alhamd taxation tests and solution

8/10/2019 Alhamd Taxation Tests and Solution

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Page 1 of 4 By:Ms. Ambreen Mukhtar

A l-HamdAcademy

Taxation

Final Test 21stFebruary 2011Module C 100 Marks 3 hours

Question 1:

Mr. and Mrs. Axe are equal partners in Burq Enterprises (BE). The firm is engaged in the

manufacturing and supply of electric generators. Following figures have been extracted from the

accounting records of the firm for the tax year 2011:

Rs. in 000

Sales of generators 574,200

Less: Cost of sales 429,520

Gross profit 144,680Less: Admin and selling expenses 96,300

Finance cost 9,000 105,300

Profit before taxation 39,380

Following further information is also available from the records:

(i) The generator sales are inclusive of sales tax of Rs.79.2 million (recoverable from the

customers).

(ii) Cost of sales includes sales tax Rs.63 million and withholding taxes on utilities bills of Rs.2.3

million.

(iii) Admin and selling expenses include salary of Rs.500,000 paid to each partner every month.

(iv) Finance cost includes interest of Rs.1.2 million paid to Mrs. Axe on her capital account.

(v) On 1.1.2011 Mr. Axe 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 tax WDV of Rs.1 million. No

adjusting entry was made in the accounts except that no depreciation was charged on that

equipment. Accounting depreciation on other items was in line with tax rules for depreciation.

(vi) On 1.7.2010 Axe 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 2008 was refunded.

(vii) Axe purchased a new building for Rs.14,000,000 in which a new flour milling plant had been

installed and leased the property on 1.11.2010 to Bhola on a composite lease rent of

Rs.400,000 per month. The consideration paid as specified in the purchase deed was

Rs.9,000,000 for the building and Rs.5,000,000 for the plant installed in the building.

(viii) Axe purchased 50,000 shares of Rs.10 each, of an unlisted public company in July 2005 @

Rs.150 per share. In August 2006 he received bonus shares in the ratio of 1 bonus share for

GCAOFFICIAL

Compiled by Shahrooz Khan


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Page 4 of 4 By:Ms. Ambreen Mukhtar

Question 9:

Kamyab Engineering Ltd (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 2010:

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 included in the above figures.

(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 May 2010. The related input tax was accounted for in the relevant

tax period.

Sales tax is payable @ 17%. All the above figures are exclusive of sales tax, wherever applicable.

Ignore special procedure rules for commercial imports.

Required: Sales tax payable / refundable and input tax credit to be c/f, if any. (Marks 15)


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A l h am d A ca d e m y

Solution for Final Test - Taxation

Module C H e l d o n 2 1 s tFe b r u a r y 2 0 1 1

Solution Q No 1

Burq Enterprises

Resident AOP

Tax year 2011

Computation of taxable income

Rs .

I n c o m e f r o m B u s i n e ss

Accounting profit before tax 39,380,000

A d j u s t m e n t s :

Less: Sales tax included in generator sales (Note 1) 79,200,000

Add: Sales tax paid on cost of sales 63,000,000

Advance tax paid on utility bills (Note 2) 2,300,000

Admin & selling expenses (partners salary) 12,000,000

Finance Cost 1,200,000

Gain on disposal (Note 3) 500,000

Taxable Income 39,180,000

Income tax @ 25% 9,795,000

Divisible income 29,385,000

Mr AxeResident individual

Tax year 2011

Computation of taxable income and tax liability Rs.

I n c o m e f r o m O t h e r So u r c e s

Rental Income from building together with plant and

Machinery 400,000 x 8 3,200,000

Less: Initial allowance on plant & machinery 2,500,000

Depreciation on

Building 900,000

plant & machinery 375,000 (3,775,000)

(575,000)

Dividend income bonus shares (Note 4) FTR -

(575,000)

I n c o m e f r o m c ap i t a l g a in

Gain on disposal of bonus shares 8,000 x (135-10) x 75% (Note 4) 750,000

Gain on disposal of paintings (1,000,000 100,000) x 75% (Note 5) 675,000

1,425,000

Note: Students are strongly advised to focus on the presentation of the practical questions and

proper explanation inclusion or exclusion of each item in question.


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I n c o m e f r o m p r o p e r t y ( s e p a r a t e b l o ck o f i n co m e )

Rental income 12,250 x 12 147,000

Unadjusted deposit {110,000 (85,000x2/10)} / 10 9,300

156,300

Taxable income including Income from property 1,006,300

Less: Income from property 156,300

Taxable income excluding Income from property 850,000

Add: Share of profit from AOP for rate purpose 14,092,500

Taxable income for rate purpose 14,942,500

Tax liability (non-salaried case)

Income tax on 14,942.5 x 25% 3,735,625

Income tax on 3,735,625 / 14,942,500 x 850,000 212,500

Tax on property income (156,300-150,000) x 5% 315

Total tax liability 212,815

N o t e s :

1 Amount of sales tax of Rs 79.2 million included in the sales figure shall be

excluded to determine taxable profit, since the same is not an income of the

business.

2 Any taxes paid on purchases including any advance taxes paid are not

admissible expenses of the business. Rs 63 million paid on purchases and rs 2.3

million paid as advance tax on utility bills are added back to compute taxable

profit of BE.

3 An asset is treated as disposed off from the business if the same is put to

personal use. In this case the proceeds on disposal is taken as the fair marketvalue which is Rs 1.5 million. Since no entry has been passed in the accounts

for the disposal, therefore taxable gain of 0.5 million is added to the accounting

profit to determine taxable profit.

4 Where bonus shares received, are subsequently disposed off the taxable

amount shall be computed as under:

? the face value of bonus shares shall be treated as dividend;

? the difference between consideration received and dividend is taxable as

capital gain.

Therefore 10,000 shares received by Mr Axe as bonus shares, their face value

@ Rs 10 each shall be treated as dividend under FTR, whereas difference

between sale proceeds @ Rs 135 per share and dividend @Rs 10 per share is

taxable as capital gain. Since the shares are of unlisted public company held formore than 12 months therefore the gain of Rs 125 per share is exempt upto

25%.

5 Asset received under inheritance, if subsequently disposed off, cost of the asset

for the purpose of determining gain on disposal is treated as the fair market

value on the date of inheritance therefore cost of painting A and B is Rs

1,700,000 and 100,000 respectively. Loss arising on the disposal of painting A

is unadjustable (specific category of assets on which loss on disposal is not


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allowed) whereas gain on disposal of painting B of Rs 900,000 is taxable upto

75% since the holding period of the asset is more than 12 months.

