Q. 2 (a) Tax Credit for Investment: SUGGESTED ANSWERS SPRING 2015 EXAMINATIONS 1 of 8 (1) Where a taxpayer being a company invests any amount in the purchase of plant and machinery, for the purposes of extension, expansion or balancing, modernization and replacement of the plant and machinery already installed therein, in an industrial undertaking set up in Pakistan and owned by it, credit equal to ten percent of the amount so invested shall be allowed against the tax payable including on account of minimum tax and final taxes payable under any of the provisions of this Ordinance by it in the manner hereinafter provided. (2) The above provisions shall apply if the plant and machinery is purchased and installed at any time between the first day of July 2010 and the 30 th day of June, 2015. (3) The amount of credit admissible under this section shall be deducted from the tax payable by the taxpayer in respect of the tax year in which the plant or machinery in the purchase of which the amount referred to in paragraph (1) above is invested and installed. In this case Rs. 50,000 calculated as (Rs. 500,000 x 10%) will be allowed as tax credit to MPL against its tax liability. 03 (b) Calculation of Income Tax Liability: Name : Maxo Packaging Limited National Tax Number : XXX Tax year ended on : June 30, 2015 Tax year : 2015 Residential Status : Resident Rupees Notes Profit before tax 3,0,000 0.5 Add: Inadmissible expenses Accounting depreciation 1,750,000 0.5 Provision for doubtful debts 1 200,000 0.5 Finance charges on leased assets 2 100,000 0.5 Subsidies received from Government 300,000 0.5 Un-vouched and unverifiable expenses 3 50,000 0.5 Donation 4 180,000 2,580,000 0.5 Less: Tax depreciation 1,650,000 0.5 Premium on issue of shares 5 500,000 0.5 Lease rental 2 400,000 0.5 (2,550,000) Taxable income 3,050,000 Brought forward loss (1,800,000) 0.5 1,250,000 Zakat Paid (57,000) 0.5 Taxable income 1,193,000 0.5 Tax Liability shall be higher of the following: Tax Liability@ 33% 393,690 01
SUGGESTED ANSWERS SPRING 2015 EXAMINATIONS 2 of 8 Notes Rupees OR Minimum tax liability Total turnover 12,000,000 Minimum tax liability @ 1% on total turnover 120,000 01 Tax liability for the tax year 2015 393,690 0.5 Less: Rebate for donation to approved trust (59,400) 01 Tax credit for enlistment in stock exchanges (393,690 x 15%) (59,054) 0.5 Net tax liability 275,236 0.5 Note-1: Note-2: As per section 29(1) of the Income Tax Ordinance, 2001 deduction is allowed where a bad debt is irrecoverable and has been written off in the books of accounts. The amount must be added back as a general provision has been made on the basis of the total trade debts. 0.5 Finance Charges: Lease rental paid during the year in respect of assets acquired on lease are admissible while finance charges paid on such assets are inadmissible. Therefore, the lease rentals allowed as a deduction instead of finance charges. 0.5 Finance charges of Rs. 200,000 paid to bank is allowed as deduction because interest on loan for imports of Machinery is a normal business expense. 0.5 Note-3: Un-vouched and unverifiable expenses and payments are in admissible. 0.5 Note-4: Donation to university established under a provincial law is not to be treated as allowable deduction; rather a rebate shall be allowed at the average rate of tax. The amount of tax credit shall be: 180,000 x 393,690 1,193,000 = 59,400 Maximum amount of donation is restricted upto 20% of taxable income which is Rs. 238,600 (i.e., 20% of 1,193,000). As the donation is within the permitted limit, tax credit shall be calculated on the actual amount of donation. However, if donation is given to such funds or institution as are specified in clause 61 of Part-1 of Second Schedule then it will be allowed as deduction from income. Note-5: Premium on issue of shares is a capital receipt. 0.5 0.5 (c) Taxation and Depreciation of Second Hand Machinery: Income tax paid at import stage by MPL on its plant and machinery shall be available for adjustment against income tax liability of MPL under Normal Tax Regime. Imported plant and machinery whether new or used, fall under the definition of eligible depreciable assets. Under MPL case the following tax depreciation shall be allowed as deduction in the year the asset used first time by MPL or the year, in which commercial production is commenced, whichever is later. Initial allowance at the rate of 25% of the cost of the cost of eligible depreciable asset. Normal depreciation at the rate of 15% of written down value of the asset. Normal depreciation shall be allowed in the first year as well as in subsequent tax years.
