CAF-2

TAX PRACTICES
Solution
Mock
MARCH-24

BY: Sir Adnan Rauf, FCA

CAF-2 Tax practices Suggested solution
Answer-1
Ms Xiang 0.25
Taxable income and Tax thereon
Tax Year 2014

Rs.
Income from salary 5,351,000 0.5
Taxable income 5,351,000
Tax on taxable income 435,000 + 1,751,000 x 27.5% 916,525 1
Less: Tax credit on donation (not allowed because paid in China) (0) 1
Tax deducted at source by her employer [u/s. 149] (940,000) 1
Tax payable with Return (23,475) 0.25

Income from salary

Basic salary (200,000 x 12) [S.12(2)(a)] 2,400,000 1
Fixed medical cost/allowance [Pt. I of 2nd Sch.] 400,000
Less: Exempt up to 10% of basic salary (2,400,000 x 10%) (240,000) 160,000 1
Car provided (1,800,000 x 5%) [S.13(3)] 90,000 1
Fuel allowance (12,500 x 12) 150,000 1
Accommodation provided (Higher of)
- Actual amount (40% x 2,400,000) 960,000 1
- 45% of basic Salary (45% x 2,400,000) 1,080,000 1,080,000
Services of a security guard (18,000 x 12) - (10,000 x 12) [S.13(5)] 96,000 1
Benefit under employee share scheme (50,000 x 30) - (50,000 x 10) 1,000,000 1
[S.14(3)(b)]
Reimbursement of child’s school fee (25,000 x 9) [S.12(2)(d)] 225,000 1
Concessional loan provided (Loan upto Rs.1,000,000 so nothing taxable) 0 1
Return air ticket to Beijing [S.12(2)(d)] 150,000 1
Less: Annual subscription China (No deductions allowed in salary) (0) 1
5,351,000

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CAF-2 Tax practices Suggested solution
Answer-2

Sheikh
Calculation of taxable income SL VL Salman
Income from business (W-1) 5,935,000 - 685,000 0.5
Income from capital gain (W-2) - - 400,000 0.5
Income from capital gain – separate block 150,000 - - 0.5
6,085,000 - 1,085,000
Less: Income from capital gain – separate block (150,000) - - 0.25
Taxable income 5,935,000 - 1,085,000

Calculation of tax liability

Tax liability - SL
Tax based on slab rates (765,000+ 35% of 1,935,000) 1,442,250
Less: Tax credit on charitable donation (1,442,250/5,935,000 x 10,000) (2,430) 1
C is lower of: 10,000 or 30% of 5,935,000
Tax liability of income falling under normal tax regime 1,439,820
Add: Tax on securities (150,000 x 0%) 0 0.5
Total tax liability 1,439,820

Tax liability – VL
Tax (As loss so no tax) - 0.5

Tax liability - Sheikh Suleman

Income under normal tax regime (as above) 1,085,000
Taxable Income 1,085,000 0.5
Add: Share of profit from AOP – SL (W-7) 3,002,500
Taxable Income for rate purpose 4,087,500 0.5
Tax liability based on above (765,000 + 35% of 87,500) = 795,625
Actual tax liability (795,625/4,087,500 x 1,085,000) 211,193 0.5

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CAF-2 Tax practices Suggested solution

Marks
(W-1) SL VL ML 0.5
Income from business
Accounting profit 3,700,000 (1,400,000) 1,300,000 0.5

Add: Scientific research conducted in Belgium 1,000,000 0.5

Less: Gain on securities to be taxed separately (150,000) 0.5
Add: Salaries to partner (40,000 x 2 x 12) 960,000 0.5
Add: Commission to partner 70,000 0.5
Less: Accounting gain on sale of building (100,000) 0.5
Add: Tax gain on sale of building (W-3) 180,000 0.5
Add: Donation qualifying for tax credit 10,000 0.5
Add: Loan to employee 80,000 0.5
Add: Salaries to partner (30,000 x 2) 60,000 0.5
Add: Intangible taken to expenses 600,000 0.5
Less: Professional tax (allowed) (-) 0.5
Add: Tax not deducted on payment to non-resident 500,000 0.5
Less: Accounting bad debt recovery (50,000) 0.5
Less: Bad debt as per tax authorities (W-4) (30,000) 0.5
Less: Accounting gain on sale of car (300,000) 0.5
Add: Tax gain on sale of car (W-5) 200,000 0.5
Less: Capital gain income (400,000) 0.5
Add: Accounting depreciation 760,000 660,000 100,000 0.5
Less: Tax depreciation (495,000) (330,000) (135,000) 0.5
Less: Tax amortization(600,000/3) (200,000) 0.5
2,235,000 1,370,000 (615,000)
5,935,000 (30,000) 685,000
(W-2)
Income from capital gain
Private company shares - - 400,000 0.5