Solution Q No 2

(i) An individual is resident for Pakistan tax purpose if his stay in a tax year is

183 days or more. Physical stay of Mr. Mahiwal in Pakistan in the tax year

20X2 is 92 days (1st July to 30th September) and therefore he is a non-

resident person in the tax year 20X2.

(ii) A day in Pakistan solely by reason of being in transit does not count as a day

present in Pakistan. Physical stay in Pakistan of Mr. Rana in the tax year 20X2

excluding a day in transit is 182 days (1st July to 29th Dec) and therefore he

is a non-resident person in the tax year 20X2.

(iii) A government employee posted abroad in the tax year is resident irrespective

of his physical stay in Pakistan. Therefore, Mr. Baber is a resident person in

the tax year 20X2 for Pakistan tax purpose.

(iv) Physical stay of Mr. Francis in Pakistan in the tax year ended 31.12.20x1

(special tax year granted by the Commissioner) is 154 days i.e. 31st July to

31st December and therefore he is a non-resident for Pakistan tax purpose.

Solution Q No 6:

a) Legal representative means any person who in law represents the estate of the

deceased person and includes any person who intermeddles with the estate of

the deceased and to whom the estate of the deceased devolves where thedeceased person sues or is sued.

b) Income earned by Mr YMN prior to his death shall be subject to tax in the same

manner if Mr YMN had not died and the tax liability shall be the first charge on

the estate of Mr YMN. Mr ABK in the representative character shall be liable for:

? Any tax that the Mr YMN would have become liable for if he had not

died: and

? Any tax payable in respect of the income of the estate of Mr YMN

However, the liability of Mr ABK in representative character shall be limited to the

extent to which the estate of Mr YMN is capable of meeting the tax liability.

c) Tax assessment proceeding pending against Mr YMN at the time of his death shall

be treated as taken from inception against Mr ABK (legal representative) andmay be continued against Mr ABK from the stage at which it stood on the date of

Mr YMNs death.

Moreover, any proceeding which could have been taken against Mr YMN if he had

survived may be taken against Mr ABK in representative character.


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Solution Q No 9

Kamyab Engineering Ltd. (KEL)

Computation of sales tax liability

For the tax period November 2010

Note: Import value and value of supply of commercial imports are identified and therefore tax

paid on import stage is not a residual input tax and shall not be apportioned.

Residual Input Tax:

17% of Rs.70.7 million 12,019,000

Add: Sales tax on utility bills

60,000 + 21,000 + 26,000 107,000

Sales tax on uniforms - inadmissible --

12,126,000

Less: Input tax on purchases o/s for more

than 180 days 200,000 x 17% 34,000

12,092,000

Apportionment of input tax:

Turnover Input tax

Taxable local supplies 64,000,000 8,794,182

Exports 13,000,000 1,786,318

Exempt supplies 11,000,000 1,511,500

88,000,000 12,092,000

Sales tax liability:

Output tax 17% of Rs.64 million 10,880,000

Less: Input tax against taxable local supplies 8,794,182

(input tax not more than 90% of output tax) 2,085,818

Output tax on supply of commercial imports(12,500,000 mark up 40,000) x 17% 2,118,200

Less: Input tax on commercial imports

10,000,000 x 17% 1,700,000 418,200

Payable 2,504,018

Refundable against exports 1,786,318


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Al-HamdAcademyICAP Module C

TEST

Taxation

Faculty: KP August 2011Time allowed: 3 Hours Max Marks: 75

Question 1: Mr. Paratha provided the following information for his accounting year ended

30.6.2011:

(1) On 1.6.2011, Paratha sold 5,000 shares in XYZ (Private) Ltd for Rs.100,000. The shares had

become his property on 1.7.2010 on the distribution of assets on the liquidation of PPP Ltd in

which company he was a shareholder.

(2) On 1.6.2011, Paratha transferred 10,000 shares in Z (Private) Ltd to his wife Puri under an

agreement to live apart. Puri is an employee of the Government of Pakistan and was posted toBangladesh during the tax year 2011. In the tax year 2011 Puri was present in Pakistan for 30

days when she was on leave from her foreign posting.

10,000 shares in Z (Private) Ltd were purchased by Paratha in the tax year 2008 for Rs.120,000.

The fair market value of 10,000 shares on 1.6.2011, based on a valuation done by the auditors of

Z (Private) Ltd, was Rs.200,000.

Paratha is of the view that:

(i) Rs.100,000 representing the sale consideration of 5,000 shares in XYZ (Private) Ltd is his

income taxable under the head Capital gains since he had not paid anything to acquire the

shares and the shares were not held for more than one year since their acquisition.

(ii) The shares transferred to his wife Puri under an agreement to live apart would be treatedas a disposal of a capital asset and Rs.80,000 representing the difference between FMV

and the cost of shares would be taxable capital gains.

Required: State, giving reasons, whether or not you are in agreement with each of the two

views expressed by Mr. Paratha. If you are not in agreement with any of his views, explain the

correct treatment to be adopted for the determination of the income, if any, chargeable under

the correct head(s) of income for the tax year 2011. (15 marks)

Question 2: Explain the residency test of an individual for tax purpose and how it can be

established where a person has frequent visits outside Pakistan. (10 Marks)

Question 3: Explain the provisions in respect of employee share scheme along with disposal of

shares and option to acquire shares under employee share scheme. (10 Marks)

Question 4: The following information is provided by Mr Qureshi:

(1) Qureshi, a citizen of Pakistan, retired from the services of XYZ Ltd (XYZ) on 29.6.2010. On

retirement, Qureshi was eligible to receive the following from XYZ:

(i) A monthly pension of Rs.20,000 payable from 1.7.2010.


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(ii) Rs.100,000 in lieu of unavailed privileged leave.

(iii) Rs.350,000 as a gratuity from an approved gratuity scheme.

The pension is deposited at the end of each month into Qureshis bank account. The

amounts for the leave pay (leave encashment) and gratuity were paid by XYZ to Qureshi on

5.7.2010. No taxes were deducted by XYZ from the above payments.

(2) Qureshi commenced employment with Superior Steel Ltd (SSL) on 1.7.2010 as the factory

accountant. In accordance with the terms of his employment the following remuneration and

benefits were received by Qureshi for the year ended 30.6.2011:

(i) A basic monthly salary of Rs.200,000.

(ii) Monthly allowances of Rs.20,000 as house rent allowance, Rs.30,000 as utility allowance

and Rs.30,000 as medical allowance.

(iii) A company maintained motor car for his business and private use.