SUGGESTED ANSWERS SPRING 2015 EXAMINATIONS 3 of 8 (d) Amortization of Intangible Assets: 03 Development of new design falls under the definition of intangible assets. Total research and development expenses shall not be allowed as deduction in the year of its incurrence, rather, shall be amortized on the basis of its useful life. Where the useful life of an intangible cannot be ascertained, the asset shall be amortized over a period of ten (10) years. This year an amount of Rs. 300,000 (i.e., 1/10 of Rs. 3000,000). (e) Payment to Advertising Agent (Media Person): Amount received by non-resident who renders independent services (e.g. professional services, services of entertainers or sportspersons) shall be treated Pakistan-source income if it is paid by a resident person or borne by a permanent establishment of a non-resident person. Under this case the payment is being made by MPL, a resident company, to a foreign advertising agent, so it shall be Pakistan-source income and charged to tax as per applicable tax rates under section 152 @ 10%. MPL shall to deduct tax at source while making payment to the advertising agent. Otherwise, it will be rendered as inadmissible deduction. (f) Group Taxation of Companies: 06 The provisions of section 59AA of the Income Tax Ordinance, 2001 as relating to group taxation of the companies entail that: (i) Holding companies and subsidiary companies of 100% owned group may opt to be taxed as one fiscal unit. In such cases, besides consolidated group accounts as required under the Companies Ordinance, 1984, computation of income and tax payable shall be made for tax purposes. (ii) The companies in the group shall give irrevocable option for taxation under this section as one fiscal unit. (iii) The group taxation shall be restricted to companies locally incorporated under the Companies Ordinance, 1984. (iv) The relief under group taxation would not be available to losses prior to the formation of the group. (v) The option of group taxation shall be available to those group companies which comply with such corporate governance requirements and group designation rules or regulations as may be specified by Securities Exchange Commission of Pakistan (SECP) from time to time and are designated as companies entitled to avail group taxation. (vi) Group taxation may be regulated through rules as may be made by the Federal Board of Revenue.
Q. 3 (a) Tax Avoidance Scheme: SUGGESTED ANSWERS SPRING 2015 EXAMINATIONS 4 of 8 Under Section 109 of the Income Tax Ordinance, 2001, the term tax avoidance scheme mean any transaction where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person s liability to tax under the Income Tax Ordinance, 2001. Recharacterization of Income and Deductions: The Commissioner Inland Revenue (CIR) may recharacterize the transaction of the taxpayer for the purposes of determining his tax liability where: (i) a transaction or an element of transaction that was entered into as part of a tax avoidance scheme. (ii) a transaction does not have any substantial economic effect or (iii) the form of the transaction does not reflect the substance. 05 (b) Income of a Minor Child: Any income of a minor child for a tax year chargeable under the head income from business shall be chargeable to tax as the income of the parent of the child with the highest taxable income for that year. Above sub-section shall not apply to the income of a minor child from a business acquired by the child through an inheritance. (c) (i) Agricultural Income: 05 Rental income received by Mr. Shah Nawaz from his lands will be treated as agricultural income. As per section 41 of the Income Tax Ordinance, 2001 where tax payer has an agricultural income, it shall be exempt from tax. Sources of Agricultural income: An agricultural income may be derived from any of the following ways: 1. Rent or revenue from the land used for agricultural purposes. 2. Income from the agriculture. 3. Income of the cultivator or receiver or rent-in-kind from the sale of agricultural produce without performing any further process. 4. Income from the performance of any process, by the cultivator or receiver of rentin-kind, generally employed to render the produce fit to be taken to market. 5. Income from a building shall also be agricultural Income, if the following conditions are satisfied: i) The building is owned and occupied by the cultivator or receiver of rent-in-kind; ii) The building is situated in the immediate vicinity of the land used for agricultural purposes; and iii) The building is required by the cultivator or the receiver of rent-in-kind, due to his connection with the agricultural land. It is required as: a) A dwelling house b) A store house; or c) Other out building
