Institute of Certified Management Accountants of Sri Lanka Operational Level May 2017 Examination. Business Law and Taxation (BLT / OL 4-204)

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1 Copyright Reserved Serial No Institute of Certified Management Accountants of Sri Lanka Operational Level May 2017 Examination Examination Date : 14 th May 2017 Number of Pages : 06 Examination Time: 1.30 p:m p:m. Number of Questions: 07 Instructions to Candidates 1. Time allowed is three (3) hours. 2. Total: 100 Marks. 3. Answer all questions in Part I and four (4) questions from Part II selecting two (2) questions from each of the Sections, A and B. 4. Part I: - Section A: Business Law and Section B: Taxation & Part II: - Section A: Business Law and Section B: Taxation 5. Candidates are allowed to use non-programmable calculators. 6. The answers should be in English Language. PART I Subject Subject Code Business Law and Taxation (BLT / OL 4-204) Question No. 01 (20 Marks) Answer all parts of Question No.1. Select the most correct answer to each part of the question. Write the number of the part of the question and the selected answer by stating the relevant English letter, in your answer booklet. E.g. (1) (relevant English letter), (2) (relevant English letter) etc Section A Business Law (1) What is the normal burden of proof placed upon the prosecution in a criminal case? (a) Beyond and doubt Beyond reasonable doubt (c) Balance of probability (d) None of the above (2) Select the incorrect answer from the following on remedies of the Buyer against the Seller under the Sale of Goods Ordinance No.11 of (a) Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an action against the seller claiming damages for non-delivery. If the buyer has already paid any money to the seller, he cannot sue to recover the money. (c) If the seller breaches any expressed or implied condition he may repudiate the contract and claim damages. (d) If the seller breaches any warranty the buyer may claim damages. (3) Select the incorrect statement from the following: (a) Under the Fire insurance, the fire should have been caused by ignition in order to fall within a loss that is covered by fire. If the fire is not caused by ignition then it is not treated as fire under fire insurance policies. Burglary Insurance is a contract of indemnity where the assured is indemnified up to an agreed amount from loss or injury by burglary to a specified property during a specified time period. Institute of Certified Management Accountants of Sri Lanka 1

2 (c) (d) Under the Accident Insurance there is no requirement for the insured to have an insurable interest on the property so damaged at the time of such damage. Life Insurance is a contract where upon the payment of premiums by the insured, the insurer agrees to pay a pre-agreed sum of money, upon the death of the person whose life is insured. (4) Select which is not an advantage of acquiring capital assets on lease: (a) Saving of Capital - Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lease agreement cannot be tailor made in respect of lease period and lease rentals according to the convenience and requirements of the lessee. (c) Planning Cash Flows- Leasing enables the lessee to plan his cash flows properly. (d) Leasing enables the lessee to plan his cash flows. (5) Select the most suitable answer from the following on the main objective/s of the Electronic Transactions Act No. 19 of (a) To Recognize and Facilitate Contracts in Electronic Form. Creation and Exchange of messages and documents and communications in Electronic Form. (c) Appointment of a Certification Authority. (d) All of the above Section B Taxation (6) Which one of the following cannot be considered as a function of taxation? (a) Reduction of income inequality using progressive tax rates. Encouraging research & development by giving tax incentives. (c) Protection of local industries from foreign competition. (d) Imposing a low rate of tax for consumption of liquor. (7) Mr. Cooray is a resident individual. His income tax is Rs.20,000/- for the first Rs.500,000/- of taxable income and Rs.40,000/- for the next Rs.500,000/- for the year of assessment 2015/2016. Under the different principles of taxation, which of the following tax principles is applicable for the above situation? (a) Equity Progressivity (c) Efficiency (d) Certainty (8) Dividend tax is payable at: (a) 10% of the gross dividend 10% of the net dividend (c) 15% of the gross dividend (d) 15% of the net dividend (9) A company is required to file its income tax return on or before a stipulated date. Which of the following statements correctly shows the position related to the statutory date? (a) Return should be filed on or before 30 th September following the end of that year of assessment. Return should be filed on or before 31 st December following the end of that year of assessment. (c) Return should be filed on or before 31 st March of that year of assessment. (d) Return should be filed on or before 30 th November following the end of that year of assessment. (10) The following statements are given for your review: (i) Business includes the letting or leasing of any premises by a company. (ii) Child includes an illegitimate child. Institute of Certified Management Accountants of Sri Lanka 2

