ACCA F6 Taxation Solved Past Papers

Paper 2.
3(PKN)
Business Taxation
(Pakistan)
PART 2
WEDNESDAY 8 DECEMBER 2004
QUESTION PAPER
Time allowed 3 hours
This paper is divided into two sections
Section A BOTH questions are compulsory and MUST be

answered
Section B THREE questions ONLY to be answered
Tax rates and allowances are on pages 2–3
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination

hall
The Association of Chartered Certified Accountants
FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

The following tax rates and information are to be used in answering the questions:
A. Tax rates for individuals and associations of persons

Taxable income Rate of tax
Up to Rs. 80,000 0%
Rs. 180,001 – Rs. 150,000 7·5% of the amount exceeding Rs. 80,000
Rs. 150,001 – Rs. 300,000 Rs. 5,250 plus 12·5% of the amount exceeding Rs. 150,000.
Rs. 300,001 – Rs. 400,000 Rs. 24,000 plus 20% of the amount exceeding Rs. 300,000.
Rs. 700,001 and above Rs. 119,000 plus 35% of the amount exceeding Rs. 700,000.
B. Reduction in tax liability of salaried individuals where salary income exceeds 50% of taxable income
Income slab Reduction in tax liability
Up to Rs. 60,000 10%
Rs. –60,001 – Rs. 80,000 70%
Rs. –80,001 – Rs. 100,000 60%
Rs. 100,001 – Rs. 150,000 50%
Rs. 150,001 – Rs. 200,000 40%
Rs. 200,001 – Rs. 300,000 30%
Rs. 300,001 – Rs. 500,000 20%
Rs. 500,001 – Rs. 1,000,000 10%
Rs. 1,000,001 and above 15%
C. Tax rates for companies

Tax Year Banking Public company other Private company other
company than a banking company than a banking company
2003 47% 35% 43%
2004 44% 35% 41%
2005 41% 35% 39%
2006 38% 35% 37%
2007 35% 35% 35%
D. Tax rates on dividends received from companies

Received by a public company or an insurance company 5% of the gross dividend
In any other case 10% of the gross dividend
E. Tax rates on certain payments to non-residents

Fees for technical services (FTS) 15% of the gross amount
Other than for royalty or FTS 30% of the gross amount
F. Rates of advance collection or deduction of tax at source

Profit on bank deposits 10% of the profit paid
Yield on certificates under the National Savings Scheme
or Post Office Saving Account 10% of the yield paid
Sale of goods 3·5% of the gross amount payable
Prizes and winnings 10% of the gross amount paid
Contracts up to the value of Rs.30 million 5% of the amount of the payment
2
G. Capital allowances
Depreciation
Factory buildings 10% 

Residential quarters for labour 10% 

Other buildings 5%  of the tax written down value

Plant and machinery (not otherwise specified) 10% 
Motor vehicles (all types) 20% 
Initial allowance 50% of cost
H. Value of free unfurnished accommodation where salary is Rs. 600,000 or more