(ii) Dividend Income: SUGGESTED ANSWERS SPRING 2015 EXAMINATIONS 5 of 8 Dividend income received from a company having exempt income is taxable. Section 55 of the Income Tax Ordinance, 2001 provides that an exemption shall be limited to the original recipient of the income. The exemption shall not be extended to any person receiving any payment out of such income. Dividend of Rs. 60,000 received by Mr. Shah from Milkshakes Agro Limited having agricultural income shall be taxable under FTR @ 10% of the gross amount of dividend received. Q. 4 (a) (i) Bad Debts: A person shall be allowed a deduction for a bad debt in a tax year if the following conditions are satisfied, namely: (a) The amount of the debt was: (i) previously included in the person s income from business chargeable to tax; or (ii) in respect of money lent by a financial institution in deriving income from business chargeable to tax; (b) the debt or part of the debt is written off in the accounts or the person in the tax year; and (c) there are reasonable grounds for believing that the debt is irrecoverable. (ii) Provision Regarding Consumer Loans: (1) A non-banking finance company or the House Building Finance Corporation shall be allowed a deduction, not exceeding three percent of income for the tax year, arising out of consumer loans for creation of a reserve to off-set bad debts arising out of such loans. (2) Where bad debt cannot be wholly set off against reserve, any amount of bad debt, exceeding the reserves shall be carried forward for adjustment against the reserve for the following years. 04 03 (b) Consideration Received: 05 The consideration received by a person on disposal of an asset shall be the total amount received by the person for the asset or the fair market value thereof, whichever is the higher, including the fair market value of any consideration received in kind determined at the time of disposal. Where an asset has been lost or destroyed by a person, the consideration received for the asset shall include any compensation, indemnity or damages received by the person under: an insurance policy, indemnity or other agreement; a settlement, or a judicial decision Where a business asset is applied for personal use, then its fair market value at the time it is so applied shall be taken as disposal consideration.
(c) (i) Cottage Industry: SUGGESTED ANSWERS SPRING 2015 EXAMINATIONS 6 of 8 Cottage Industry means a manufacturer whose annual turnover from taxable supplies made in any tax period during the last twelve months ending any tax period does not exceed five million rupees or whose annual utility (electricity, gas and telephone) bills during the last twelve months ending any tax period do not exceed seven hundred thousand rupees. (ii) CREST: CREST means the computerized program for analyzing and cross-matching of sales tax returns, also referred to as Computerized Risk based Evaluation of Sales Tax. Q. 5 (a) (i) Conditions for Adjustment of Input Tax: {Any six (6) Points} The conditions for admissibility of input tax as laid down under Sections 7, 8, and 73 of Sales Tax Act, 1990 are summarized below: A registered person is entitled to deduct input tax paid or payable during the tax period for the purpose of taxable supplies made or to be made, by him from the output tax that is due from him for that tax period [Section 7(1)] It is compulsory for a registered person to hold tax invoice in his name bearing registration number and goods declaration also showing his name and registration number for validating the input tax claim [Section 7(2)] Extra sales tax as chargeable under section 3(5) of the Sales Tax Act, 1990 is not admissible as input tax, as applicable on electrical appliances and other specified goods. [Section 8] Input tax paid against invoices, which subsequently discovered as fake invoices or if the related sales tax is not deposited in the Government treasury by the supplier. [Section 8] Input tax is not admissible on taxable goods and services which are exempt from sales tax [Section 8] Input tax credits on purchases of vehicles, food, beverages, garments, fabrics etc., consumption on entertainment related goods, gifts and give-away, and electricity consumed in residential colony, if any, are not admissible for adjustment/ refund. 06