(W-3) Tax Gain on sale of building

Consideration received 500,000
Less: Tax WDV
Cost 500,000
Accumulated depreciation (300,000 - 120,000) (180,000) (320,000)
180,000 1
(W-4) Tax bad debt recovery
Amount recovered 50,000
Less: Actual bad debt 200,000
Less: Previously allowed as deduction (120,000) (80,000)

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CAF-2 Tax practices Suggested solution

(30,000) 1
(W-5) Gain on sale of car
Consideration received 900,000
Less: Tax WDV (700,000)
200,000 1
(W-6) Divisible income
Taxable income of AOP-SL 5,935,000 0.5

(W-7) Share of each member

Suleman Other Total
Salaries (40,000 x 12) 480,000 480,000 960,000
Commission 70,000 - 70,000
Profit share 2,452,500 2,452,500 4,905,000 (bal.)
Divisible Income 3,002,500 2,932,500 5,935,000 1.5

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CAF-2 Tax practices Suggested solution
Answer-3
(a) (i) Mr. Jaffer paid charity to reduce the tax liability by availing tax credit available under
Income Tax Ordinance, 2001. Thus, this is tax avoidance.
(ii) Sakhi Limited paid 50% of the salary to Mr. Ahmed in cash, so that only 50% of salary
may be disclosed to tax authorities and tax burden on Mr. Ahmed may be reduced which
is against law. This is tax evasion.
(iii) Mrs. Shamim will pay lower rate tax on Income from Salary and will claim deduction of
salary under the head Income from business which is not allowed. This is tax evasion.
(1.5 marks each)
(b) Natural gas and hydro-electric power [161]
(i) (a) the net proceeds (receipts) of:
 Federal excise duty on natural gas charged at well-head and
 royalty collected by the Federal Government
shall not form part of the Federal Consolidated Fund and shall be paid to the Province
where well-head is located (1.5)
(b) the net proceeds of Federal excise duty on oil charged at well-head shall not form part of
the Federal Consolidated Fund and shall be paid to the Province where well-head is
located. (1)
(ii) The net profits earned from the bulk generation of power at a hydro-electric station shall be paid to
the Province. (1)
Explanation - "net profit" means revenue from supply of power less operating expenses (including taxes,
duties, interest, and depreciations and element of obsolescence).

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CAF-2 Tax practices Suggested solution
Answer-4
Khalida and Nasreen
Income and Tax Thereon
TY 2016 0.25

Rs. In million
Income from business (W-1) 192.3 0.5
Taxable Income – NTR 192.3
Tax liability(Higher of)
- Tax under normal tax regieme (765,000+ 35% of 188,300,000) 66.7 0.5
Less: Tax credit = A/B x C = (66.7/192.3 x 2.4) (0.8) 0.75
C is lower of 2.4 and 20% of 192.3 0.25
65.9

- Tax on turnover (400 x 1.25%) 5 0.5

Payable to Government 65.9 0.25

(W-1) Income from business

Revenue 400 0.25
Less: Cost of sales (180) 0.25
Operating expenses (78 – 5 – 8) (65) 0.75
Interest expense (10 – 10) (-) 0.5
Donation [12 – 2.4(20% of 12)] = 9.6 – 9.6 (-) 0.75
(245)
Allowed (245 – (W-4) 24.5) (220.5) 0.5

Add: Other income (4 + 8.8 (W-2)) 12.8 0.5

192.3

(W-2) Tax Gain/(loss) on Disposal TY 2022

Consideration (Higher of:) 23 0.5
- Actual (20 + 3) = 23
- Fair value = 21
Less: Tax Written down value on Disposal (14.2) 0.5
Tax gain on disposal 8.8

