Answers

Fundamentals Level Skills Module, Paper F6 (PKN)

Taxation (Pakistan)

June 2013 Answers

and Marking Scheme

Notes:
1. The suggested answers provide detailed guidance on the subject for use as a study aid to the question paper. Candidates were
not expected to produce answers with this extensive detail, which would not be possible in a three hour exam.
2.

All references to legislation shown in square brackets are for information only and do not form part of the answer expected from
candidates.

Sahiwal Engineering Limited

Marks

(a)

(b)

Since Sahiwal Engineering Ltd (SEL) is a company incorporated in Pakistan under the Companies Ordinance,
1984, it shall be treated as a resident taxpayer in Pakistan. For a company incorporated under the
Companies Ordinance, 1984, the other test that the place of control and management of the company should
be wholly situated in Pakistan at any time in a tax year needs not to be satisfied to qualify as a resident
company.

20

Taxable income for the tax year 2013 (accounting year ended 30 June 2013)
Note
Income from business
Net profit as per income statement
Add:
Sales under recorded due to an accounting error
Cess paid to the local government
Accounting depreciation
Contribution to an unapproved superannuation fund
Acquisition of manufacturing rights
Charitable donation made in kind
Salaries paid in cash
Provision for bad debts
Other expenditure
Rent payable since the tax year 2009
Purchase of furniture

Rs.

Rs.
10,550,000

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)

35,000
50,000
1,000,000
300,000
1,600,000
1,000,000
800,000
1,500,000
8,000,000
400,000
750,000

05
10
05
05
05
05
10
10
05
15
10
05

15,435,000
Less:
Amortisation of acquisition of manufacturing rights
Trade debts written off
Recoveries against bad debts written off in prior years
Additional payment for delayed tax refunds
Tax loss on sale of machinery
Initial allowance
Tax depreciation

Income from business

Income from other sources

(5)
(12)
(13)
(14)
(11)
(11)
(11)

40,000
800,000
750,000
1,300,000
200,000
1,750,000
2,662,500

(14)

Total/taxable income

15
10
10
05
10
10
30
(7,502,500)

18,482,500
1,300,000

19,782,500

10

Items not included in the computation of taxable income

(i)

Write off of obsolete stock Rs. 500,000

Writing off of obsolete stock is incidental to the carrying out of the business and allowable as a
deduction. [s.20 and general principles of taxation]

(ii)

10

Compulsory annual fee to the Engineering Development Board Rs. 200,000

Any expenditure, in aggregate, under a single accounting heading in excess of Rs. 50,000 other than
by crossed bank cheque or crossed bank draft or any other banking instrument is not deductible with
certain exceptions. One of the exceptions is any fee expenditure. Hence, the Rs. 200,000 paid, in cash,
to the Engineering Development Board established by the Federal Government is deductible and no
adjustment is required. [2nd proviso to s.21(l)]

17

10

Marks
(iii) Expenditure on the annual get-together function for the employees Rs. 600,000
In order to promote harmony and cohesiveness among the employees, businesses arrange such
functions in which employees and their families gather together and get to know each other better. Any
expenditure incurred on such functions is allowable expenditure on the ground of commercial
expediency, being expenditure incurred wholly and exclusively for the purposes of business. [s.20(1)]

10

(iv) Profit on debt paid to a subsidiary company of SEL Rs. 700,000

The withholding tax provisions do not apply in respect of inter-company profit on debt within a group
of companies which are entitled to group taxation. Therefore, SEL was not required to deduct tax. So,
no adjustment is required. [ Cl.(11C) of Pt IV of 2nd Sch]
(v)

10

Loan to associate written off Rs. 300,000

A loan to an associate written off against the bad debt provision is not deductible since it is not the
business of SEL to lend money and it does not fulfil the condition that the debt should have previously
been included in the persons income from business chargeable to tax. Since it has not been claimed
as a deduction, no adjustment is required. [s.29(1)(a)]

