TAXATION Suggested Answers Intermediate Examinations Spring 2010

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1 A.1 Computation of Taxable Income and Tax Liability of Association of Persons For Tax year 2010 Rupees Income from business Business loss for the year (1,500,000) Less: Income from property (1,502,500) Add: Inadmissible expenses Salary to Sohail 900,000 Salary to Khaled 600,000 Interest to Sohail 300,000 Interest to Khaled 300,000 Interest to Qazi 500,000 Taxable loss (402,500) Loss will be carried forward by the AOP itself so no impact on members. Computation of Taxable Income and Tax Liability of each Member Sohail Khaled Qazi Income under NTR Rupees Income from other businesses 800, ,000 Income from consultancy (940,000+60, ,000) ,000 Taxable income 800, , ,000 Divisible profit from another AOP (W-1) (Rs. 255,000 + [Rs. 112,500 40%]) 300,000 Income for rate purposes 800,000 1,200, ,000 Income tax (15%:25%:17.5%) 120, ,000 *148,750 Income tax payable u/s 88 by Khaled [Taxable income Total income] Income Tax) 225,000 Income under FTR Share of rental income 800, , ,000 Tax on rental liability 42,500 42,500 20,000 * The minimum tax liability in this case is Rs. 60,000. Since the liability under NTR exceeds the minimum tax, he needs to pay the difference amount.

2 A.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; 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 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. A.3 (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. (b) (i) 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. Where the Commissioner is of the view that Mr. Sami 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. ` 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.

3 A.4 (a) Taxpayer means any person who derives an amount chargeable to tax under the Income Tax Ordinance 2001, and includes - (i) any representative of a person who derives an amount chargeable to tax; any person who is required to deduct or collect tax; or (iii) any person required to furnish a return of income or pay tax; (b) (i) The management s point of view is not correct. Every company is liable to pay advance tax. In the absence of latest assessed turnover, the company shall estimate the amount of advance tax payable on the basis of quarterly turnover of the company. In case of non- payment of advance tax, the company is liable for additional tax at a rate equal to (KIBOR+3% per quarter) on the unpaid amount of tax computed for the period commencing on the date on which it was due and ending on the date on which it was paid or date on which the return of income for the relevant tax year was due whichever is earlier. In addition to this, the defaulter shall also be punishable on conviction with a fine or imprisonment for a term not exceeding one year or both. (c) (i) A person is not required to deduct tax if the vendor supplies the goods in the same condition in which they were imported. In view of the above provision and assuming that the importer had already paid tax at the import stage, ZEL was not required to deduct tax from the payment of Shahid & Co. The tax is required to be deducted on the gross amount of sales inclusive of sales tax. Therefore, ZEL is liable to pay the amount of tax not deducted and additional tax at KIBOR + 3% per quarter from the date ZEL failed to deduct the tax to the date the show cause notice was issued. (iii) Payments by way of advance are also liable for deduction of tax at the time payment is made. Therefore, ZEL is liable to pay the amount of tax not deducted and additional tax at KIBOR + 3% per quarter from the date ZEL failed to deduct the tax to the date the tax was paid. (iv) Commission paid to an employee falls under the definition of salary. Accordingly, ZEL was required to deduct tax on commission at the rate prevailing in respect of income from salary instead of deducting it at the rate of 10%. A.5 (a) A company shall be resident company in a tax year if: (i) it is incorporated or formed by or under any law in force in Pakistan. the control and management of the affairs of the company is situated wholly in Pakistan at any time in the year, or (iii) it is a Provincial Government or Local Authority in Pakistan. An association of persons shall be considered as resident if control and management of the affairs of association is situated wholly or partly in Pakistan at any point of time during the year. (b) The exceptions to the given rule are as follows: (i) 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. (iii) Any royalty or fees for technical services which are exempt from tax under the Income Tax Ordinance, 2001.

4 A.6 (a) Capital asset means property of any kind held by a person, whether or not connected with business but does not include - (i) any stock in trade (not being stocks and shares), consumable stores, or raw materials held for the purpose of business; any property with respect to which the person is entitled to deprecation deduction or amortization deduction; (iii) any immovable property; (iv) any movable property held for personal use by the person or any member of the person s family dependent on the person excluding capital assets specified in Section 38(5). (b) (i) Since gain on sale of shares of a listed company is exempt from tax, loss will be taken into account neither for setting off nor for carrying forward. It is a taxable gain. However, since Mr. Shahbaz held the shares for more than one year, the gain will be reduced by 25%. (iii) It is a taxable gain. However, since he held the jewellery for more than one year, the gain will be reduced by 25%. (iv) Loss from sales of sculpture is not allowed to be recognized. (v) It is a taxable loss and it can be set off against capital gains only. It can also be carried forward for adjustment during the next six tax years. A.7 (a) A person registered under the Sales Tax Act, 1990 is required to maintain the record: (i) in English or Urdu language. at his business premises or registered office. The following types of record is required to be kept in prescribed form and manner as would permit ready ascertainment of his tax liability during a tax period: (i) records of supplies made shall indicate the description, quantity and value of goods, name and address of the person to whom supplies were made and the amount of the tax charged; records of goods purchased shall show the description, quantity and value of goods, name, address and registration number of the supplier and the amount of the tax on purchases; (iii) records of goods imported shall show the description, quantity and value of goods and the amount of tax paid on imports; (iv) Records of zero-rated and exempt supplies. (v) double entry sales tax accounts; (vi) Invoices, credit bills, debit notes, bank statements, banking instrument, inventory records, utility bills, salary and labor bills, rental agreements, sale purchase agreements and lease agreements. A registered person is required to retain the records and documents for a period of five years (six years after the recent amendment) after the end of the tax period to which such record or documents relate or till the final decision in any proceedings including proceedings for assessment, appeal, revision, reference, petition and any proceedings before an alternative Dispute Resolution Committee. (b) Following exports are outside the purview of zero rating: (i) Goods which are intended to be re-imported into Pakistan. Goods have been entered for export under Customs Act but are not exported. (iii) Goods exported to a country specified by the Federal Government, by notification in the official gazette.

5 A.8 Rs. in million Output tax (W-1) Less: Input tax - relating to manufactured goods (W-2) (17.28) - relating to commercial imports (W-3) (7.04) Sales tax payable 4.48 Amount to be carried forward to March 2010 (Rs m - Rs m) 0.79 W-1: Output tax Taxable supplies Manufactured goods (Rs. 120m x 16%) Commercial Imports (Rs. 60m x 16%) 9.60 Exports - Zero rated supplies - Exempt supplies W-2: Input tax manufacturing (lower of actual and 90% of output tax) On purchase of raw and packing materials (Rs. 160 m x 16%) x Rs. 120m Rs. 170m Restricted to 90% of output tax (Rs x 90%) W-3: Input tax import C & F value Add: Custom Input 16% 7.04 Note: Purchase from unregistered persons will have no implication on the above computation. (THE END)