(iv) Reimbursement of all medical treatment for Qureshi and his wife

(v) Two months notice in writing on either side in case of cessation of employment.

(3) As a policy matter of SSL, which is applicable to all employees, the basic salary for the month

is deposited into each employees bank account on the first working day of the following month.

The monthly allowances are to be collected by the employees from the cashier on the lastworking day of each month.

(4a) In order to provide the benefit of a car to Qureshi, a new Toyota Saloon was taken on lease

by SSL on 1.8.2010 from an approved leasing company, for an annual lease rental of Rs.400,000

payable for four years. If the car had been purchased outright by SSL, the cash price would have

been Rs.1,200,000.

(4b) For the year ended 30.6.2011, SSL paid Rs.210,000 as hospitalisation charges for the

treatment of Qureshis wife. NTN of the medical practitioner is available along with employers

attestation.

(4c) SSL made a one time payment of Rs.500,000 to Qureshi on his agreement to give six

months notice of cessation of employment instead of the two months notice agreed to in theoriginal terms of employment.

(4d) During the last days of June 2011, Qureshi was on vacation. On resuming his duties on

7.7.2011, he collected his monthly allowances from the cashier for the month of June 2011.

(4e) Tax deducted at source by SSL from Qureshis salary income for the relevant tax year was

Rs.767,000.

(5a) On 1.7.2010, Qureshi rented an apartment owned by SSL, located in a building adjoining the

SSLs factory premises. The apartment had recently been vacated by a tenant. The tenant, who

had no connection with SSL, had paid a monthly rent of Rs.15,000 (considered as Fair Market

Rent). Qureshi is paying Rs.10,000 per month to SSL as rent for the use of the apartment.

(5b) Due to the constantly fluctuating power supply, SSL agreed to supply electricity to the

apartment rented by Qureshi from the factory generator. The electricity units consumed during

the year ended 30.6.2011 as per the meter installed in the apartment, if purchased from an

independent power company, would have cost Rs.123,800.

(6) Qureshi is the owner of a piece of land in Sadar.

On 1.9.2010, Qureshi entered into a contract with Mr Govind for the sale of the land for

Rs.20,000,000. Under the terms of the sale contract, Govind paid Rs.300,000 as a deposit and


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the balance of Rs.19,700,000 was payable at the latest by 1.10.2010, failing which the deposit

would stand forfeited.

Govind failed to pay the balance amount of Rs.19,700,000 and the deposit of Rs.300,000 was

forfeited. On 1.10.2010, Qureshi rented the land to Govind on a monthly rental of Rs.250,000.

Govind paid the rent in advance up to 30.6.2011. On 1.10.2010 Govind also paid Qureshi a

refundable deposit of Rs.3,000,000 which was not adjustable against the rent payable.

(7) After seeking permission from SSL, Qureshi commenced his own part-time business, under

the name of Taxhelp, of preparing returns of income of salaried individuals for the year ended

30.6.2010 which were to be furnished to the tax authorities by 30.9.2010. The permission

granted by SSL was on the understanding that on working days Qureshi could devote his time to

the business only after 7 pm and that his business should not interfere with his official duties as

the factory accountant.

Qureshi closed the first accounts of Taxhelp for the period ended 30.6.2011. The summarised

income and expenditure account for that period is as follows:

Rs.

Rece ip ts

Fees received (net of tax @ 6%) from Rose Pakistan Ltd (RPL)

for preparing the tax returns of all the employeesof RPL category 1 282,000

Fees received from other individuals category 2 100,000 382,000

Expend i t u r es

Salaries to employees working exclusively on the RPL assignment (155,600)

Expenditure common to both categories 1 and 2

Salaries to part-time employees 64,000

Stationery, computer hire and conveyance of staff 24,432 (88,432)

Surplus of receipts over expenditure 137,968

(8) Other information submitted by Qureshi:

(i) On 13.6.2011, Qureshi donated Rs.150,000 through banking channel to an educationalinstitution established in Karachi by the Federal Government.

(ii) Qureshi received a dividend of Rs.45,000 (net of tax) from a private company on 10.1.2011.

(iii) Qureshi paid Rs.15,000 as zakat under the Zakat and Ushr Ordinance during the year.

Required:

(a) Compute the taxable income of Mr Qureshi for the tax year 2011 giving clear explanations for

the inclusion in or exclusion from the computation of taxable income of each of the items listed

above. (Marks 25)

(b) Calculate the tax payable by Mr Qureshi for the tax year 2011. (Marks 5)

Tax rates along with marginal relief rates are as under:

Category 2(salaried case i.e. where taxable salary exceeds 50% of taxable income)

TAXABLE INCOME RATE

1 Up to Rs.300,000 Nil

2 300,001 350,000 0.75%

3 350,001 400,000 1.50%


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Al-Hamd Academy

Answers to the test Taxation Module C August 2011

Answer to Q.1

(i) Sale of 5,000 shares

Where a capital asset becomes the property of a person, inter alia, on the distribution of

assets on the liquidation of a company, the FMV of the assets on the date of its

acquisition is treated as the cost of asset.

In the circumstances, Parathas view that the sale consideration is taxable as capital gain

is not correct. The capital gain or loss on the sale of shares would be the difference

between the consideration received and the cost of assets which in this case would be

the FMV of shares on the date of acquisition.

(ii) Mr. Parathas view is not correct. Under the non-recognition rules, no gain or loss arises

on the disposal of an asset, inter alia, under an agreement between spouses to live a

part provided the recipient is a resident for Pakistan tax purposes at the time of the

acquisition.

When puri acquired 10,000 shares she was a resident for Pakistan tax purposes since

during that year she was an employee of the Federal Government of Pakistan posted

abroad.

Accordingly, under the non-recognition rules, this transaction is not taxable.

Answer to Q.2:

An individual is a resident for Pakistan tax purpose when he is physically present in Pakistan

during the relevant tax year for 183 days or more. A government employee posted abroad in the

tax year is resident irrespective of his physical stay in Pakistan.

Where an individual has frequent visits outside Pakistan, Rule 14 explains the procedure to countdays for tax residency purpose as under:

o Part of a day that an individual is present in Pakistan counts as a whole day including:

? A day of arrival in Pakistan

? A day of departure from Pakistan

? A public holiday

? A day of leave

? A day that the individuals activity in Pakistan is interrupted because of a strike, lock-

out or delay in receipt of supplies

? A holiday spent in Pakistan before, during or after any activity in Pakistan

o A day in Pakistan solely by reason of being in transit does not count as a day present in

Pakistan

Answer to Q.3a) Right or option to acquire shares

Right or option made available to an employee to acquire shares is taxable only where the

employee disposes of the same in which case gain is taxable in the year of disposal under

the head salary as consideration received less cost of right or option.