Notes:
Note 1
The amount of any tax from any payment received is treated as income derived by the person to whom such
payment is made. Therefore, the amount of tax deducted at source from the sale proceeds was part of the
sale proceeds and taxable. The amount of tax deducted at Rs. 35,000 (1,000,000 x 35%) is, therefore,
added to the income and allowed as advance tax paid when computing the tax payable by SEL. [ss.21(b) &
168(1)(a)]
Note 2
Any cess which is levied on the profits or gains of the business is assessed as a percentage or otherwise on
the basis that such profits or gains are inadmissible against Income from Business. [s.21(a)]
Note 3
Accounting depreciation is not a deductible charge. Tax depreciation and initial allowance are deductible at
the rates prescribed in the Third Schedule and subject to the conditions mentioned in the relevant provisions
[ss.22 & 23] of the Ordinance.
Note 4
Any contribution to a superannuation fund which is not approved is not admissible for deduction. [s.21(e)]
Note 5
Acquisition of the contractual right to manufacture water-kits for cars in Pakistan is an intangible for income
tax purposes. The total amount cannot be deducted in one year. It has to be amortised over its useful life (in
years) and allowed on the basis of the number of days it is used in a year as below:
Total amount paid for the intangible
Useful life of the intangible
Per year deduction (1,600,000/8)
Proportionate allowable deduction for 73 days during the tax year 2013
(73/365 x 200,000)
[ss.24(4), (6) and (11)]

Rs. 1,600,000
8 years
Rs. 200,000
Rs. 40,000

Note 6
A donation in kind to a relief fund run by the Government of Sindh is not for the purpose of business, hence
not allowable as expenditure. However, it is eligible for tax credit under the law. [s.20(1)]
Note 7
If the salary of an employee exceeds Rs. 15,000 per month, it should be paid through a crossed cheque or
by direct transfer of funds to the employees bank account, otherwise such an expense becomes
inadmissible. Since the salaries of the temporary workers were paid in cash, the whole amount of
Rs. 800,000 is inadmissible despite the fact that tax was deducted from such salaries. [s.21(m)]
Note 8
Since the provision made for bad debts is a general provision and there are no reasonable grounds to believe
that the debts have become irrecoverable, the provision of Rs. 1,500,000 is inadmissible. [s.29(1)(c)]

18

10

24

Marks
Note 9
Other expenditure
(1) Accounting loss on sale of machinery

Rs. 500,000

An accounting loss or profit resulting from the disposal of an asset is tax neutral. Therefore, to nullify
its effect, the amount of the accounting loss is added back in the total income. A loss is only allowable
where the consideration received on the disposal of a fixed asset is less than the tax written down of
the asset. [s.22(8)(b)]
(2) Provision for taxation

Rs. 5,500,000

Provision for taxation is in the nature of an appropriation of profit and not expenditure to earn business
income. Hence, it is not allowable under the law. [s.21(a)]
(3) Provision for anticipated losses

Rs. 2,000,000

Tax law allows only losses which are revenue in nature and which have occurred during the relevant
tax year. Anticipated losses are not allowable. [s.34(1)]
Note 10
Where a taxpayer is allowed a deduction for any expenditure in deriving income under the head Income from
Business and the person has not paid the liability to which the deduction relates within three years of the
end of the tax year in which the deduction was allowed, the unpaid amount of the liability is chargeable to
tax in the first year following the end of the three years.
Since the liability on account of rent payable was allowed in the tax year 2009 and it has not been paid by
the end of the tax year 2012, it is added back in the tax year 2013. [s.34(5)]
Note 11
Fixed assets
(1) Initial allowance and tax depreciation:
Asset

(1)

Land
Office and
factory
buildings
Residential
quarters
Plant and
machinery
Motor vehicles

TWDV on
1 July 2012

Addition/
(deletion)
during
the year

(2)

(3)

Rs.
15,000,000

Rs.
3,000,000
(see (a))

9,000,000

9,000,000

10%

900,000

7,000,000
(see (a))

1,750,000
(see (b))

5,250,000

10%

525,000

4,000,000
1,500,000

(500,000)
2,500,000
(see (c))
750,000
(see (d))

3,500,000
4,000,000

15%
15%

525,000
600,000

750,000

15%

112,500

Furniture
Total

Initial
TWDV
Rate of
Depreciation
allowance
for
depreciation
at 25% of depreciation
addition
of eligible
buildings
(4) =
(5) = (2 + 3)
(6)
(7)
(3) x 25%
(4)
Rs.
Rs.

