutions
                        Investment in shares
                        Contribution to an approved pension fund
                        Profit on debt

A.4   (a) Public company means:
          (i) A company in which not less 50% of the shares are held by the Federal or Provincial
          (ii) A company in which not less 50% of the shares are held by a Foreign Government, or a foreign
                company owned by a foreign government;
          (iii) A company whose shares were traded on a registered stock exchange in Pakistan at any time in
                the tax year and which remained listed on that exchange at the end of that year;
          (iv) A unit trust whose units are widely available to the public and any other trust as defined in the
                Trusts Act, 1882.

            Private company means a company that is not a public company.

      (b) (i)      The firm cannot claim deductions on account of bad debts unless the following conditions are
                    the amount of debt was previously included in the person’s income from business chargeable
                       to tax;
                    the debt or part of the debt is written off in the accounts of the person in the tax year;
                    there are reasonable grounds for believing that the debt is irrecoverable.

            (ii)   Since the liability pertaining to the year 2006 has been charged/(added back) to tax therefore
                   subsequent payment thereof shall be allowed as a deduction, in the year in which the payment is
                   made i.e. 2009.

            (iii) The firm can claim the initial allowance against the imported used plant as:
                   it is used in Pakistan for the first time in a tax year.
                   it is used by the firm for the purposes of its business
                   it falls in the definition of eligible depreciable asset;

                                                                                                            Page 3 of 6
                                              Suggested Answers
                                   Intermediate Examinations – Autumn 2010

A.5   (a) As a legal representative, Mr. Hyder is liable for any tax, which would have been payable by his
          uncle, if he had not died. However, such liability is limited to the extent of Rs. 10 million i.e. value of
          his deceased uncle’s estate.

           Any proceeding taken against his uncle shall be continued against Mr. Hyder from the stage at which
           it stood on the date of his uncle’s date. Further, any proceeding which could have been taken against
           the deceased if he had survived may be taken against the legal representative.

      (b) A person should apportion the expenditure for the purpose of claiming deduction, where an
          expenditure relates to
          (i) the derivation of more than one head of income; or
          (ii) derivation of income comprising of taxable income and any class of income on which the tax
                collected at source is treated to be the final tax liability of the person
          (iii) the derivation of income chargeable to tax under a head of income and to some other purpose

A.6                                             Mr. Abdul Ghaffar
                                         Computation of Net Sales Tax Liability
                                             For the period August 2010
                                                                                                         Rs. in ‘000
                                                                              Gross         Taxable
                                                                                                         Sales Tax
                                                                              Value          Value
      Commercial imports @ 18% (10,000 x 1.15)                                   11,500        11,500          2,070
      Imports for domestic consumptions @ 16%                                    17,000        17,000          2,720
      Local purchases @ 16%                                                       8,000         8,000          1,280
      ( - ) Inadmissible import - exempt supplies – [W-1]                                                    (1,067)
      Input tax for the month                                                                                  5,003
      + previous month credit brought forward                                                                    365
      Accumulated credit                                                                                       5,368
      Domestic supplies of manufactured goods                                    22,000        22,000           3,520
      Exempt goods                                                                3,000         3,000          -
      *Supplies of imported goods                                                14,000        14,000           2,240
      Exports                                                                     5,000         5,000          -
      Debit for the month                                                                                       5,760

      *Admissible credit lower of accumulated credit, 90% of output tax
      for the month and debit for the month [5,368 or 5,184 (90% of 5,760)]                                    5,184

      Sales tax payable (5,760 – 5,184)                                                                           576
      Refund claim (Input consumed in export) [W-1]                                                               667

      Balance credit to be carried forward (5,368 – 5,184)                                                        184

                                                                                                          Page 4 of 6
                                               Suggested Answers
                                    Intermediate Examinations – Autumn 2010

      W-1: APPORTIONMENT OF INPUT TAX                                                         Taxable       Sales Tax
      Imports for domestic consumption                                                          17,000            2,720
      Local purchases                                                                            8,000            1,280
      Residual input tax                                                                                          4,000

      Total sales other than sales of commercial goods                                                           30,000
      Inadmissible input tax
       Exempt supplies (3,000 ÷ 30,000 x 4,000)                                                                    400
       Exports – note 2 (5,000 ÷ 30,000 x 4,000)                                                                   667
      Total inadmissible input tax                                                                                1,067

A.7   (a)   A registered person shall not be entitled to claim or deduct input tax paid on:
            (i) goods or services used or to be used for any purpose other than for taxable supplies made or to
                   be made by him; OR goods or services used or to be used for making the exempt goods
            (ii) any other goods which the Federal Government may, by a notification in the official Gazette,
            (iii) the goods which are subject to extra tax in addition to normal tax payable at 16%.
            (iv) fake invoices.
            (v) taxable goods or services which has not been deposited into government treasury by the
            (vi) purchases made by a registered person, who fails to furnish the information required by the
                   Board through a notification.
            (vii) purchases where payment has not been made through crossed cheque.
            (viii) vehicles falling in Chapter 87 of the 1st Schedule of the Customs Act, 1969.
            (ix) food, beverages, garments, fabrics, etcetera and consumption of entertainment.
            (x) gifts and give away.
            (xi) supplies used for specified goods if such good are supplied to unregistered person.

      (b)   A credit note can be issued within 180 days of the date of relevant supply. As the supply was made on
            February 15, 2010, the 180 days expired on August 13, 2010 . Therefore the credit note cannot be
            issued in the month of September 2010.

            However, the Collector , at the request of Rizwan Enterprise, extends the period for the submission of
            the credit note. The Collector has been empowered to extend the period of 180 days by a further 180
            days at the request of the supplier in writing giving reason for the desired extension in time.

      (c)   (i)      If there is a change in the rate of tax
                       a taxable supply made by a registered person shall be charged to tax at such rate as 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.
                             in case the goods are cleared from warehouse, on the date on which a [goods
                                 declaration] for clearance of such goods is presented.

                     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.
                     If the tax is not paid within seven days of the presenting of the [goods declaration] the tax
                      shall be charged at the rate as is in force on the date on which tax is actually paid.
                     If there is a change in the rate of tax during a tax period, a separate return has to be furnished
                      in respect of each portion of the tax period showing the application of different rates.

                                                                                                             Page 5 of 6
                                 Suggested Answers
                      Intermediate Examinations – Autumn 2010

(ii) Any person who has collected or collects any tax or charge, whether under misapprehension of
     any provision of the Sales Tax Act, 1990 or otherwise, which was not payable as tax or charge or
     which is in excess of the tax or charge actually payable and the incidence of which has been
     passed on to the consumer. Such person is required to pay the amount of tax or charge so
     collected to the Federal Government.

    Any amount payable to the Federal Government by virtue of the above shall be deemed to have
    been paid as an arrear of tax or charge payable under the Sales Tax Act, 1990 and shall be
    recoverable accordingly and no claim for refund in respect of such amount shall be admissible.

                                     (THE END)

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