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I t ems no t i n c l u ded i n t he compu t a t i o n o f i n come and t a x payab le

(1) Sadar land: 10% of unadjustable advance received by an owner of a building is treated as

chargeable rent. However, this provision is applicable in the case of an owner of land and

therefore Rs.3,000,000 received from Govind is not included in chargeable rent.

(2) Dividend: Dividend income is taxed @ 10% under FTR. Rs.5,000, being the tax deducted at

source (10% of Rs.50,000), is the final tax.

(b) Computation of tax payable

Rs.

Tax on Rs.4,271,768 at 18.5% 790,277

Tax under marginal relief formula

17.5% on Rs.3,550,000 621,250

50% on Rs.721,768 360,884

982,134

Whichever is lower 790,277

Tax on property income

Tax on Rs.1,000,000 57,500

Tax on Rs.1,550,000 @ 10% 155,000 212,5001,002,777

Tax credit on donation 1,002,777 / 6,821,768 x 150,000 22,049

980,726

Tax deducted from salary income 767,000

Tax payable 213,727

Notes

(1A) Pension is exempt since Qureshi is a citizen of Pakistan, pension is received from his former

employer XYZ and he does not continue to work for XYZ or any of its associate.

(1B) Leave encashment of Rs.100,000 is taxable even if it is received from the past employer.

(1C) Gratuity from XYZ is taxable in the tax year 2011. However, gratuity from approved schemeis exempt up to Rs.200,000. Taxable amount of gratuity is 350,000 200,000 = Rs.150,000.

(2) The basic salary of June 2011 was credited in Qureshis bank account in July 2011. As salary

is taxed on receipt basis, basic salary for 11 months is taxable in the tax year 2011.

(3) As per SSLs policy, Qureshi should have collected the allowances for housing, utilities and

medical on the last working day of June 2011. The allowances were made available to Qureshi in

June 2011 and are therefore treated as having been received by him in June 2011 despite the

fact that the allowances were actually collected by him on 7 July 2011.

(3A) The allowances for housing and utilities are fully taxable.

(3B) Medical allowance up to 10% of basic salary is exempt if free medical or reimbursement is

not provided for in the terms of employment. Therefore, the medical allowance is fully taxable.

(4) Taxable benefit of a car used for both purposes is 5% of the FMV of vehicle at the

commencement of the lease. Rs.1,200,000 being the cash price of the vehicle on 1.8.2010 is the

FMV of the vehicle. Taxable benefit is Rs.1,200,000 x 5% = 60,000 x 11/12 = Rs.55,000.

(5) Hospitalisation is exempt as this benefit is in accordance with the terms of employment.


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(6) Rs.500,000 received on his agreement to give 6 months notice period against the period of 2

months in the original terms of employment is taxable.

(7) Any concession in rent is a taxable perquisite. The previous tenant who had recently vacated

the apartment was paying a monthly rent of Rs.15,000 is considered as the FMV of apartment.

The difference of Rs.5,000 a month is a benefit of employment.

(8) Since the electricity was supplied free of cost to Qureshi Rs.123,800 is a benefit of

employment chargeable to tax as salary.

(9) Income from property.

Rupees

Consideration for the use of land at Rs.250,000 per month for 9 months 2,250,000

Forfeited deposit paid under a contract for the sale of land 300,000

Rent chargeable to tax 2,550,000

(10) Income from service income is taxable under normal tax structure. However, normal tax

liability should not be less than 6% of service income as the same is minimum tax. In the case of

Mr. Qureshi tax liability is more than 6% of gross service revenue and therefore provision of

minimum tax is not applicable.


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(iv) Disallow Rs.500,000 being damages paid to JJAs sole distributor.

(v) Disallow the donation of Rs.1,000,000 paid to a hospital.

(vi) Disallow the Rs.1,200,000 salary paid to Mr. Jamal.

The Commissioner has required JJA to furnish explanations as to why he should not amend theassessment on the lines indicated.

(2) The following information on the issues raised by the Commissioner is provided to you:

(i) Travelling expensesThe travel to Japan was entirely for business purposes. It was necessary for the firms

technical manager to travel to Japan for the purpose of selecting a second-hand mixingmachine, so as to ensure that the machine was compatible with the firms requirements.

(3 marks)(ii) Contribution to the unrecognized provident fund.

JJA, in its accounting system, has ensured that when any payment is made from the fundto an employee, tax would be deducted at source from the amount of the payment, if the

amount is chargeable to tax as the salary income of the employee. (3 marks)

(iii) Eid-Milan partyThe expenditure on the party was motivated by the purpose of maintaining cordial relationsbetween the employees and the management. (3 marks)

(iv) Damages paid to the sole distributor

Due to the failure to deliver supplies within the time stipulated in the contract, JJA had to

pay damages to their sole distributor. The failure to deliver the supplies in time was due tothe negligence of the dispatch department of the firm and not due to the violation of any

law. (3 marks)

(v) Donation

The donation was to a hospital which was established in Pakistan by the FederalGovernment. (3 marks)

(vi) Salary paid to Mr Jamal

Mr Jamal is a partner in the firm of JJA. He is also the Chief Executive Officer (CEO) of the

firm devoting his full time to managing the affairs of the firm. His salary was approved bythe partners. (3 marks)

Mr Jamal, as CEO of JJA, wants you to explain the relevant statutory tax provisions on the issuesraised by the Commissioner.

Required:State giving reasons whether or not in each case, the amendment proposed by the

Commissioner is or is not in accordance with the provisions of the tax statute.

Question 4:

Mr. Z provided the following information relevant to his accounting year ended 30.6.2012:

(1) Until 31.10.2011, Z was an employee of AOPL. On 31.10.2011, Z opted for early retirement

scheme of AOPL. On retirement, Z, in addition to his monthly remuneration, received:

Rs.7,000,000 as golden handshake payment under AOPLs voluntary retirement scheme.

Rs.9,000,000 accumulated balance from AOPLs recognized Employees Provident Fund. A bonus equal to two months basic salary.


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(2) Zs terms of employment with AOPL provided for the following:

(i) A basic salary of Rs.500,000 per month

(ii) Monthly allowances of:

10% of basic salary for utili ties

Rs.75,000 for medical [No entitlement for free medical benefit or reimbursement]

(iii) A company maintained car, having cost of Rs.3,000,000, for office and private use. Z to

pay AOPL Rs.10,000 per month for the private use of the car. In accordance with AOPLspolicy, Z purchased the car on 31.10.2011 at Rs.600,000. Another employee of AOPL had

then offered to purchase the car at that date for Rs.900,000.