1,750,000

2,662,500

[ss.22 and 23 read with 3rd Sch]

Sub-notes to Note 11 (1)

(a)

Land is not eligible for depreciation. The cost of construction of the residential quarters is,
therefore, reduced by Rs. 3,000,000, being the price of land. [s.22(15)]

(b)

Only the cost representing the construction of the residential quarters is eligible for initial allowance
and depreciation. The rate of initial allowance in the tax year 2013 is 25% [previously it was
50%]. Depreciation is charged on the cost of construction of the residential quarters after the initial
allowance has been deducted. Use of the eligible asset for even one day is sufficient for a valid
claim of depreciation and initial allowance.

19

Marks
(c)

For the tax year 2013 and onwards, a car having a cost of Rs. 2,500,000 is eligible for
depreciation on its full cost [the previous maximum cost was Rs. 1,500,000]. Further, a car is not
eligible for initial allowance. [ss.22(13)(a) and 23(5)]
The cost incurred to enhance the security and safety features of the car is capitalised and eligible
for depreciation.

(d)

Furniture is eligible for tax depreciation but not for an initial allowance. [ss.22 & 23(5)(b)]

(2) Debiting of the cost of the furniture purchased during the year to the income statement is not allowable,
hence Rs. 750,000 must be added back in the total income, being capital expenditure. [s.21(n)]
(3) The loss on the sale of machinery of Rs. 200,000 (representing excess TWDV of Rs. 500,000 over the
sale proceeds of Rs. 300,000) is an admissible deduction. [s.22(8)]
Note 12
Trade debts written off Rs. 800,000
Since trade debts are irrecoverable and have actually been written off (and not merely provided for) in the
books of accounts, the amount is allowable as a deduction. [ss.29(1) & (2)]
Note 13
Recoveries against bad debts Rs. 750,000
Since the amount recovered belongs to the bad debt of prior years, its recovery in the current tax year would
only be taxable if it had previously been allowed as a deduction. Since the amount was not allowed as a
deduction in previous years, taxable income is reduced by the same amount to avoid double taxation.
[s.29(3) & s.73]
Note 14
Additional payment for delayed refund Rs. 1,300,000
Under the law, if an excess amount of tax paid by a taxpayer is not refunded by the tax department within
the prescribed time limit, the taxpayer is entitled to an additional amount from the tax department. Taxability
of such additional amount was disputable. Through an amendment in the Finance Act, 2012, it has been
made taxable under the head Income from Other Sources. Therefore, it is deducted from the head Income
from Business and taxed under the head Income from Other Sources.
(c)

Tax liability for the tax year 2013

Rs.
Taxable income for the tax year 2013 (from (b))
Tax at 35%
Tax credit admissible on the donation in kind to the relief fund run by the
Government of Sindh.
The value of the donation in kind (Rs. 1,000,000) is 505% of the
taxable income which is within the allowable upper limit of 20% of taxable
income. Hence a tax credit is allowable on this amount as below:
Tax assessed

Taxable income
6,923,875

19,782,500

Rs.
19,782,500

6,923,875

05

x Value of donation in kind

x 1,000,000

[ss.61(1) & (2)]

(350,000)

15

6,573,875

Less tax already paid

Tax deducted from payment on account of sales to a public company
35,000
[ss.153(3) & 168]
Tax paid at the time of registration of car [ss.168 & 231B]
50,000
Tax collected along with electricity bills [ss.168 & 235]
900,000
Advance tax paid in four instalments [s.147]
5,000,000

05
05
05
05
(5,985,000)

588,875

Tax payable with return [s.137]

20

40

30

Marks
2

Mr Rizwan
Taxable income and tax payable for the tax year 2013 (accounting year ended 30 June 2013)
Rs.
Income from salary
Basic salary
Technical allowance (Rs. 1,200,000 x 5%)
Payment in lieu of recreational leave
Utilities allowance (Rs. 1,200,000 x 6%)
Payment for honouring restrictive covenant
Perquisite representing accommodation
Perquisite representing car
Benefit on purchase of car
Waiver of outstanding loan of Rs. 50,000
Services of domestic servant to Rizwan