Land area Value for areas within municipal limits
Up to 250 sq. yards Rs. 40,000
251 to 500 sq. yards Rs. 106,000
501 to 1000 sq. yards Rs. 199,000
1001 to 2000 sq. yards Rs. 370,000
2001 sq. yards and over Rs. 462,000
3 [P.T.O.
Section A – BOTH questions are compulsory and MUST be attempted
1 ABC Limited is a public company incorporated under the Companies Ordinance, 1984 whose shares were traded on
the Karachi stock exchange from 1 July 2002 until 29 June 2003 on which date the company was delisted on the
exchange. The control and management of the affairs of the company was situated partly outside Pakistan during the
year ended 30 June 2003.
ABC Limited is engaged in the manufacture of engineering goods and the summarised income statement for the
accounting year ended 30 June 2003 is as follows:
Note Rupees in thousands
Sales 718,000
Cost of sales (2) 575,000
––––––––
Gross profit 143,000
Administration expenses (3) 48,500
Selling and distribution expenses (4) 29,200
––––––– 77,700
––––––––
65,300
Financial charges (5) 35,000
Provision for bad debts (7) 850
––––––– 35,850
––––––––
29,450
Other income (6) 4,200
––––––––
33,650
Provision for taxation 12,000
––––––––
Net profit 21,650
––––––––
The following additional information is provided:
(1) All amounts are stated in thousands of Rupees (’000 Rupees)
(2) Cost of sales include:
Freight expenses paid in cash and not by crossed bank cheques or crossed bank drafts 6,000
(3) Administration expenses include:
Accounting depreciation. 20,500
Contributions to an unrecognised provident fund; effective arrangements have been
made by the company to ensure that tax would be deducted from any payment made
by the fund. 3,900
Payment to a software company for developing special accounting software. The
software has been used by ABC Limited since 1 March 2003 and its normal useful
working life is unascertainable. 6,300
Donations to the Board of Education (Federal Government) paid by a crossed bank cheque. 700
(4) Selling and distribution expenses include:
Expenditure on the provision of perquisites and allowances to a sales executive in excess
of 50% of his salary. 5,600
Salary to a part time sales representative paid in cash. 800
(5) Financial charges include:
Profit on a debt paid to a non-resident on a foreign currency loan on which no tax was
deducted. 750
4
(6) Other income includes:
Accounting profit on the sale of a car. 600
Dividend from a public company as defined for tax purposes (gross amount of dividend). 200
Recoveries against bad debts written off but not allowed as a deduction in prior years. 300
(7) The provision for bad debts comprises:
Balance on 1 July 2002 1,750
Provision made during the year (5% of debtors) 850
––––––
2,600
Trading debts written off (1,200)
Loan to employee written off (100)
––––––
1,300
––––––
(8) Creditors include rent payable which was allowed as a deduction against the income
for the year ended 30 June 2002. 500
(9) The tax written down values on 1 July 2002 were:
Factory buildings 25,000
Office buildings 30,000
Plant and machinery 225,000
Motor vehicles 10,000
(i) The construction of residential quarters for factory workers was completed in
December 2002 at a cost of Rs.12,000 and the workers occupied the quarters
on 15 January 2003.
(ii) The chief executive’s car (tax written down value Rs.150) was disposed of for
Rs.800 in October 2002. On 17 October 2002, the company purchased a new
car for Rs.1,200.
(iii) New plant was imported from the UK for Rs.150,000. Installation of the plant
was completed on 30 June 2003 at a cost of Rs.5,000 which was included in cost
of sales. The plant was commissioned for use on 1 July 2003.
(10) Unadjusted business loss: 30,000
This business loss was determined in the assessment year 2002–2003 (income year
ended on 30 June 2002).
(11) Tax deducted at source: 20,000
The tax was deducted by the customers of ABC Limited from payments made to ABC
Limited for the sale of its own manufactured goods. ABC Limited has not opted to be
assessed on the final tax basis on income arising from the sale of goods.
Required
(a) State, with reasons, whether you consider ABC Limited to be a resident or a non-resident company.
(2 marks)
(b) Briefly state, with reasons, whether or not you consider ABC Limited to be a public company for tax purposes.
(2 marks)
(c) Compute the taxable income of ABC Limited for the relevant tax year giving clear explanations for the
inclusion or exclusion of each of the items listed above. (23 marks)
(d) Calculate the tax liability of ABC Limited for the relevant tax year. (3 marks)
(30 marks)
5 [P.T.O.
2 The following information has been made available to you by Mr Irfan Zaidi, for his accounting year ended 30 June
2003.
(1) Irfan is a Pakistani national and was resident in Pakistan for tax purposes until 30 December 2001 when he left
for Saudi Arabia. He was appointed to work at the Pakistan Embassy from 15 January 2002 on a salary of
Rs.300,000 per month which was paid to him in Saudi Arabia by the Federal Government of Pakistan. He