3 PART II According to the definitions provided in the Inland Revenue Act No. 10 of 2006, which of the above statements is/are correct? (a) Both (i) and (ii) are correct Both (i) and (ii) are incorrect (c) Only (i) is correct (d) Only (ii) is correct (10 2 Marks = Total 20 Marks) End of Part I Section A: Business Law Answer any two (2) questions Question No. 02 (20 Marks) (a) What are the basic requirements for making a valid contract? (10 Marks) (c) Surath wrote to his Uncle offering to buy the Uncle s car and stated, "If I hear no more from you I consider the car as mine for Rs. 3 Mn. Though the uncle intended to accept it, he did not communicate his acceptance to Surath. Uncle instructed Sami, an auctioneer, not to sell the car. Due to a misunderstanding, the car was sold and Surath sued claiming the car. Discuss the legal principles on this scenario focusing on the formation of a contract. (05 Marks) X lost his Dog and published an advertisement stating that anyone, who returns the dog, will receive a gift of Rs.10,000/-. Y saw this advertisement and act upon it and found the dog. Now X refuses to pay stating that he has not communicated the acceptance. Discuss the rights of Y in this scenario. (05 Marks) Question No. 03 (20 Marks) Write short notes on the following. (a) (c) (d) A crossed cheque is a cheque that is payable only through a collecting banker and not directly at the counter of the bank. Discuss the importance of a crossing and different types of crossings that could be placed on a cheque. CIF and FOB are two widely used INCOTERM agreements. Each specifies which party is responsible for goods in transit, what insurance is required and who pays freight charges. The agreements also specify the point at which a seller's obligation is complete and the buyer assumes responsibility. Discuss the key differences of CIF and FOB. Discuss the rights of an Agent against its Principal with reference to decided cases. Computer crime is an act performed by a knowledgeable computer user, sometimes referred to as a hacker that illegally browses or steals a company's or individuals private information. Discuss the offences which are classified as Computer Crimes listed out in the Computer Crime Act No. 24 of (4 5 Marks = Total 20 Marks) Institute of Certified Management Accountants of Sri Lanka 3

4 Question No. 04 (20 Marks) (a) An unpaid seller means a person to whom the whole price has not been paid or tendered or who has been paid by means of a bill of exchange which is subsequently dishonored. An unpaid seller is given certain remedies by the sale of goods ordinance. Explain three remedies available to an unpaid seller against the goods. (10 Marks) As defined in the Section 2(1) of the Sale of Goods Ordinance, A Sale of good is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called the Price. You are required to compare and contrast the difference between the terms transfers or agrees to transfer the property in goods. (10 Marks) End of Section A Section B: Taxation Answer any two (2) questions Question No. 05 (20 Marks) (a) Explain the "residence rule" for the purposes of the Inland Revenue Act No. 10 of 2006: (i) in the case of an individual; and (ii) in the case of a company or body of persons. Praveena has made quarterly installment payments for the year of assessment 2015/2016 based on the income tax liability of the previous year of assessment (i.e. 2014/2015). Subsequently she has found that the income tax payable in relation to the current year is less than what she has already paid. Explain how Praveena can make a valid claim for the excess tax paid. (c) An employee of a firm has only the following sources of income: Employment income - on which PAYE tax has been deducted. Dividend income - from which dividend tax has been deducted. State, with reasons, whether he is required to file a return of income. (d) Asha and Nisha are carrying on a partnership business of importing motor vehicles. For the year of assessment 2015/16, the divisible profit computed for tax purposes was Rs.9,530,000/-. Further, the partnership had net rent income amounting to Rs.2,470,000/-. Calculate the partnership tax payable for the year of assessment 2015/2016. (e) Sumudu (Pvt) Limited, which is fully owned by Ms. Sumudu Kalupahana, is in the business of manufacturing shoes. The turnover and taxable income of the company for the year of assessment 2015/2016 was Rs.100 Mn and Rs.3,550,000/- respectively. The company has distributed dividends amounting to Rs.256,000/- on 15 th August 2015 out of previous year s profit (i.e. 2014/2015), which is greater than 10% of the distributable profits of the company for the year. Calculate the gross tax payable by Sumudu (Pvt) Limited for the year of assessment 2015/2016. Institute of Certified Management Accountants of Sri Lanka 4