[s.12(2)(a)]
[s.12(2)(c)]
[s.12(2)(a)]
[s.12(2)(c)]
[s.12(2)(e)(v)]
(working 1)
(working 2)
(working 3)
[s.13(9)]
(working 4)

05
10
10
10
20
20
20
10
05
10

Income under the head salary

Income from business
Share of profit from AOP Agrofriends
Income from property [taxable under fixed tax regime]

1,200,000
60,000
50,000
72,000
100,000
720,000
27,178
100,000
50,000
84,000

2,463,178

(working 5)
(working 6)

0
796,500

3,259,678

25
20

Total taxable income

Tax payable on taxable income
Tax on income from property
Tax on taxable income other than income from property

(working 6)
(working 7)

Total tax payable

Less tax deducted at source by the employer

[s.149]

Tax payable with return

[s.137]

Rs.
42,238
428,053

Rs.
05
25
470,291
(125,000)

345,291

05

Explanation of items not included in the computation of taxable income

(i)

Car provided for business use

A car was provided to Rizwan for business use. No personal benefit is derived by him, hence, no amount is
taxable as a perquisite. [ss.12 & 13]

(ii)

10

Concessional loan Rs. 400,000

Any loan advanced at a profit rate which is less than the benchmark rate constitutes a perquisite. However,
by virtue of an amendment in the Finance Act, 2012, no amount on account of the concessional rate of profit
is taxable if the loan amount does not exceed Rs. 500,000. [2nd proviso to s.13(7)]

10

(iii) Benefit of shares allotted to Rizwan under an employee share scheme

Although the shares of the company were allotted to him at a price lower than the breakup value (which is
assumed to be the fair market value in the absence of any other information about their valuation), there was
a restriction on the sale or transfer of the shares. Where the issuance of shares is subject to a restriction on
the transfer of the allotted shares, no amount is chargeable to tax to the employee until the earlier of:
(a)
(b)

the time the restriction is removed; or

the time the employee actually disposes of the shares.

Neither of these events occurred before 30 June 2013. Hence, no amount is taxable as salary of Rizwan for
the tax year 2013. [s.14(3)]

10

(iv) Expenditure on self-education

No deduction is allowable for any expenditure incurred by an employee in deriving his salary income.
[s.12(4)]
(v)

10

Share from association of persons (AOP), Agrofriends

As an AOP is taxed separately from its members, where the AOP has paid the tax, the share of profit received
by a member of the AOP out of the income of the AOP is exempt from tax. However, it shall be added for
the determination of the tax rate applicable to his other income (working 7). [s.92(1)]

21

10

25

Marks
Workings:
Working 1
Accommodation provided to Rizwans family is a perquisite of Rizwan provided by his employer and is taxable.
The value of this perquisite is equal to the amount that would have been paid by the employer if such
accommodation were not provided, subject to a minimum value being equal to 45% of the basic salary. Since
Rizwan was entitled to a 60% house rent allowance, had he not been provided with the accommodation, the same
amount is taken as the value of the perquisite as computed below:
Rs.
1,200,000
720,000

Basic salary
Value of the perquisite (1,200,000 x 60%)

The fair rent of the accommodation at Rs. 50,000 per month is not relevant for the purposes of computing the
value of the perquisite representing accommodation. [s.13(12) read with rule 4 of the income tax rules, 2002]
Working 2
The car was provided for Rizwans exclusive personal use on 1 January 2013 by leasing it on the same day.
According to the tax law, 10% of the fair market value (FMV) of the car on 1 January 2013 shall be treated as a
perquisite received by him. The lease rentals to be paid by the company are not taken into consideration when
computing the value of the perquisite. Since the car was provided for half of the year, the value of the perquisite
is worked out proportionately. Further, the amount paid by the employee is also to be deducted. Therefore, the
perquisite shall be computed as below:
FMV of the car
10% of the FMV (2,000,000 x 10%)
Restricted to the number of days (181) it was used during the tax year 2013
(200,000 x 181/365)
Less amount paid by Rizwan
Amount to be treated as salary

Rs.
2,000,000
200,000
99,178
(72,000)

