PRINCIPLES OF TAXATION

Suggested Answer
Certificate in Accounting and Finance – Spring 2017

Ans.1 Mushtaq Enterprises

Computation of total income, taxable income and net tax payable/refundable
For tax year 20X7

Income from Business: Rupees

Profit before taxation 1,800,000
Add: Inadmissible expenses/admissible income
Salary paid to salesmen [5×(22,000–6,000)×12] 960,000
Entertainment expenditures -
Research expenditure incurred outside Pakistan 150,000
Accounting loss on the sale of patents 65,000
Amortisation charged on patents for the year 25,000
Gain on sale of patents (524,000 – 430,000) 94,000
Bad debts recovered: Atif [700,000 – (800,000 – 550,000)] 450,000
Accounting depreciation 580,450
Transfer of furniture to Dubai (850,000–610,000) 240,000
Less: Admissible expenses/inadmissible income
Bad debts recovered: Aslam [1,200,000–600,000–400,000] (200,000)
Tax depreciation (W-1) (667,650)
3,496,800
Less:
B/f business loss (125,000)
Unabsorbed tax depreciation – brought forward (705,000)
(830,000)
Total business income for the year 2,666,800

Capital Gain (Separate block income)

Gain on the sale of 6,000 shares [432,000 – (6,000 × 25)] 282,000

Total income for the year 2,948,800

Less: Separate block income (282,000)
Taxable income for the year under NTR 2,666,800

Computation of net tax liability

Tax on Rs. 2,500,000 344,500
Tax on income exceeding Rs. 2,500,000 @ 25% 41,700
Income tax payable on separate block income @ 7.5% 21,150
407,350
Less: Tax paid under (200,000)
Income tax payable with the return 207,350

W-1: Computation of tax depreciation

Depreciation on furniture (200,000 × 15%) 30,000
Used imported machine
Initial allowance (500,000 × 25%) 125,000
Depreciation [(500,000 – 125,000) × 15%] 56,250
Depreciation on additions 211,250
Depreciation for the year 456,400
667,650
 PRINCIPLES OF TAXATION
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Certificate in Accounting and Finance – Spring 2017

Ans.2 (a) A person who holds an asset shall be treated as having made a disposal of the asset at
the time the person parts with the ownership of the asset, including when the asset is:

 sold, exchanged, transferred or distributed; or

 cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.

The transmission of an asset by succession or under a will shall be treated as a

disposal of the asset by the deceased at the time asset is transmitted.

The application of a business asset to personal use shall be treated as a disposal of the
asset by the owner of the asset at the time the asset is so applied.

Where a business asset is discarded or ceases to be used in business, it shall be treated

to have been disposed of.

A disposal shall include the disposal of a part of an asset.

(b) (i) Since Saleha inherited paintings from her father, the fair market value of the
painting on the date of its acquisition/transfer would be treated to be its cost.
Hence, cost of the painting would be Rs. 1,550,000. and there is a loss of Rs.
300,000. But, according to the ITO-2001, no loss can be recognized on disposal
of painting.

(ii) The cost of the Jewellery would be Rs. 1,300,000 i.e. the value thereof at the
time of gift. Therefore, the gain of Rs. 1,000,000 should be recognized.
However, as the holding period of Jewellery is more than one year, the taxable
gain will be restricted to 75% i.e. Rs. 750,000

(iii) The car sold by Saleha was being used by her for business purposes and
therefore depreciation was also being charged on it. However, depreciable
assets are specifically excluded from the definition of capital assets. Therefore,
no capital gain or loss would arise on the disposal of car.

(iv) No capital gain/loss will arise as any movable property held for personal use
by the person is excluded from the definition of capital assets.

Ans.3 (a) Taxable income of Dawood Rupees

Income from property (Rs. 3,600,000 (W-1) × 65%) 2,340,000
Income from other sources (Rs. 480,000 (W-2) × 65%) 312,000
Income from other sources 3,000,000
5,652,000
Less: Separate block of income - Income from property (2,340,000)
3,312,000

Taxable income of Dewan

Income from property (Rs. 3,600,000 (W-1) × 35%) 1,260,000
Income from other sources (Rs. 480,000 (W-2) × 35%) 168,000
1,428,000
Less: Separate block of income - Income from property (1,260,000)
168,000
 PRINCIPLES OF TAXATION
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Certificate in Accounting and Finance – Spring 2017

W-1: Computation of joint taxable income under income from property

Income from property:
Rent received by joint owners for 12 months 4,500,000
Less: Amount received on account of utilities, cleanliness & security
(75,000×12) (900,000)
Rent chargeable to tax 3,600,000
Deduction of expenses against income from property is allowed only
for company therefore no deduction is allowed [15A (1)]

W-2: Computation of income from other sources

Income from other sources
Amount received on account of utilities, cleanliness & security
(75,000×12) 900,000
Less: Actual expenses incurred (35,000×12) (420,000)
480,000

(b)  The amount of Rs. 5 million forfeited by Najam in accordance with the terms of
the agreement for the sale of his house to Zameer is to be treated as rent
received.