(3) The monthly salary and cash allowances of all employees of AOPL are deposited into eachemployees bank account on the first working day of the following month.

(4) On 1.11.2011, Z commenced business of supply of locally purchased items to various

companies. Z closed his business on 31.3.2012. Zs profit for the period is as follows:Rs.

Sales (net of tax deducted @ 3.5%) 1,664,625Less: Expenses 1,586,500

Profit 78,125

(5) On 1.4.2012, Z left for Saudi Arabia for employment for a period of two years at salary of

US$ 20,000 (Rs.1,600,000) per month. No tax has been paid or deducted at source in SaudiArabia on the salary income of Z. For the tax year 2012, Z is resident for Pakistan tax since

his stay in Pakistan was more than 182 days. Following his departure, Z returned to Pakistan

for the first time on 5.7.2012 for a short stay of one week.

(6) On retirement from AOPL on 31.10.2011, Z was due Rs.6,000,000 from unapproved gratuityscheme of AOPL. The gratuity was paid on 30.4.2012 to Z at his request in Saudi Arabia inUS dollars.

(7) Other information:

(i) On 8.6.2011, Z had acquired 5,000 shares in CD Pakistan Ltd for Rs.500,000 and had

been allowed a tax credit thereon of Rs.50,000 in the tax year 2011. On 11.6.2012, Z

sold these 5,000 shares in CD Pakistan Ltd for Rs.500,000.

(ii) Tax Rs.16,700 collected by a bank on cash withdrawal by Z in the tax year 2012.

(iii) Z elected to tax the amount of the golden handshake at the average rate of tax for the

preceding three years which is 12%.

(iv) Tax deducted at source from Zs salary by AOPL for the tax year 2012 is Rs.2,800,000.

Required:

(a) Compute the taxable income of Mr. Z, giving necessary explanations. (20 marks)

(b) Calculate the taxable payable by or refundable to Mr Z (2 marks)


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Question 5 (40 Marks)

Choose the correct answer:

1. Perquisites include:

(i) Bonus

(ii) Overtime

(iii) Extra amount to enter into employment contract(iv) Benefit of company maintained car

2. Employment under the Income Tax Ordinance includes:

(i) Directorship or an office of management in a company(ii) A position entitling the holder to a fixed or ascertainable remuneration

(iii) Holding or acting in a public office(iv) All of the above

3. Mr. Z joined a private company as a financial controller on 1.2. 2011 at a monthly salary

of Rs.300,000. His salary is paid in the first week of the next month. However, he tooksalary of June and July 2011 in advance in the last week of June and he wants to tax his

salary on accrual basis as he is an employee of a private company. His salary for the taxyear 2011 would be taxed for:

(i) 4 months(ii) 5 months

(iii) 6 months(iv) at the option of Mr. Z to be exercised with the return of income

4. Option granted under employee share scheme is a:

(i) capital asset and taxable under the head capital gain(ii) personal asset and therefore not taxable(iii) business asset and taxable under the head income from business

(iv) capital asset but taxable under the head salary(v) None of the above

5. Share of profit received by a company from a joint venture i.e. AOP is:

(i) included in the companys taxable income only for rate purpose(ii) Exempt in the hands of the company as the AOP has already paid tax(iii) Taxable in the hands of the company in the normal manner

(iv) Taxable subject to a tax credit

6. A company lets out building along with plant and machinery. Its income is chargeable as:

(i) Income from property(ii) Income from business(iii) Income from other sources

(iv) Taxable as a separate block of income

7. Co-owners of immovable property:

(i) can never be assessed as an AOP(ii) are always assessed as an AOP

(iii) can be assessed as an AOP in some cases


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8. Deduction of tax at source from payment on account of rent is mandatory for:

(i) Every tenant(ii) Companies

(iii) companies and AOP constituted under law(iv) None of the above

9. Capital gain is computed as a difference between:

(i) consideration received of a capital asset and its cost

(ii) fair market value (FMV) of a capital asset and its cost(iii) FMV as determined by the Commissioner or consideration received of a capital

asset whichever is higher and its cost(iv) FMV of a capital asset as declared by the taxpayer and its cost

10.Rental income earned by a person engaged in the business of letting out shops in a large

shopping plaza is taxed as:

(i) Income from business(ii) Income from property

(iii) Income from other sources(iv) Capital gain being a capital asset

11.Dr. Awan purchased a building for his clinic few years ago and claimed tax depreciationon such building. He disposed off his building during the current year. The profit on sale

of the said building is taxed as:

(i) Exempt from tax being a capital receipt

(ii) capital gain being a capital asset(iii) Business income

(iv) income from other sources

12.Mr. Zulfiqar is full time engaged in purchase and sale of shares of listed companies by

holding such shares on short term as well as on long term basis. His gain on sales ofsuch shares is:

(i) Taxable as business income

(ii) Taxable as income from other sources

(iii) Taxable as capital gain(iv) Exempt from tax if holding period is more than one year

13.Admissible business expenses are those:

(i) As list down in the income tax laws(ii) As reported in the annual accounts and audited by a firm of Chartered

Accountants(iii) As admitted by the Commissioner(iv) disallowed by the Commissioner but relief is given by the Appellate Tribunal

14.Which of the following is not admissible expense under business income:

(i) Litigation expense to defend an existing title of a business asset(ii) Litigation expense for the purpose of amalgamation(iii) legal expense for making agreement for the supply of goods in future

(iv) None of the above is the correct answer


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15.Unpaid trading liability concept is applicable on:

(i) An expense outstanding in the 3rdyear after its accrual(ii) An expense outstanding in the 4thyear after its accrual

(iii) Outstanding principal amount of loan taken for trading purpose(iv) Interest payable on the above loan but not paid till the 4thyear after its accrual

16.Business loss (excluding loss due to depreciation) suffered by an AOP in a tax year:

(i) can be set-off by the members of AOP

(ii) can be carried forward by the AOP for future period without any time limit(iii) can be carried forward by its members

(iv) None of the above

17.Speculation losses:

(i) are adjusted against income from other sources(ii) can be c/f up to 6 years against income from any source of income in future

(iii) are first adjusted against other speculation gain and then against business income(other than speculation business) of the same tax year


18.A carried forward loss under the head income from business can be set-off against:

(i) Income from other sources

(ii) Income from any head of income(iii) Capital gain


19.Return of income shall be furnished by a company having year end 31stMarch (special

tax year), on any of the following date:

(i) 30thday of September

(ii) 31stday of December(iii) 31stday of March next year


20.Extension in filing of return can, on the application by the taxpayer, be granted up to any

duration applied for by the:

(i) Commissioner with the approval of the Chief Commissioner

(ii) Commissioner with the approval of the FBR(iii) Chief Commissioner with the approval of FBR

(iv) Commissioner without any approval under exceptional circumstances

21.First appeal against the Commissioners order is to be filed within any of the followingdays from the date of service of the said order:

(i) 30 days

(ii) 60 days(iii) 90 days

(iv) any time period allowed by the appellate authority applied for by the taxpayer


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22.Notice for discontinuation of business shall be submitted to the Commissioner within ___days of such discontinuation:

(i) 30

(ii) 15(iii) 60

(iv) any time on or before the due date for filing of return

23.