27,178

[ss.13(3) & (6) read with rule 5 of the income tax rules, 2002]
Working 3
Rs.
500,000

Fair market value of the car on 25 June 2013

Less:
Amount paid by Rizwan

(400,000)

100,000

Perquisite on account of acquisition of car

[s.13(11)]
Working 4

Since the services of a domestic servant were provided to Rizwan by the employer, the amount Rizwan will be
chargeable to tax will include the total amount paid to the domestic servant as computed below:
Rs.
7,000
84,000

Monthly salary of domestic servant

Annual salary (7,000 x 12)
[s.13(5)]
Working 5
Share from Agrofriends
Agrofriends is an AOP of which Rizwan has a 40% share in the profits.
Taxable income before adjustment on account of capital allowances on computers
Initial allowance on computers (Rs. 200,000 x 50%) [s.23]
Tax depreciation on computers (Rs. 200,000 100,000) x 30% [s.22]
Taxable income of the AOP
Rizwans share (1,470,000 x 40%)

Rs.
1,600,000
(100,000)
(30,000)

1,470,000

588,000

Working 6
Income from property
The property is jointly owned with his brother and each has a specific share; therefore, the share in property
income is to be assessed in the hands of individual partners and not as an association of persons. [s.66]

22

Marks
Since the rent is received in foreign currency, it must be converted into Pakistan rupees at the State Bank of
Pakistan rate prevailing on the day the amount was received, i.e. on 1 July 2012 as below:
Total annual rent of the property in US$ (1,500 x 12) US$ 18,000
Rs.
1,593,000
796,500

Total rent in Pakistan Rupees (18,000 x 885) [s.71]

Rizwans 50% share
Tax payable on Rs. 796,500
[Rs. 12,500 plus 75% of the gross amount exceeding Rs. 400,000]
(12,500 + 75% x (796,500 400,000))

42,238

[s.15 read with Div VI of Pt I of the 1st Sch]

Working 7
Rs.
3,259,678
(796,500)

2,463,178
588,000

3,051,178

Taxable income including Income from property

Less Income from property to be taxed separately [working 6]
Add share from the Agrofriends for rate purposes [working 5]
Taxable income plus share from Agrofriends

Rs. 588,000 being the share of profit [working 5] received by Rizwan from the AOP Agrofriends is exempt from
tax. [s.92(1)] However, for the purpose of determining the rate of tax applicable to the other taxable income
(Rs. 2,463,178), Rs. 588,000 is included in Rizwans income as if it were chargeable to tax. [s.88] The
computation is as below:
Rs.
Tax payable on taxable income including share from AOP
[Rs. 420,000 plus 20% of the amount exceeding Rs. 2,500,000]
(420,000 + 20% x (3,051,178 2,500,000))
(A) 530,236
Taxable income if the share of profits from the AOP were chargeable to tax (B) 3,051,178
Actual taxable income
(C) 2,463,178
Tax on taxable income
A/B x C
(530,236/3,051,178 x 2,463,178)

(a)

Rs.

428,053

Immunity from enquiries into the nature and sources of amounts invested in shares
No enquiries as to the nature and sources of an amount invested in the shares of a public company traded
at a registered stock exchange in Pakistan shall be made provided that the following conditions are fulfilled:
(1) the investment is made any time between 24 April 2012 and 30 June 2014;
(2) the amount remains invested for a minimum period of 120 days in the prescribed manner;
(3) tax on the capital gains, if any, is discharged in accordance with the rules provided in the Eighth
Schedule to the Income Tax Ordinance, 2001; and
(4) a statement of investments is filed with the Commissioner Inland Revenue along with the return of
income and wealth statement for the relevant tax year within the due date as provided in the law.
[s.118]
[Rule 2(2) of the 8th Schedule]

23

40

Marks
(b)

Mr Bilal
Tax payable for the tax year 2013 (accounting year ended 30 June 2013)
Transaction

Note

Capital gain/(loss)
Rs.

Tax
Rs.