resigned his post on 31 December 2002 and returned to Pakistan on the same day. There is no tax payable in
Saudi Arabia on salary income.
(2) In January 2003, Irfan as a self-employed individual entered into a one time contract with Builders Ltd to provide
temporary workers during the month of January. Irfan received Rs.475,000 (after deduction of tax at the
applicable rate) from the company. He informs you that he incurred costs of Rs.350,000.
(3) Since 1 February 2003 Irfan has been employed in Karachi as the company secretary of XYZ Limited. His terms
of employment provide for the following:
Basic salary of Rs.500,000 per month and monthly cash allowances of Rs.60,000 and Rs.10,000 for utilities
and entertainment respectively.
Medical allowance of Rs.15,000 per month. The terms of employment do not provide for free medical treatment
or hospitalisation or any reimbursement of such expenses.
Payment of Rs.15,000 per month for the school fees of Irfan’s children to be paid in the first week of each month
to the Karachi Grammar School.
Rent free accommodation in the company’s fully furnished house on a land area of 1000 square yards. The
house is located within the municipal limits of Karachi.
Two company maintained motor cars. A new car was leased on 1 February 2003 from an approved leasing
company for Irfan’s private and business use and another car was purchased by the company for Rs.1,300,000
which was exclusively for his business use. The fair market value of the leased vehicle at the commencement of
the lease period was Rs.3,000,000.
Annual payment of Rs.500,000 to an approved pension fund to provide for Irfan’s retirement.
(4) Other information
(i) Tax deducted at source from his salary income by XYZ Ltd was Rs.750,000.
(ii) Prior to accepting the position as company secretary, XYZ Limited paid Irfan Rs.1,000,000 in Saudi Arabia
as consideration for his agreement to enter into an employment contract with the company. XYZ Limited at
the same time paid Rs.200,000 to PQR Bank in Saudi Arabia in discharge of a loan taken out by Irfan from
the bank.
(iii) On a business trip to the USA in March 2003 Irfan incurred expenses of Rs.350,000 which were
reimbursed to him by XYZ Limited.
(iv) The salary of all XYZ Ltd’s staff including allowances as a company policy is always disbursed on the first
day of the following month.
(v) While in Saudi Arabia, Irfan purchased a house property in Karachi for Rs.15,000,000. He rented out the
house to an individual on 1 July 2002 at a monthly rent of Rs.150,000. He also collected from the tenant
a refundable deposit of Rs.300,000 which is not adjustable against the rent. Irfan has incurred the following
expenditure in respect of this house.
Rupees
Repairs 70,000
Property tax paid to Karachi Municipal Corporation 25,000
Ground rent 2,000
Legal expenses for defending the title to the house 20,000
Profit paid to a bank on money borrowed to acquire the property 10,000
Irfan also informs you that the tenant has not paid the rent for the months of May and June 2003. The
tenant has neither vacated the house, nor has Irfan taken any steps to compel the tenant to vacate the
house. Irfan wants to claim the unpaid rent as a deduction. He also wants to claim a deduction of 6% of
the rent as collection charges for the rent.
6
(vi) The following amounts were also received by Irfan in the year ended 30 June 2003 after deduction of tax
at source
– Rs.135,000 as dividends from a private company incorporated in Pakistan.
– Rs.180,000 profit on debt on a fixed deposit account maintained with a banking company.
– Rs.90,000 as a prize on a winning prize bond
(vii) Zakat paid was Rs.250,000.
Required
(a) State, giving a brief explanation, the residential status of Irfan in the tax year relevant to the income year
ended 30 June 2003. (2 marks)
(b) Compute Irfan’s taxable income for the tax year relevant to the income year ended 30 June 2003 giving
explanations for the treatment given to all of the aforesaid items in the computation of income. (19 marks)
(c) Calculate the tax payable by Irfan for the relevant tax year. (4 marks)
(25 marks)
7 [P.T.O.
Section B – THREE questions ONLY to be answered
3 (a) Mr Ali is a registered person for sales tax purposes and he makes both taxable and exempt supplies. The following
transactions took place in the month of May 2004:
– Purchased raw materials aggregating to Rs.1,150,000 inclusive of sales tax of Rs.150,000, to be used for
making both taxable and exempt supplies.
– Taxable supplies during the month were Rs.700,000 and exempt supplies were Rs.800,000.
Required:
(i) Calculate the input tax that can be claimed for the month of May 2004. (4 marks)
(ii) State the due date for furnishing the sales tax return for the month of May 2004 and with whom the
sales tax return would be filed. (3 marks)
(b) List any EIGHT types of services chargeable to sales tax. (4 marks)
(c) State the particulars to be included on a sales tax invoice. (4 marks)