Quarterly advance income tax is payable by an individual taxpayer whose last assessedincome exceeds Rs.:

(i) 200,000

(ii) 500,000(iii) 1,000,000


24.Withholding tax on account of purchase of raw material is required to be deposited intoGovernment treasury within:

(i) 7 days of the delivery of goods

(ii) 7 days of the receipt of suppliers invoice(iii) 7 days of payment to the supplier

(iv) a period at the discretion of the taxpayer for which he is required to obtainpermission from the Commissioner

25.Dividend income includes:

(i) A reward for achieving a particular target

(ii) A payment / reward against any investment made including any securities issuedunder National Savings Schemes

(iii) an advance / loan to a shareholder by a public unlisted company which does notqualify as a public company under the Income Tax Ordinance

(iv) Amount repaid by a company to its shareholders on reduction of capital to the

extent of accumulated profits



TAXABLE INCOME RATE


2 350,001 400,000 1.50%

3 400,001 450,000 2.50%

4 450,001 550,000 3.50%5 550,001 650,000 4.50%

6 650,001 750,000 6.00%

7 750,001 900,000 7.50%

8 900,001 1,050,000 9.00%9 1,050,001 1,200,000 10.00%

10 1,200,001 1,450,000 11.00%

11 1,450,001 1,700,000 12.50%

12 1,700,001 1,950,000 14.00%

13 1,950,001 2,250,000 15.00%


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14 2,250,001 2,850,000 16.00%

15 2,850,001 3,550,000 17.50%

16 3,550,001 4,550,000 18.50%

17 Over Rs.4,550,000 20.00%

Marginal relief in case of salaried taxpayers

Where the total income of a taxpayer marginally exceeds the maximum limit of a slab in the

table, the income tax payable shall be the tax payable on the maximum of that slab plus anamount equal to

(i) 20% of the amount by which the total income exceeds the said limit where the totalincome does not exceed Rs.550,000.

(ii) 30% of the amount by which the total income exceeds in each slab but total incomedoes not exceed Rs.1,050,000.

(iii) 40% of the amount by which the total income exceeds in each slab but total incomedoes not exceed Rs.2,250,000.

(iv) 50% of the amount by which the total income exceeds in each slab but total incomedoes not exceed Rs.4,550,000.

(v) 60% of the amount by which the total income exceeds in each slab but the totalincome exceeds Rs.4,550,000.

- The end -


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9

Al-Hamd Academy

Answers to the test Taxation Module C August 2011

Answer to Q.1

The following persons are required to file return of income:

a) Every company including an approved non-profit organization and an approved welfare

institution;

b) A person other than a company whose taxable income exceeds basic exemption which isRs.350,000. However, an individual whose business income exceeds Rs.300,000 but does

not exceed Rs.350,000 is also required to file return of income;

c) Who has been charged to tax for any of the two immediately preceding tax years;

d) Who claims a loss carried forward;

e) A person who owns immovable property of 250 square yards or more or a flat in urban

areas other than property owned by a non-resident person, widow, orphan below 25years of age and disabled person;

f) A person who owns immovable property of 500 square yards or more in a rating area;

g)

A person who owns a flat of 2,000 square feet or more in a rating area;

h) A person who owns a vehicle of 1,000 cc or more;

i) A person who has obtained National Tax Number; or

j) A person who holds commercial or industrial connection of electricity where the annual

bills exceed Rs.1 million.

Due date for filing:

i. 31stAugust

1. Annual statement of tax deduction from salary

2. Return of income through e-portal in the case of salaried individual

3.

Statement for FTR u/s 115(4) by an individual or AOP

ii. 30thSeptember

a) Return of income by an individual or AOP (other than return of income through e-portal

in the case of salaried individual)b) Return of income and statement for FTR u/s 115(4) by a company having year end

between 1stJuly to 31stDecember.

iii. 31stDecember

Return of income and statement for FTR u/s 115(4) by a company having year end between1stJanuary to 30thJune.

Answer to Q.2:

(i)As the three items of expenditure were incurred prior to the commencement of commercial

production, such expenditure is classified as pre-commencement expenditure which has beendefined to mean any expenditure incurred before the commencement of commercial production

wholly and exclusively to derive taxable income and specifically includes the cost of feasibilitystudies, construction of prototypes and trial production activities.

Pre-commencement expenditure is amortized on a straight line basis over 5 years in equalproportion [20% per year]. In the circumstances the treatment accorded to the three items of

expenditure is not correct.


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(ii) BBPL is entitled to a deduction for amortization for the three items @ 20%. To claim this

amortization deduction, BBPL would have to file a revised return of income.

Answer to Q.3(1) The following issues raised by the Commissioner are not in accordance with the provisions ofthe tax statute:

(i) Contribution to the unrecognised provident fund:

A contribution to a recognised provident fund is an allowable deduction. A contribution made toan unrecognised provident fund is also deductible provided the employer has made effective

arrangements to ensure that tax would be deducted from any payments made by the fund to theemployees.

As JJA has made the aforesaid effective arrangements, the contribution of Rs.400,000 made tothe fund is a deductible expenditure.

(ii) Eid-Milan party:

The expenditure of Rs.75,600 is in the nature of an amenity provided to the employees to

maintain cordial and friendly relations with employees which is an integral part of the business.Expenditure incurred in order to indirectly facilitate the carrying on of the business is expenditure

incurred wholly and exclusively for business purpose and is a deductible expenditure.