(W-3) Initial allowance and tax depreciation on new machine

Cost (30 – 5) 25 0.25
Exchange gain on repayment 80,000 Pound x (330 – 315) 1.2 0.5
Cost [S. 76] 26.2
Less: Initial allowance (26.2 x 25%) (6.6) 0.25
19.6
Less: Tax depreciation -TY 2021 (19.6 x 15%) (2.9) 0.25
Tax WDV 16.7
Less: Tax depreciation -TY 2022 (16.7 x 15%) (2.5) 0.25
Tax WDV 14.2

(W-4) Expense disallowed (lower of)

- 245/400 x 130* 79.6 0.5
- 10% of 245 24.5 0.5

Sale to unregistered (158.6/122 x 100) = 130*

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CAF-2 Tax practices Suggested solution
Answer-5
(i) Where the taxpayer is satisfied with the decision of Committee:
(a) the taxpayer shall deposit the tax (including penalty and default surcharge as per
Committee decision);
(b) Commissioner shall amend assessment according to Committee decision after tax
payment (including penalty and default surcharge) as per decision of the Committee;
(c) taxpayer shall waive right of appeal against such amended assessment; and
(d) no further proceedings shall be undertaken on issues decided by the Committee if the tax
has been deposited by the taxpayer. [S. 122A] 4 Marks
(ii) If there is a dispute in a Civil Court on ownership of a property whose income is chargeable, an assessment
order may be issued within 1 year of the end of the financial year in which Court decided the case.
The civil court has decided the case on 15 May 2020. It means that the Commissioner can issue the
assessment order by 30 June 2021. As the assessment order is issued 12 March 2021, the commissioner is
justified in issuing the assessment order as it is within the time limit i.e. 30 June 2021. [S. 125] 2 Marks
(iii) (1) Where a question of law has been decided by High Court or the Appellate Tribunal, the
Commissioner may, follow this decision for same taxpayer for other years pending before
him, even if Commissioner is going in an appeal against the order.
(2) In case the decision is reversed (means that now it is decided against taxpayer), the
Commissioner may modify all the assessments. This modification is to be made within 1
year of receipt of appellate order. In this case, the general limits for issuing assessment
order will not apply. So modification can be made by April 2021. [S. 124A] 2 Marks

Answer-6
Income from Business – Speculation 1
Share price of PEL shares in March 2017 (500 x 29) 14,500 1
Purchase price of PEL shares in December 2016 (500 x 32) (16,000) 1
Speculation loss (1,500)

Answer-7
i. A person who has succeeded another person in a business (except inheritance), he cannot set off (or
carry forward) the loss of other person. [S.59A] [Chapter 14]
In case of association of persons, any loss of AOP shall be set off or carried forward against the
income of the association. [S.59A] [Chapter 12]
A member of an AOP cannot setoff (or carry forward) the loss of AOP against his income.
[S.59A] [Chapter 12]
The loss due to depreciation, amortisation and initial allowance deductions (allowed under sections 22,
23 and 24) that has not been set off, it shall be set off against the income from business (after setting
off loss under sub-section (1)), in the following tax year and so on until completely set off. The
amount not setoff shall be added the relevant amounts in following years. [S.57 (4)]
If taxable income for current year is equal to or more than Rs.10 million than brought forward
depreciation, amortization and initial allowance shall be set off against 50% of income. [S.57 (4)] (4 Marks)
ii. a person acting in Pakistan (the agent) [other than an independent agent acting in the ordinary course
of business] on behalf of the person shall be considered as permanent establishment if the agent –
(i) - exercises an authority to conclude contracts on behalf of the other person or
- plays the principal role and conclude contracts without material modification and these
contracts are-
(a) in the name of the person; or
(b) for the transfer of ownership of (or granting of the right to use) property
owned by that enterprise; or
(c) for providing services by that person; or
(ii) has no authority but habitually maintains stock (merchandise) for regular deliveries on
behalf of the other person: 3 Marks

