Question No. 2 (a) SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS 1 of 6 Shalimar Fibres Limited Computation of Taxable Income Tax Year 2016 Rs. Note Income from business Profit before tax 1,065,000 0 5 Add: Inadmissible Items Accounting depreciation (220,000+300,000) (1) 520,000 01 Rent paid in advance (2) 128,000 01 Penalty for late deposit of sales tax (3) 120,000 01 Provision for gratuity (4) 900,000 01 Profit on funds obtained for non-business 01 (5) 700,000 use(personal use of director) 2,368,000 Less: admissible items Tax refund (7) 50,000 01 Advance received for sales (8) 200,000 01 Bad debts recovered during the year (9) 300,000 01 Loss on stock destroyed by fire (10) 100,000 01 Tax depreciation (11) 1,631,250 01 (2,281,250) Income from business/ Taxable income 1,151,750 Notes: Note 1. 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 and 23] of the Income Tax Ordinance, 2001. Note 2. Rent was paid as an adjustable advance on July 1, 2015 for a period of 20 months (320,000/20x12). The amount of Rs. 128,000 relating to the 08 months falling in the tax year 2017 is not admissible, hence added back. The balance of the claim is admissible. [ss.20(1) and 34] Note 3. Payment of a penalty is not an admissible expenditure under the Income Tax Ordinance, 2001. [s.21(g)] Note 4. Since SFL does not have an approved gratuity fund, any amount accrued on the basis of a provision for gratuity is not admissible due to the specific disqualification clause under the Income Tax Ordinance, 2001 to this effect.[s.21(e) Note 5. SFL obtained funds borrowed from the bank which were not utilized for the purpose of deriving Income from business by the company, hence the profit paid on them was not admissible under the law. [s.20] Note 6. The expenditure on account of preparation of rent agreement has been incurred wholly and exclusively for business and is not capital in nature. Hence, fully allowable in the year of accrual. [s.20(1)] Note 7. A tax refund is not a revenue receipt, it is a receipt of the excess amount paid to the revenue authorities. Hence, it is not taxable. [s.2(9)]
SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS 2 of 6 Note 8. A deposit against a future supply of goods does not accrue as income until the goods have been delivered. [s.34(2) and s.2(9)] Note 9. As the amount was allowed as a deduction in the tax year 2012 and it has not been paid until the tax year 2015, it must be added back in the income in the tax year 2016 (being the next year after three years in which it was allowed) [s.34(5)]. However, if it is paid in future, it will be deductible in the year of payment. Note 10. Since the amount of insurance has accrued even though not received, loss of Rs.100,000 (i.e., Rs. 500,000- Rs. 400,000) is to be included in income. Note 11. Calculation of tax depreciation and initial allowance is as follows: Asset TWDV on 1 July 2015 (Rs.) Addition/ (deletion) during the Year (Rs.) Initial allowance at 25%(Rs.) TWDV for depreciation (Rs.) Rate of depreciation Depreciation (Rs.) (1) (2) (3) (4) 5 = (2+3) (4) (6) (7) Building 4,200,000 4,200,000 10% 420,000 Plant and machinery 3,100,,000 9,00,000 225,000 3,775,000 15% 566,250 01 Cars 1,200,000 800,000 2000,000 15% 300,000 Furniture and fixtures 600,000 200,000 800,000 15% 120,000 TOTAL 225,000 1,406,250 [ss.22 and 23 read with 3rd Sch.] Note 12. Note 12: SFL was required to collect tax on the fair market value of the Motorcycles [s.156(2)]. Non-withholding of tax on this account will attract certain adverse consequences under the law. However, the expenditure incurred on a prize for sales promotion does not become inadmissible for default of non-deduction of tax. [s.21(c)] (b) Tax payable/ (refundable) for the tax year 2016: Rs. Taxable income for the tax year 2016 1,151,750 Tax at 32% 368,560 01 Less: Tax already withheld at source Tax collected by bank on cash withdrawals [s.231a] 40,000 0 5 Tax paid with registration of car [s.231b] 96,000 0 5 (136,000) Tax liability 232,560) Tax credit U/s 65B (90,000) Tax payable along with return 142,560 (c) Minimum Tax Total turnover for the year Rs. 11,000,000 Less: Advance received from customer Rs. _ (200,000) Turnover for the year Rs. 108,00,000 Minimum tax rate 1% Minimum tax on tunover Rs. 108,000