(iii) Damages paid:

Rs.500,000 paid to the sole distributor as damages due to the failure to deliver supplies withinthe time stipulated in the contract, is an expense connected and incidental to the business. The

fact that the delay in delivery of goods was due to the negligence of JJAs dispatch department isnot relevant. The expenditure incurred is wholly and exclusively for business purpose and is a

deductible expenditure.

(2) The following issues raised by the Commissioner are in accordance with the provisions of thetax statute:

(i) Travelling expenses:

The expenditure of Rs.1,530,000 incurred solely to secure the purchase of machine, is capitalexpenditure and is not deductible. Rs.1,530,000 should be added to the cost of the machine for

tax purposes.

(ii) Donation:

The donation of Rs.1,000,000 paid to a hospital run by the Federal Government is not adeductible expenditure. JJA is however entitled to a tax credit.

(iii) Salary paid to Mr Jamal:

Any salary paid by an AOP to i ts members is not a deductible expenditure. Mr Jamal is a member

of the AOP and therefore, the salary paid to him is not a deductible expenditure.


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Answer to Q.4Mr Zaki

Tax year 2012

( a ) Compu t a t i o n o f t a xab l e in come

Salary from AOPLBasic salary for five months 2,500,000

Utility allowance for five months 250,000Medical allowance for five months 325,000

Less: 10% of basic salary 250,000 125,000Bonus 1,000,000

Benefit of company maintained car5% of Rs.3 million for 4 months 50,000

Less: payment by Mr. Z Rs.10,000 per month 40,000 10,000Benefit on purchase of motor car 900,000 600,000 300,000

Golden handshake payment 7,000,000Gratuity 6,000,000

AOPLs Employees Provident Fund exempt

Salary from Saudi Arabia

Foreign-source salary exempt

Taxable income 17,185,000Less: Golden handshake payment to be taxed separately 7,000,000

Taxable income excluding separate block of income 10,185,000

( b ) Compu t a t i o n o f t a x payab l e

Tax on balance of Rs.10,185,000 at 20% 2,037,000Tax on Rs.7,000,000 (golden handshake) at 12% 840,000

2,877,000Add: surrender of tax credit on shares allowed in the tax year 2011 50,000

2,927,000Advance tax col lected by bank on cash withdrawals 16,700

Tax deducted at source by AOPL from salary income 2,800,000 2,816,700Tax payable 110,300

Notes:

(1) Salary and cash allowances of each month are transferred to each employees bank accounton the first working day of the following month. Therefore, the basic salary and allowances

have been calculated for five months (June 2011 to October 2011).

(2) Rs.6,000,000 from unapproved gratuity: Amount received from unapproved gratuity scheme

is exempt up to 50% of the gross amount or Rs.75,000 whichever is lower.

However, since the gratuity was received by Z outside Pakistan, the above exemption is not

available and the entire amount is taxable.

(3) If a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that taxyear, any foreign source salary income earned by a resident person is exempt. Z left Pakistanfor Saudi Arabia on 1.4.2012 and remained abroad till the end of the tax year 2012 and

therefore salary earned in Saudi Arabia is exempt in Pakistan.

(4) The net profit of Rs.78,125 on the sale of locally purchased items is not taxable under anyhead of income since the tax deducted Rs.60,375 (35% of gross sales of Rs.1,725,000) is

the final tax on the income arising from the sale of such items.

(5) As the shares of CD Pakistan Ltd were disposed off within a period of 36 months, the taxcredit of Rs.50,000 allowed in the tax year 2011 is required to be surrendered.


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Answer to Q.5

1 (iv)

2 (iv)

3 (iii) Note for students:Option to tax salary on accrual basis can be exercised by the

Commissioner in this case and not the taxpayer.4 (iv)

5 (iv)

6 (iii)

7 (iii)

8 (ii)

9 (iii)

10 (ii)

11 (iii)

12 (iii) and (iv)

13 (iii) and (iv)

14 (iv)

15 (ii) and (iv)

16 (iv)17 (iv)

18 (iv)

19 (ii)

20 (iv)21 (i) and (iv)

22 (ii)

23 (ii)24 (iii)

25 (iv)


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Al-Hamd AcademyICAP Module C

TEST

Taxation

Faculty: KP August 2012Time allowed: 3 Hours Max Marks: 75

Question 1:

Explain the correct tax treatment in each of the following situations:

(i) In 2001, Mr. Hammad inherited from his father a rare sculpture of Alexander which had a

fair market value of Rs.2,000,000 on the date of inheritance. In March 2012, the

sculpture was sold by him at Rs.750,000.

(ii) In December 2011, Mr. Harun entered into an agreement for sale of his residential plot

to Mr. Bux, who paid an advance of Rs.500,000. According to the agreement, Mr. Bux

was required to pay the balance by 28.2.2012. However, instead of paying the balance

amount, he terminated the sale agreement. Mr. Harun forfeited the advance of

Rs.500,000 in accordance with the terms of the agreement.

(iii)In September 2011, Mr. Saleem sold his personal car, Toyota Starlet, to one of his

friends at a price of Rs.350,000 whereas the fair market value of the car was Rs.500,000.

The car was purchased by him in the year 2008 at a cost of Rs.425,000.

(iv) Mr. Zarrar was working as a Chief Financial Officer in Dawai Pakistan (Pvt) Ltd, which is a

wholly owned subsidiary of Dawai AG, Germany. According to the Companys policy, Mr.

Zarrar was sent on secondment to Germany on 1.1.2012 for a period of five years.

During this period, half of his salary will be credited to his bank account in Pakistan,

whereas the remaining portion will be received by him in Germany.

(v) Mr. Jafar provided consultancy services to Sultan Ltd. In consideration for his services, he

received a net amount of Rs.470,000 after tax deduction of Rs.30,000.

(Marks 15)

Question 2:

Explain the term long term contract and the method of computing the income from long term

contract, under the Income Tax Ordinance, 2001. (Marks 10)

Question 3:

Discuss the procedure required to be followed by a resident company if it intends to make

payments to a non-resident individual without deduction of tax. (Marks 5)

Question 4:

Mr. Arif is working as a Senior Executive in PQ Pakistan Ltd. The details of his income / receipts

during the tax year 2012 are as follows:

(i) He received basic salary of Rs.100,000 per month.

(ii) He was provided with furnished accommodation for which PQ Pakistan Ltd paid a rent of

Rs.30,000 per month.


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You are required to compute taxable income after taking into consideration the following notes:

(a) Allowable tax depreciation amounts to Rs.8,600

(b) Law charges include Rs.6,000 paid as compromise amount for suit against one of the

directors.

(c)

Sufficient verification is on record and the entire expenses are allowable.