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CAF-2 Tax practices Suggested solution
iii. Minimum tax section shall apply where due to following reasons:
(a) loss for the year;
(b) the setting off of a loss of an earlier year;
(c) exemption from tax;
(d) the application of credits or rebates; or
(e) the claiming of allowances or deductions (including depreciation and amortization deductions)
no tax is payable or tax payable is less than 1.25% of turnover. [S. 113] 2 Mark

Answer-8
Ghumman Associates
Sales tax Liability
for the month of February 2023
0.5
Calculation of tax liability Rs. in “000” 0.5
Output tax (7,444 x 18%) 1,339.92 0.5
Less: Input tax (lower of)
- Actual input tax 955 0.5
b/f input - 955

- 90% of output (1,339.92 x 90%) 1,205.93 (955) 0.5

384.92
Further tax @4% of sale to un-registered (1,450 x 4%) 58 0.5
Tax Payable 442.92
Refund against exports 321 0.5

(W-1) Calculation of input tax

Rs. in “000”
Purchase from registered person (1,900 - 500 - 100) x18% 234 0.75
Taxable goods from un-registered supplier of 900 - 0.5
Imports (4,000 x 1.2) x 18% 864 0.5
Purchase from Jut (500 x 18%) 90 0.25
Less: Purchase return of electronic items (70 x 30%) x 18% (3.78) 0.5
Less: Payment not made within 180 days (90 x 18%) (16.2) 0.5
Less: Purchase return through debit note (no limit of 180 days) (230 x 18%) (41.4) 0.5
Sales tax on electricity (80% for factory) (150 x 80%) 120 0.5
Construction material (2,000 x 40%) x 18% 144 1
1,390

(W-2) Apportionment of input tax

Input tax Input tax
Turnover
(Other) (Machine)
Taxable local supplies (7,444 – 200)` 7,244 955 - 0.5
Sales with no NIC/NTN 200 26 0.5
Exports (1,800 + 500) 2,300 303 + *18 = 321 - 1
Exempt 800 106 504 0.75
10,544 1,390
*100 x 18% = 18

(W-2.1) Machine (Specific input)

Machine (for exempt local supplies) (2,800 x 18%) 504 0.5

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CAF-2 Tax practices Suggested solution
(W-3) Taxable sale
Rs. „000‟
To Registered Customer:
Taxable supplies –registered (5,000 – 120 (20 x 40 x 150 ) - 450 – 200) 4,230 0.75
Sales return (80 x 30%) x 500 (12) 0.5
Price reduction (80 x 70%) x 80 (4.5) 0.5
Supply of tea (20 x 40 x 150) 120 0.75
Trade discount to Shaukat Industries (As per norms) 450 0.25
Supply of (decorative goods) goods to end consumer 250 0.25
Sale of construction material (2,000 x 40%) = 800 (cost) /100 x 120 = 960 1
To Unregistered Customer:
Taxable supplies – un-registered (1,500 – 250) 1,250 0.75
To unregistered distributor, Abbas (no NIC) 200 0.5
1,450
7,444

Answer-9
(i) Value of supply shall be the price fixed by the Board. However if supply is made higher than value fixed by
Board the value shall be the actual price. Therefore value of supply will be Rs.140 per kg. [VOS defintion]
(ii) In case of imported goods, value of supply shall be the value determined under Customs Act including
custom duty and excise duty charged on it. Thus in this case, value of goods imported from Brazil shall be
Rs. 910,000 (Rs. 880,000 + Rs. 30,000). [VOS definition]
(iii) Payment must be made from business bank account of buyer to business bank account of the supplier. Bank
account of both buyer and supplier should be declared to Board at the time of registration/through change of
particulars subsequently. As above condition is not fulfilled QL will not be entitled to claim input tax.
[Section 73]
(iv) If a registered person is liable to pay any tax, default surcharge or penalty under any law administered by
Board, the refund under Sales Tax Act shall be made after adjustment of that amount. Thus Rs. 25,000
default surcharge shall be adjusted against exports refund of Rs. 186,000. [Section 10]
(v) The supplier (seller) shall issue a debit Note (in duplicate) where for any valid reason the value of supply
mentioned in invoice issued has increased. Thus QL shall issue a debit to increase the value from Rs. 535,000
to Rs. 695,500 (535,000 / 50 x 65). [Rule 21]
(Each point carry 2 Marks)

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