5 Question No. 06 (20 Marks) Mr. Asela Guneratne is a professional accountant working as the Chief Financial Officer (CFO) at a well reputed company. The following information is available for the year of assessment 2015/ Employment income Gross salary: Rs.350,000/- per month. Vehicle allowance: Rs.110,000/- per month Telephone bills reimbursed by the company within the year of assessment Rs.172,000/-. Deduction from salary to Employee Provident Fund (EPF) was Rs.336,000/-. PAYE deduction: Rs.350,800/-. 2. Mr. Guneratne was offered 10,000 shares of the company a few years back under a share benefit scheme. During the year of assessment, he received a net dividend of Rs.90,000/- and made a profit of Rs.55,000/- by selling few of the shares he had. 3. He owns a residential apartment in a luxury housing apartment scheme in Rajagiriya which was let on rent. He receives Rs.80,000/- per month as rent. The rating assessment was Rs.260,000/- and the rates paid for the year of assessment was Rs.54,000/-. 4. Mr. Guneratne also has a 20 acre Coconut estate in Chillaw. The following is a summary of the estate s income statement prepared for the year ended 31 st March Rs. Coconut Sales 15,000,000 Less: Fertilizer cost (3,000,000) Labour cost (4,500,000) Other cost (750,000) Profit 6,750,000 All the expenses are allowable for tax purposes. 5. Mr. Guneratne has made the following payments during the year of assessment: Rs. 850,000/- as repayment of a loan taken from a bank to purchase the apartment. Capital repayment of this loan was Rs. 340,000/-. Tax paid on a self-assessment basis for the year of assessment 2015/2016 is Rs. 150,000/-. You are required to calculate the gross income tax payable and the balance tax payable/(refund due) by/to Mr. Asela Guneratne for the year of assessment 2015/2016. Institute of Certified Management Accountants of Sri Lanka 5

6 Question No. 07 (20 Marks) (a) (i) Briefly explain the purpose of introducing Economic Service Charge (ESC). (03 Marks) (ii) BK Limited is has recorded a tax loss for the year of assessment 2014/2015. The revenue of the company for the year of assessment 2015/2016 is given below. Calculate the ESC payable by the company for the year. Quarter ending 30 th June th Sep st Dec st March 2016 Revenue Rs. 70 million Rs. 35 million Rs. 120 million Rs. 47 million Sithara Distributors (Pvt.) Limited is a newly registered company providing distribution services as a dealer for various reputed brands. The total turnover for the quarter ended 31 st March 2016 is Rs.18,540,000/-. (i) In order to obtain registration for Nation Building Tax (NBT), what is the minimum turnover that the company needs to exceed? (02 Marks) (ii) Determine the effective NBT rate applicable for Sithara Distributors (Pvt.) Ltd and the NBT to be paid for the quarter ended 31 st March (03 Marks) (c) (i) What is the due date by which the Value Added Tax (VAT) return for the quarter ended 31 st March 2016 should be submitted to the Department of Inland Revenue? (02 Marks) (ii) Bala Clothing is a garment manufacturer. The following information has been provided for the quarter ended 31 st March 2016: Value of local supplies made: Rs. 234,000,000/-. Input VAT for the above taxable period on purchases: Rs. 10,545,000/-. This amount includes Rs. 327,000/- of Input VAT paid on a motor car. There is no carried forward input tax to be claimed. You are required to compute the VAT payable / (refundable) for the above taxable period. (06 Marks) End of Section B End of Part II End of Question Paper Institute of Certified Management Accountants of Sri Lanka 6