Alternate Corporate Tax : SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS 3 of 6 Net profit for the year Rs.1,065,000 Less: Advance received from customer Rs. (200,000) Less: Tax refund Rs. (50,000) Revised Accounting profit Rs. 815,000 Alternative Corporate Tax Liability (ACT) @ 17% Rs 138,550 (d) Input tax on destroyed goods: In the light of definition of supply under Section 2(33) of the Sales Tax Act, 1990, goods destroyed by fire and subsequently compensated by an insurance company do not constitute supply. Sales tax paid on the goods destroyed by fire is therefore not refundable or adjustable. As amount of sales tax has already been claimed in the month of May 2016, therefore, such amount needs to be adjusted from input tax to the extent of insurance claim in the month of June 2016. The sales tax amount related to loss on stock Rs. 17,000/- (Rs.100,000*17%) needs to be verified from the Tax Department for claim of input tax. Input Tax Not Claimed in Relevant Tax Period: Input tax on raw material purchased in the month of November 2015 cannot be claimed as the same can be adjusted with six (6) tax periods immediately after the tax period to which it relates. Question No. 3 (a) (i) Fee for Technical Services: 03 It means any consideration for the rendering of any managerial, technical or consultancy services (including the services of technical or other personnel). The fee may be paid periodically or in lump sum. However, the fee for technical services does not include a consideration: 1- for services rendered in relation to a construction, assembly or like project; or 2- which would be taxable under the head Salary. (ii) Taxability of Fee for Technical Services: 05 Resident Person: Fee for technical services is an income taxable under the head Income from Business. It is taxable under Normal Tax Regime (NTR). Permanent Establishment of Non-Resident Person: Its treatment should be normal and all other expenses as per rules to be deducted from calculating taxable income. Non-Resident Person: Any Pakistani Source of income on account of Fee for Technical services received by a non-resident person shall be treated as separate block of income. It should be treated as full and final tax @15% of the gross amount. (b) (i) Set off or Carry Forwarded of Losses against Partners Income: A member of a non-professional association of persons (AOP) is not entitled to set-off or carry forward any share in losses sustained by AOP against his other incomes. Only AOP can carry forward or set off losses against firm income.
(ii) SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS 4 of 6 Set off or Carry Forwarded of Losses of AOP Income: Where there is a change in the constitution of an AOP then it will not be entitled to carry forward and set-off that part of its losses which represents the share of a retired or deceased member. (iii) Loss to be Carried Forward by AOP: Rs. Total loss of the AOP 500,000 Less: Share of C (500,000 4) 125,000 Loss to be carried forward by the AOP 375,000 Page 251 Question No. 4 (a) (i) Adjustable Advance: After the expiry of a certain period the amount adjustable against rent will become zero as being fully adjustable against the rent payable by the tenant. (ii) Non-Adjustable Advance: Where the owner of a building receives from a tenant an amount which is not adjustable against the rent payable by the tenant, the amount shall be treated as rent chargeable to tax under the head Income from Property in the tax year in which it was received and the following nine tax years in equal proportion. Treatment of amount refunded to Old tenant: Where an amount is refunded by the owner to the tenant on termination of the tenancy before the expiry of ten years, no portion of the amount shall be allocated to the tax year in which it is refunded or to any subsequent tax year. Treatment of receipt of the new deposit: Where the owner lets out the building or part thereof to another person (succeeding tenant) and receives from the succeeding tenant any amount (succeeding amount) which is not adjustable against the rent payable by the succeeding tenant, the succeeding amount as reduced by such portion of the earlier amount as was charged to tax shall be treated as rent chargeable to tax under the head Income from Property. Where any building is rented out to another tenant, the amount to be included in RCT as per calculation below: Amount of advance received from new tenant XXX Less: Amount already charged to tax out of advance from previous tenant (XXX) Balance to be charged to tax during 10 Years XXX 03 05 (b) Registration of Income Tax Practitioners: 05 (1) On receipt of an application under rule 85 of the Income Tax Rules, 20 the Director General, Regional Tax Office may make such further enquiries and call for such further information or evidence as may be considered necessary. (2) If the Director General, Regional Tax Office is satisfied that an applicant qualifies to be registered as an income tax practitioner, the Director-General, Regional Tax Office shall cause the applicant s name to be entered in a register to be maintained for the purpose in the office. (3) The name of a person entered on the register of income tax practitioners shall be notified to the Commissioner and the Appellate Tribunal.
SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS 5 of 6 (4) The Director General, Regional Tax Office shall notify the applicant, in writing, of the decision on the application. (5) Where the Director General, Regional Tax Office decides to refuse an application for registration, the notice referred to in sub-rule (4) shall include a statement of reasons for the refusal. Question No. 5 (a) (i) Whistle blower means a person who reports concealment or evasion of duty leading to detection or collection of duty, corruption or misconduct, to the competent authority having power to take action against the person or a federal excise authority committing fraud, corruption, misconduct, or involved in concealment or evasion of duty. (ii) Wholesale Dealer means a person who buys or sells goods wholesale for the purpose of trade or manufacture, and includes a broker or commission agent who, in addition to making contracts for the sale or purchase of goods for others, stocks such goods belonging to others as an agent for the purpose of sale. (b) MEHRAN PARTS LIMITED Sales Tax Registration No. XXX Computation of Sales Tax Liability for the tax period March 2016 Output sales tax Rate/ Rs. working Rs. Sales of manufactured spare parts to registered persons 21,600,000 17% 3,672,000 Sales of manufactured spare parts to nonregistered persons 10,000,000 17% 1,700,000 Further tax on sales made to non-registered persons 2% 200,000 Sales of imported parts to registered persons 7,300,000 17% 1,241,000 Sales of imported parts to non-registered persons 4,500,000 17 765,000 2% 90,000 Total 43,400,000 7,668,000 Less: Input sales tax Purchases of taxable raw materials from registered person 17,000,000 17% 2,890,000 Purchases of raw materials from unregistered person 1,000,000 Nil - Import of parts for consumption in manufacturing 5,310,000 17% 9,700 Imports of parts for trading in local market 4,000,000 17% 680,000 3% 120,000 Total input tax 27,310,000 *(4,592,700) Sales tax payable with sales tax return 3,075,300 01 * Admissible credit as per Section 8B of Sales Tax Act [Restricted 90% of output tax i.e. Rs.6,901,200 or actual if lower]
Question No. 6 (a) Zero-Rated Supplies: SUGGESTED SOLUTIONS/ ANSWERS SPRING 2016 EXAMINATIONS 6 of 6 It means a supply, which is charged to tax at the rate of zero percent under section 4 of the Sales Tax Act, 1990. According to section 4, the following goods shall be charged to tax at the rate of zero percent: 1- Goods exported out of Pakistan; 2- Goods specified in the Fifth Schedule; 3- Supply of stores and provisions for consumption aboard a conveyance proceeding to a destination outside Pakistan; 4- Such other goods as the Federal Government may notify; and 5- Such other goods as may be specified by the Board through a general order as are supplied to registered persons engaged in manufacture and supply of zero-rated goods. The following goods shall not be treated as zero-rated supply: 1- The goods that the exported but have been or intended to be re-imported in Pakistan. 2- The goods that have been entered for export but are not exported. 3- The goods, which have been exported to a country, specified by the Federal Government. Page 212 05 (b) (i) Free Replacement of Faulty Parts: (ii) Where goods are sold under warranty there is an obligation that the seller shall either replace the goods or replace the faulty parts free of cost. Under such a case the price already charged for the goods sold includes expected cost of parts to be replaced during warranty period. Thus, free replacement of faulty parts during warranty period is not taken as a separate supply and no output tax is charged. Page 85 Sales tax Value of a Supply: Where the consideration for a supply is received partly in kind and partly in cash, the value of the supply for sales tax purposes would be taken as the open market price of the supply excluding the amount of sales tax. Where goods are supplied at a discounted price, the value of the supply would be the discounted price excluding the amount of sales tax, provided that: The discounted price and the related tax is shown on the tax invoice; and The trade discount allowed is in conformity with the normal business practices of the industry. Where the above conditions are not fulfilled, the discount allowed cannot be reduced from the price of the supply. THE END 04