Capital gains/(losses) and tax on the disposal of

immovable properties taxable as a separate block
On the sale of agricultural land
On the exchange of the plot in Lahore
On the sale of the flat in Karachi

(1)
(2)
(3)

2,020,000
1,500,000
0

202,000
75,000
0

30
15
10

Capital gains on securities taxable as a separate block

On the sale of call options
On the sale of shares in Turbo Motors Ltd

(4)
(5)

50,000
248,940

5,000
19,915

20
30

(6)

1,125,000

15

(7)

(440,500)

684,500

10

Income under the head Capital gains assessable

to tax along with other heads of income
On the sale of shares in Farid Sugar Mills
Less:
Capital loss brought forward
Total taxable income
Tax at 10% of the amount exceeding Rs. 400,000
(684,500 400,000) x 10%
[Para (1) of Div I, Pt I of the 1st Sch]

28,450

05

Tax payable under the final tax regime (FTR)

Dividend income
Tax on dividend income at 10% (1,500,000 x 10%)

(6)
(6)

Total tax
Less: tax already paid

on the sale proceeds of agricultural land at 05% of total

proceeds Rs. 9,000,000 (9,000,000 x 05%) [s.236C]

on cash withdrawals from bank [s.231A]

Rs.
1,500,000

Rs.
150,000

480,365

45,000
12,000

05
05
(57,000)

423,365

Tax payable with return

Notes:
Note 1
Sale of agricultural land
Through an amendment in the Finance Act, 2012, a gain on the disposal of immovable properties held not
beyond two years has been made chargeable to tax according to the rates prescribed for such capital gains
in the First Schedule to the Income Tax Ordinance, 2001. The capital gain on the disposal of agricultural
land is computed as below:
Rs.
Consideration received
Less:
Purchase price [s.76(2)(a)]
Transfer fees [s.76(2)(b)]
Expenditure on the valuation of the property [s.76(2)(b)]
Brokerage to real estate agent [s.76(2)(b)]
Expenditure to improve the fertility of the land [s.76(2)(c)]

Rs.
9,000,000

6,500,000
160,000
40,000
80,000
200,000

(6,980,000)

2,020,000

Capital gain
Tax at 10% as the holding period of the land was less than one year
(2,020,000 x 10%) [Div VIII of Pt I of 1st Sch]

24

10
05

202,000

16

20

Marks
Note 2
Exchange of a plot of land in Lahore with a plot in Okara
The exchange of an asset is also treated as a disposal of the asset for tax purposes. [s.75(1)(a)]
The fair market value of the plot that was obtained in exchange with Mr Asad is less than the fair market
value of the plot Bilal gave to him. Tax law in such situations prescribes that the fair market value of the asset
disposed of shall be taken as the consideration received. [s.77(1)] Consequently, the capital gain/(loss) is
worked out by taking the consideration received at Rs. 7,500,000. Other factors given in the question, such
as the expected future increase in the value of the plot received in exchange, are not relevant for the
computation of the capital gain.
Rs.
7,500,000

Deemed consideration on the disposal on 15 July 2012

Less:
Cost of the plot on 15 February 2011

(6,000,000)

1,500,000

Capital gain
Tax at 5% as the holding period of the land was more than one year and less than
two years (1,500,000 x 5%) [Div VIII of Pt I of 1st Sch]

75,000

Note 3
Sale of flat in Karachi
Rs.
5,000,000
(4,000,000)

1,000,000

Consideration received for the sale on 10 August 2012

Less cost incurred at the time of purchase on 1 January 1995

Since the disposal was made after holding the flat for more than two years, no gain is taxable under the law.
[s.37(1A)]
Note 4
Sale of call options
Gain on the sale of securities is taxed as a separate block of income. The definition of a security includes
derivative products, e.g. call options. [s.37A(3)] The capital gain on the sale of the call options is, therefore,
treated as a gain on securities and tax thereon is computed as below:
Rs.
Consideration received on the sale of 100,000 call options at
Rs. 25 per call option on 25 June 2013 (100,000 x 25)
Less:
Cost incurred on 20 June 2013 at Rs. 19 per call option
(100,000 x 19)
Other admissible expenditure

Rs.
250,000

190,000
10,000

(200,000)

50,000

Capital gain
Tax on the capital gain of Rs. 50,000 at 10% as the holding period
is less than six months (50,000 x 10%) [Div VII of Pt I of 1st Sch]