(d) Tax WDV of furniture was Rs.10,000 which was sold for Rs.10,900.

(e)

The company has fulfilled all the requirements of a small company. (Marks 20)



TAXABLE INCOME RATE


2 350,001 400,000 1.50%

3 400,001 450,000 2.50%

4 450,001 550,000 3.50%

5 550,001 650,000 4.50%6 650,001 750,000 6.00%

7 750,001 900,000 7.50%

8 900,001 1,050,000 9.00%

9 1,050,001 1,200,000 10.00%

10 1,200,001 1,450,000 11.00%

11 1,450,001 1,700,000 12.50%

12 1,700,001 1,950,000 14.00%

13 1,950,001 2,250,000 15.00%

14 2,250,001 2,850,000 16.00%

15 2,850,001 3,550,000 17.50%

16 3,550,001 4,550,000 18.50%

17 Over Rs.4,550,000 20.00%

1.2 Marginal relief in case of salaried taxpayers

Where the total income of a taxpayer marginally exceeds the maximum limit of a slab in

the table, the income tax payable shall be the tax payable on the maximum of that slab

plus an amount equal to

(i) 20% of the amount by which the total income exceeds the said limit where the total

income does not exceed Rs.550,000.

(ii) 30% of the amount by which the total income exceeds in each slab but total income

does not exceed Rs.1,050,000.

(iii) 40% of the amount by which the total income exceeds in each slab but total incomedoes not exceed Rs.2,250,000.

(iv) 50% of the amount by which the total income exceeds in each slab but total income

does not exceed Rs.4,550,000.

(v) 60% of the amount by which the total income exceeds in each slab but the total

income exceeds Rs.4,550,000.


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Tax rates on income from propertywhere the owner is an individual:

S. No. Gross amount of rent Rate of tax

(1) Where the gross amount of rent does not

exceed Rs.150,000

Nil

(2) Where the gross amount of rent exceeds

Rs.150,000 but does not exceed Rs.400,000

5% of the gross amount

exceeding Rs.150,000


Rs.400,000 but does not exceed

Rs.1,000,000

Rs.12,500 plus 7.5% of

the gross amount

exceeding Rs.400,000


Rs.1,000,000

Rs.57,500 plus 10% of

the gross amount

exceeding Rs.1,000,000

- The end -


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5

Al-Hamd Academy

Answers to the test- Taxation Module C Augus t 2012

Answer to Q.1:

(i) Fair market value on the date of inheritance is a deemed cost for the recipient. There are

certain capital assets including sculpture on the disposal of which gain is taxable subjectto holding period but loss, if any, shall not be recognized. Therefore, loss on disposal of

sculpture is not recognised.

(ii)

Forfeited deposit under a contract for sale of immovable property is included in the

definition of rent under the head income from property which is taxable as separate

block of income. This amount is therefore taxable under the head income from property

and separate tax would be worked out as under:

Income tax on Rs.400,000 12,500

Income tax on Rs.100,000 @ 7.5% 7,500

Total tax on property income 20,000

(iii)

Car held for personal use is not a capital asset and therefore its disposal does not fall

within the ambit of capital gain. Sale of a personal car is a capital receipt which is not

taxable under any head of income.

(iv) Salary shall be Pakistan source income where the salary is received from any

employment exercised in Pakistan, wherever paid. As the services are performed outside

Pakistan, salary in this case shall be foreign source salary.

Foreign source salary shall be exempt if a citizen of Pakistan leaves Pakistan during a tax

year and remains abroad during that tax year section 51(2). Therefore, foreign source

salary in this case would not be taxable in Pakistan.

(v)

Service Income earned by a person where the service is provided to a tax deductingagency:

This income is taxable under normal tax structure at normal slab rates. However, tax

deduction at source @ 6% shall be minimum tax on such income. It means that normal

tax liability on service income shall not be less than 6% of gross revenue.

Answer to Q.2:Income from any long-term contract shall be computed on the basis of % of completion method.

% of completion in a tax year shall be determined as under:

Cost of contract incurred before the end of the tax year _

Total estimated contract cost at the commencement of contract

Long-term contract means a contract which is not completed within the tax year in which work is

commenced other than a contract estimated to be completed within 6 months of the

commencement of work.

Answer to Q.3:Where a person intends to make a payment to a non-resident without tax deduction on any

ground e.g. payment to the non-resident is not taxable in Pakistan, he shall furnish a notice to

the Commissioner before making payment setting out:


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o name and address of the non-resident; and

o nature and amount of the payment

The Commissioner shall within 30 days pass an order accepting or rejecting the application.

Answer to Q.4:Mr. Arif

Tax Year 2012

Computation of taxable income and tax liability

Rs.

SALARY

Basic salary 100,000 x 12 1,200,000

Accommodation 45% of basic salary 540,000

Company car 5% of Rs.500,000 25,000

Medical allowance 150,000

Less: 10% of basic salary 120,000 30,000

Provident Fund (assumed to be recognized)

Companys contribution 12% of basic salary 144,000

Less: Exempt up to Rs.100,000 or 10% of basic salary + DA 100,000 44,000(Whichever is lower)

1,839,000

Income from property

Rent 12 x 20000 240,000

Un-adjustable advance 200,000

Less: Amount already taxed in the year 2011 14,000

186,000

10% of the balance advance 18,600

Chargeable rent 258,600

CAPITAL GAIN

Gain on sale of jewellery (holding period assumed to be within 1 year) 45,000Loss on sale of antique not recognized (28,000) --

Taxable income 2,142,600

Less: Property income (separate block of income) 258,600

Income taxable at normal slab rates 1,884,000

Notes:

Company car:5% of the cost of car to the employer (and not the FMV) is taxable where the car

is being used for office and private purposes. However, if an employer has taken a car on lease

then FMV of the car at the inception of the lease shall be considered for this purpose.

Medical allowance: Medical allowance is exempt up to 10% of basic salary and for this

purpose actual medical expense incurred by the employee shall not be considered.Antique: Antique is a capital asset. However, there is a specific category of capital assets

including antique on which capital gain, if any, is taxable but capital loss is not recognized.

Therefore, capital loss on disposal of antique is not considered in the computation of income.

Dividend income: Gross dividend income is taxable under Final Tax Regime and tax deducted

at source @ 10% of gross dividend is the full and final tax on such income and therefore,

dividend income is not included in normal taxable income.

Share of rent to HBFC: Share of rent to HBFC is not deductible from property income.

However, rebate is allowed on share of rent to HBFC at average rate of tax.


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alhamd taxation tests and solution

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