 Najam should recognize the gain of Rs. 10,000,000 (30,000,000 – 20,000,000)

on disposal of the house to Farid under the head ‘Capital Gain’.

Since the disposal was made after holding the house for more than three years
as it was acquired in 2012, therefore no tax is payable under the law.

Ans.4 (a) The duty of the National Finance Commission is to make recommendations to the
President as to:

(i) the distribution between the Federation and the Provinces of the net proceeds
of the taxes;
(ii) the making of grants-in-aid by the Federal Government to the Provincial
Governments;
(iii) the exercise by the Federal Government and the Provincial Governments of
the borrowing powers conferred by the Constitution; and
(iv) any other matter relating to finance referred to the Commission by the
President.

(b) Following taxes may be raised under the authority of the Parliament:

(i) taxes on income, including corporation tax, but not including taxes on income
consisting of remuneration paid out of the Federal Consolidated Fund;
(ii) taxes on the sales and purchases of goods imported, exported, produced,
manufactured or consumed;
(iii) export duties on cotton, and such other export duties as may be specified by
the President;
(iv) such excise duties as may be specified by the President; and
(v) such other taxes as may be specified by the President.
Powers of the Provinces to legislate on taxes
Following taxes are covered in the scope of legislation of Provinces:

 Agriculture income tax

 PRINCIPLES OF TAXATION
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Certificate in Accounting and Finance – Spring 2017

 Sales tax on services

 Taxes on transfer of immoveable property
 Professional tax
 Tax on luxury houses
 Tax on registration of luxury vehicles
 Property tax

Ans.5 (a) Persons liable to file a tax return

The following persons are required to furnish a return of income for a tax year:

(i) Every company

(ii) Every person (other than a company) whose taxable income for the year
exceeds the maximum amount that is not chargeable to tax
(iii) Any non-profit organisation
(iv) Any welfare institution

In addition to the above, return is also required to be filed by a person who,-

(i) has been charged to tax in respect of any of the two preceding tax years;
(ii) claims a loss carried forward for a tax year;
(iii) owns immovable property with a land area of two hundred and fifty square
yards or more or owns any flat located in areas falling within the municipal
limits existing immediately before the commencement of local government
laws in the provinces; or areas in a cantonment; or the Islamabad capital
territory.
(iv) owns immoveable property with a land area of five hundred square yards or
more located in a rating area;
(v) owns a flat having covered area of two thousand square feet or more located in
a rating area;
(vi) owns a motor vehicle having engine capacity above 1000 CC;
(vii) has obtained National Tax Number;
(viii) is the holder of commercial or industrial connection of electricity where the
amount of annual bill exceeds rupees five hundred thousand.
(ix) is a resident person registered with any chamber of commerce and industry or
any trade or business association or any market committee or any professional
body including Pakistan Engineering Council, Pakistan Medical and Dental
Council, Pakistan Bar Council or any Provincial Bar Council, Institute of
Chartered Accountants of Pakistan or Institute of Cost and Management
Accountants of Pakistan.
(x) every individual whose income under the heading ‘Income from business’
exceeds Rs. 300,000 but does not exceed Rs. 400,000 is also required to file tax
return.

(b) (i) The Commissioner may, by notice in writing, require the following persons or
their representatives to furnish a return of income for a period of less than
twelve months:
 a person who has died;
 a person who has become bankrupt or gone into liquidation;
 a person who is about to leave Pakistan permanently;
 where the Commissioner otherwise considers it appropriate to require such
a return to be furnished.
(ii) If a person fails to furnish the return as required in (i) above then the
Commissioner may, based on any available information or material and to the
best of his judgment, make a provisional assessment of the taxable income of
the person and issue a provisional assessment order specifying the taxable
 PRINCIPLES OF TAXATION
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

income and the tax due thereon.

The provisional assessment order is treated as the final assessment order after
the expiry of forty five days from the date of service of order of provisional
assessment.