(ii) Admissibility of Input Tax: SUGGESTED ANSWERS SPRING 2015 EXAMINATIONS 7 of 8 Sales tax paid on electricity bills consumed in residential colony at the manufacturing site of a registered person is not admissible for claim/adjustment as it is specifically restricted under Section 8 of the Sales Tax Act. Since the wires and cables are directly related with taxable activity, as such any input tax paid on such purchases would be admissible. Input tax on imported pre-fabricated building structure as installed at plant location is admissible input tax. Input tax on raw materials is not admissible if the same are lost and not consumed in supply of finished goods. Sindh Sales Tax paid on insurance premium since related with commercial vehicles can be adjusted against Federal output sales tax as the definition of input tax under Sales Tax Act, 1990 covers the Provincial Sales Tax. 05 (b) Recovery of Arrears of Tax: Where any amount of tax is due from any person, the officer of Inland Revenue Sales Tax may: 1. deduct the amount from any money owing to person from whom such amount is recoverable and which may be at the disposal or in the control of such officer or any officer of Income Tax, Customs or Central Excise Department; 2. require by a notice in writing any person who holds or may subsequently hold any money for or on account of the person from whom tax may be recoverable to pay to such officer the amount specified in the notice; 3. stop removal of any goods from the business premises of such person till such time the amount of tax is paid or recovered in full; 4. require by a notice in writing any person to stop clearance of imported goods or manufactured goods or attach bank accounts; 5. seal the business premises till such time the amount of tax is paid or recovered in full; 6. attach and sell or sell without attachment any movable or immovable property of the registered person from whom tax is due and; 7. recover such amount by attachment and sale of any moveable or immoveable property of the guarantor, person, company, bank or financial institution where a guarantor or any other person, company, bank or financial institution fails to make payment under such guarantee, bond or instrument. 06 (c) Posting of Inland Revenue Officer: Subject to such conditions and restrictions, as deemed fit to impose, the Federal Board of Revenue (FBR) or Chief Commissioner Inland Revenue, may post Officer of Inland Revenue to the premises of registered person or class of such persons to monitor production, sale of taxable goods and the stock position. Provided that if a Commissioner Inland Revenue, on the basis of material evidence, has reason to believe that a registered person is involved in evasion of sales tax or tax fraud, he may, by recording the reason in writing, post an officer of Inland Revenue to the premises of such registered person to monitor production or sales of taxable goods and the stocks position. 04
SUGGESTED ANSWERS SPRING 2015 EXAMINATIONS 8 of 8 Q. 6 (a) Liability to Pay Excise Duty: 03 The liability to pay excise duty to the Government shall be determined as per the following schedule: Sr. No. (i) Situation Goods produced or manufactured in Pakistan Person Liable to Pay The person manufacturing or producing the goods. (ii) Goods imported into Pakistan The person importing the goods. (iii) Services provided or rendered in Pakistan (iv) Services are rendered by the person out of Pakistan (v) Goods produced or manufactured in nontariff areas and brought to tariff areas for sale or consumption therein. The person providing or rendering the service. The recipient of such service in Pakistan. The person bringing or causing to bring the goods to tariff areas. (b) Alternative Sources for Levy of Duty: The Federal Excise Act, 2005 levies the excise duty generally as a percentage to the value of the goods or services. However, it also empowers the Federal Board of Revenue to charge excise duty on some other basis, which are as follows: 1. levy of duty on the production capacity of the plant, machinery, undertakings, establishments or installations producing or manufacturing the excisable goods. 2. on fixed basis, as it may deem fit, on any goods or class of goods or on any services or class or services, payable by any establishment or undertaking producing or manufacturing such goods or providing or rendering such services. The FBR shall exercise it power through a notification in the official Gazette. (c) (i) Date of Determination of Rate of Import Duty: Under section 30(b) of the Customs Act, 1969, the date of clearance is taken in case of imported goods under bonded warehouse as the date on which a goods declaration for clearance of such goods is manifested under section 104 of the Customs Act. In relation with warehoused goods, the assessment of duty and taxes on imported goods is made through ex-bond goods declaration when the goods are removed for home consumption. 04 (ii) Date of Determination of Rate of Duty for Clearance through the Customs Computerized System: Subject to the provision of section 155 A of the Customs Act, 1969, the rate of duty applicable to any imported or exported goods if cleared through the Customs Computerized System, shall be the rate of duty in force on: (a) the date of payment of duty; (b) in case the goods are not chargeable to duty, the date on which the goods declaration is filed with Customs. THE END