25

5,000

Marks
Note 5
Sale of shares in Turbo Motors Ltd
Since 50% of the shares in Turbo Motors Limited are held by the Government of Balochistan, the company
is treated as a public company for the purposes of the computation of any capital gain/(loss) despite the fact
that it is not a listed company. Shares of a public company are included in the definition of a security. The
capital gain/(loss) is computed as below:
Rs.
Consideration received on the sale of 5,000 shares at
Rs. 170 per share (5,000 x 170)
Less:
Purchase price at Rs. 120 per share (5,000 x 120)
Capital value tax paid (5,000 x 120 x 001%)
Commission on purchase of the shares (5,000 x 01)
Commission on sale of the shares (5,000 x 01)

Rs.
850,000

600,000
60
500
500

(601,060)

248,940

Tax at 8% of the capital gain as the holding period is more than six months
but less than 12 months (248,940 x 8%) [Div VII of Pt I of 1st Sch]

19,915

Note 6
Sale of FSM shares
A dividend in specie derived in the form of shares of a company registered under the Companies Ordinance,
1984, is taxed at the time of disposal of such shares and not at the time of their receipt. In this instance,
although 150,000 shares were received as a dividend in specie in the tax year 2011, the dividend was not
taxable in that year, but in the tax year 2013, when the shares were disposed of. Therefore, the fair market
value of these shares on the date of acquisition, i.e. Rs. 10 per share, will be taxed as dividend income in
the tax year 2013.
The amount of dividend taxed is treated as the cost of these shares and taken into account for the purpose
of the calculation of the capital gain:
Dividend income
Rs.
Dividend in the form of 150,000 shares in Farid Sugar Mills (Pvt) Ltd
at Rs. 10 per share taxed in the tax year 2013

1,500,000

Capital gain
Rs.
3,000,000
(1,500,000)

1,500,000

Consideration received on 1 January 2013

Cost of the dividend in specie
Capital gain
Since the shares were held by Bilal for more than one year, only 75% of the
capital gain is taxable (1,500,000 x 75%) [s.37(3)]

1,125,000

Note 7
Capital loss
Bilal had a brought forward loss of Rs. 440,500 relating to the tax year 2010 arising from a disposal of
shares in a private company. Bilal is entitled to carry forward this loss for a period of six years following the
year in which it arose and set it off against capital gains (which are not taxable as a separate block). Since
there were no capital gains in the tax years 2011 and 2012, it has rightly been brought forward for offset
against the capital gains accruing to Bilal on the disposal of capital assets (other than immovable properties
and securities). [s.59]

26

Marks
4

(a)

Direct and indirect taxes

Taxes are broadly categorised into direct and indirect taxes. Indirect taxes are also called consumption taxes.
A direct tax is one which is demanded from the very person who it is intended or desired should pay it,
whereas an indirect tax is one which is demanded from one person in the expectation and with the intention
that they shall pass on the burden of the tax to another person, ultimately to the end consumer of the goods
or services. In other words, in the case of indirect taxes, the immediate payer of the tax only acts as an
intermediary or a tax collecting agent.
Examples of direct taxes include: income tax, wealth tax and property tax.
Examples of indirect taxes include: sales tax, federal excise, customs duty and provincial sales tax.

(b)

40

Mr Naveed
(i)

Penalty payable for non-maintenance of records

Where a person does not maintain records as required under the Income Tax Ordinance, 2001 or the
rules made thereunder, a penalty of Rs. 10,000 or 5% of the amount of tax payable on taxable income,
whichever is higher, can be levied by the Commissioner.
On the basis of income tax liability determined by the Commissioner, Mr Naveed is liable to pay the
penalty below:
Rs.
300,000
15,000

Tax due
5% of tax

Since the amount calculated at 5% of the tax is higher than Rs. 10,000, Mr Naveed shall be liable to
pay a penalty of Rs. 15,000 for the non-maintenance of records as required under the Income Tax
Ordinance, 2001. [Sr. No. 7 of table under s.182]
(ii)

20

Period of maintenance of records

Records are required to be maintained for six years after the end of the tax year to which they relate.
However, where any proceedings are pending before any authority or court, the taxpayer is required to
keep the records until the final decision of the proceedings. [s.174(3)]