Ans.6 Mr. Zahid

Wealth Statement
For the tax year 20X7
2017
Rupees
Agriculture land in Hyderabad 5,000,000
Residential property in DHA Karachi 3,000,000
Investment in shares of listed companies (1,100,000–100,000–50,000) 950,000
Business capital FG & Co. (4,000,000+2,540,000–450,000) 6,090,000
Advance against bungalow 1,000,000
Motor Vehicle 1,540,000
Cash at banks 730,000
Cash 157,500
Total 18,467,500
Less: Bank loan – closing balance (1,300,000)
Wealth as on 30 June 20X7 17,167,500

Wealth reconciliation statement

Wealth as on 30 June 20X7 17,167,520
Wealth as on 30 June 20X6 14,040,000
Net increase in wealth 3,127,500

Inflows
Income from business 2,540,000
Agriculture income – Exempt 2,500,000
Capital gain [(350,000 – 50,000 – 37,500)] 262,500
5,302,500
Outflows
Gift to brothers – Listed company shares and shares sold 100,000
Personal expenses 2,075,000
2,175,000
Net increase in wealth 3,127,500

Ans.7 Jawwad Associates (JA)

Computation of Net Sales Tax Liability
For the tax period February 2017

Taxable Sales Tax @

SALES TAX CREDIT (INPUT TAX)
value 17%
Taxable goods from registered suppliers 1,950,000 331,500
(3,000,000–320,000–30,000–500,000–200,000)
Exempted goods from registered suppliers 70,000 -
Taxable goods from unregistered suppliers 95,000 -
Fixed assets (Machinery) 500,000 85,000
416,500
 PRINCIPLES OF TAXATION
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Certificate in Accounting and Finance – Spring 2017

Less: Inadmissible/un-adjustable input tax (W-1) (15,426)

Admissible input tax 401,074
Add: Excess of input tax over output tax 110,000
Input Tax for the month (Accumulated credit) 511,074

SALES TAX DEBIT (OUTPUT TAX)

Taxable goods supplied to Qatar (zero rated) 100,000 -
Taxable goods to registered persons (750-300) 450,000 76,500
Taxable goods to an associated undertaking at a
special discount (300/0.75) 400,000 68,000
Taxable goods supplied to unregistered customers 550,000 93,500
Goods disposed of by the bank 1,200,000 204,000
Total supplies / Output tax for the month 2,700,000 442,000
Input tax on fixed assets [(2,700,000 – 100,000) /2,700,000] × 85,000) (81,852)
360,148
Admissible credit (90% of output tax i.e Rs. 324,133 (360,148 × 0.9 ) or input tax
excluding Fixed Assets (511,074 – 81,852 = 429,222) whichever is lower (324,133)
Excess of output tax over input tax 36,015
Add: Further tax on supplies made to unregistered person [550,000 × 2%] 11,000
Sales tax payable 47,015

Input tax to be carried forward (429,222 – 324,133) 105,089

Sales tax refund on zero rate supplies (W-1) 15,426

W-1: Apportionment of input tax

Total supplies 2,700,000
Zero rated supplies 100,000
Input tax 416,500

Inadmissible input tax relating to zero rate supplies (100,000/2,700,000×416,500) 15,426

Ans.8 (a) (i) A registered person shall not be entitled to reclaim or deduct input tax paid on:
 the goods or services used or to be used for any purposes other than for
taxable supplies made or to be made by him;
 the goods on which extra amount of tax is payable under sub-section (5) of
section 3;
 any other goods or services which the Federal Government may by a
notification in the official Gazette specify;
 the goods or services in respect of which sales tax has not been deposited
in the Government treasury by the respective supplier;
 goods which are destroyed with the permission of the collector of sales tax
 purchase from suppliers who are black listed by the Commissioner
 if the payment in case of a transaction on credit is not transferred within
180 days of issue of the tax invoice
 if payment is not made for the supplies in the business bank account of the
supplier
 fake invoices;
 purchases made by a registered person in case he fails to provide
information relating to his imports, purchases, sales etc. as required by the
Board.
 purchases in respect of which a discrepancy is indicated by CREST or
input tax of which is not verifiable in the supply chain;
 goods and services not related to the taxable supplies made by the
 PRINCIPLES OF TAXATION
Suggested Answer
Certificate in Accounting and Finance – Spring 2017

registered person;
 goods and services acquired for personal or non-business consumption;
 vehicles falling in Chapter 87 of the First Schedule to the Customs Act,
1969.
 services in respect of which input tax adjustment is barred under the
respective provincial sales tax law;
 import or purchase of agricultural machinery or equipment subject to sales
tax at the rate of 7% under Eighth Schedule to this Act; and
 from the date to be notified by the Board, such goods and services which,
at the time of filing of return by the buyer, have not been declared by the
supplier in his return or he has not paid amount of tax due as indicated in
his return.
 the goods which are subject to extra tax in addition to normal tax payable
at 17%.
 gifts and giveaways.

(ii) The following registered persons may apply for deregistration:

 Who ceases to carry on his business
 Whose supplies become exempt from tax

The Commissioner may de-register a person if that person fails to file tax return
for six continuous months.

(b) Time limitation of 180 days shall not apply in the given case as it is applicable only
in the case of decrease in output tax and increase in input tax. The above increase of
output tax may be declared without any time limitations.

Since Abid Limited has already accounted for the output tax in the sales tax return
for the supplies, it can issue a debit note in the month of February 2017 when the
error was detected, and increase the amount of output tax in the return for February
2017 by Rs. 20,000.
(THE END)