(c)

20

40

Exemption from penalty and default surcharge by the Federal Board of Revenue (FBR)
The FBR is empowered to exempt any person or class of persons from payment of the whole or part of any
penalty or default surcharge payable under the Income Tax Ordinance, 2001 in the following manner:
(1) The exemption may be published as a notification or as an order in the official Gazette of Pakistan.
(2) The reasons for the exemption shall be given in the notification or the order so published.
(3) The conditions or limitations, if any, applicable to such exemption from payment of the penalty or
default surcharge shall also be given in the notification or the order. [s.183]

(d)

30

Ms Kausar
Ms Kausar can revise her return, on her own, without waiting for any notice from the Commissioner for this
omission. The points raised in the question are answered as follows:
(i)

The revised return shall be accompanied by the revised accounts or the revised audited accounts, as
the case may be. [s.114(6)(a)]

(ii)

Ms Kausar will have to give the reasons for the revision of the return, in writing, duly signed by her.
[s.114(6)(b)]

(iii) Ms Kausar will be liable to pay a default surcharge on the amount of tax evaded by the omission of the
amount for the period starting from the date it was due (30 September 2011) to the date it is actually
paid.
However, she will not be liable to pay any penalty as she is revising the return without receiving any
notice of audit or amendment of the assessment from the Commissioner Inland Revenue. [s.114(6A)]
(iv) Ms Kausar can revise her return to declare the correct amount of income without seeking any
permission from the Commissioner Inland Revenue. [s.114(6)]

27

40

15

Marks
5

(a)

Mr Usman
Sales tax payable/(refundable) for March 2013
Rs.
Output tax
Sale of taxable goods to the registered and unregistered persons
(Rs. 80,000,000 + Rs. 16,000,000) x 16%
Sale of goods against international tender Rs. 10,000,000 [exempt]
Sale of exempt goods to a local charity Rs. 10,000,000
Export of goods to Turkey (Rs. 5,000,000 x 0%)

Input tax
Purchase of raw materials for the manufacture of both taxable and exempt
supplies (working)
Input tax relating to the machinery (10,000,000 x 16/116) (also see explanation)

Sales tax payable/(refundable)

Output tax
Input tax

15,360,000
0
0
0

15,360,000

05
05
05
05

7,944,143
1,379,310

9,323,453

30
05

15,360,000
(9,323,453)

6,036,547

Payable

05

Working:
Rs.
Input tax on the purchase of raw materials from registered persons
for manufacturing both taxable supplies and exempt supplies
(Rs. 70,000,000 x 16/116)
Input tax on the purchase of raw materials from unregistered persons

9,655,172
0

9,655,172
(137,931)

9,517,241

Less input tax on purchases returned (Rs. 1,000,000 x 16/116)

Apportionment of Rs. 9,517,241 to taxable supplies

Value of taxable supplies

sales to registered persons

sales to unregistered persons

exports to Turkey

Value of taxable supplies + exempt supplies

(Rs. 101,000,000 + Rs. 20,000,000)
Input tax to be apportioned
A/B x C
101,000,000/121,000,000 x 9,517,241

Rs.

Rs.

80,000,000
16,000,000
5,000,000

(A)

101,000,000

(B)
(C)

121,000,000
9,517,241
7,944,143

Explanation:
With effect from 1 July 2011, input tax paid on fixed assets is allowable fully in the tax period the input tax
is paid. Further, the restriction on the adjustment of input tax in excess of 90% of the output tax does not
apply in the case of fixed assets or capital assets. [Proviso to s.8B]

(b)

10

70

Time of supply
The Sales Tax Act, 1990 defines time of supply as below:
(i)

For goods supplied under a hire purchase agreement

The time at which the agreement for the supply of goods under hire purchase is entered into is treated
as the time of supply for such goods.

28

10

Marks
(ii)

For goods supplied otherwise than under a hire purchase agreement

The time of supply is the time at which the goods are delivered or made available to the buyer.

10

(iii) For the rendering of services

The time of supply in relation to services is the time at which the services are rendered or provided to
the person obtaining such services. [s.2(44)]

29

10

30

10