(15 marks)
4 Mr Idrees, a tax resident, makes the following information available to you relating to his accounting year ended
30 June 2003.
(1) He retired from his employment with Prime Foods (Pakistan) Limited on 30 June 2000 and since then he has
been self-employed as a management consultant. His income from self-employment adjusted for tax purposes
for the year ended 30 June 2003 is Rs.850,000.
(2) During his employment with Prime Foods he had participated in an employee share scheme of Prime Foods plc
(an associated company), the details of which are as follows:
– He was granted the right to purchase 500 shares of Prime Foods plc at the exercise price of £10 per share.
This amount was inclusive of a consideration of £1 for the right to acquire the shares. Idrees accepted the
right offered and made payment of £500.
– On 1 July 2002 he disposed of the right relating to 200 shares for Rs.40,000. On the same day he
exercised the right to acquire the balance of 300 shares and made a payment of £9 per share having already
paid £1 at the time of acquiring the right. The market price of one share on that date was £15.
– On 30 June 2003 he disposed of his entire holding of 300 shares in Prime Foods plc for Rs.600,000.
(3) He sold jewellery on 31 May 2003 for Rs.12,000,000 which was purchased by him two years earlier for
Rs.9,000,000. The jewellery was held for the personal use of his wife. Out of the sale proceeds, he purchased
a rare manuscript for Rs.10,000,000 and old coins for Rs.2,000,000. On 30 June 2003, he disposed of the
manuscript for Rs.15,000,000 and of the coins for Rs.1,000,000.
(4) He sold a residential house for Rs.7,000,000. The house had been inherited from his father in 1930 when the
market value of the house was Rs.1,000,000.
(5) Disposal of shares
– Gain of Rs.75,000 on the sale of shares in a private company. The sale was made more than two years
after the acquisition of the shares.
– Gain of Rs.750,000 on the sale of shares in PQR Ltd, a company in which 50% of the shares are held by
the Federal Government. The sale was within one year of the acquisition of the shares.
(6) Rs.6,000 Zakat was paid by Idrees.
8
(7) Unadjusted losses brought forward:
– Business loss of Rs.1,000,000 sustained in the immediate preceding year which includes a loss of
Rs.100,000 from speculation business and unabsorbed depreciation of Rs.600,000.
– Capital loss of Rs.50,000 sustained under the income head of ‘Capital gains’ in the year ended 30 June
1997.
(8) The rate of exchange is to be taken as £1 = Rs.100.
Required:
Compute the taxable income of Idrees for the tax year 2003, giving clear explanations for the inclusion or
exclusion of each of the items listed above.
(15 marks)
5 (a) There are provisions in the Income Tax Ordinance 2001 relating to persons who are to be treated as ‘associates’
for tax purposes.
Required:
(i) State when two persons can generally be treated to be associates for tax purposes. (2 marks)
(ii) Briefly state the powers of the Commissioner in the case of a transaction between associates not
considered to be an arm’s length transaction. (2 marks)
(b) The Central Board of Revenue (CBR) issues circulars from time to time.
Required
(i) Explain the purpose for the issuance of circulars by the CBR. (2 marks)
(ii) State whether or not such circulars are binding on:
– the Regional Commissioner of Income Tax;
– the Commissioner of Income Tax;
– the Commissioner of Income Tax (Appeals); and
– the taxpayer (2 marks)
(c) Under s.34, in the tax year 2003, a person accounting for income chargeable to tax under the head ‘Income
from business’ on an accrual basis:
– shall derive income when it is due to the person; and
– shall incur expenditure when it is payable by the person.
Required;
(i) Explain when an amount becomes due to a person under the accrual basis accounting. (2 marks)
(ii) Explain when an amount becomes payable by a person under the accrual basis accounting.
(5 marks)
(15 marks)
9 [P.T.O.
6 The Finance Director of Popat Electric (Private) Limited (PEPL) furnished you with the following information on
28 September 2003:
– PEPL is a company incorporated in Pakistan under the Companies Ordinance 1984 engaged in the manufacture
of circuit breakers.
– PEPL closes its accounts on 30 June of each year.
– PEPL’s only customer is the Federal Government.
– The budgeted figures for the turnover and the taxable income (i.e. adjusted for tax purposes of PEPL) are as
follows:
11 Tax year Turnover Taxable income
Rs. Rs.
2004 10,000,000 1,500,000
2005 12,000,000 1,920,000
2006 14,000,000 2,380,000
– In the tax year 2007, PEPL plans to expand its business which would entail the purchase of new plant and
machinery. The cost of the new plant is estimated to be Rs.10 million. The plant is expected to be commissioned
for use in July 2006.
– For the tax year 2007, the company’s turnover is estimated to be Rs.16 million and the profit to be 18% of the
turnover. The estimated profit has been adjusted for tax purposes except that no adjustments have been made
for any initial allowance and depreciation allowable on the new plant.
The Finance Director wants you to:
(i) explain the tax provisions under which the tax deducted from the payments made for the sale of goods is the
final tax on the income arising from the said sale;
(ii) state, with reasons, whether PEPL is eligible to be assessed on the final tax basis on the income from the sale
of circuit breakers, and if so the steps to be taken by PEPL to ensure that the assessment for the tax year 2004
is made on the final tax basis; and
(iii) advise on the basis of the information furnished, whether or not it would be beneficial from a tax viewpoint for
PEPL to opt for assessment on the final tax basis for the tax years 2004, 2005, 2006 and 2007.
Required;
Provide the information and advice requested by the Finance Director of PEPL relating to the three issues stated
above. Your answer to item (iii) should be supported by relevant calculations and explanations.
Marks will be allocated to the three items as (i) 3 marks; (ii) 3 marks; and (iii) 9 marks.
(15 marks)
10
7 (a) A fee for technical services has been defined in the Income Tax Ordinance 2001 to mean any consideration for
the rendering of any managerial, technical or consultancy services including the services of technical or other
personnel but excluding consideration for services rendered in relation to a construction, assembly or like project
undertaken by the recipient or consideration which is the income of the recipient chargeable as salary income.
Usman Pakistan Limited (UPL) a company incorporated in Pakistan is engaged in the business of manufacture
and marketing of fertilizers. Under an agreement, Urea Ltd, a company incorporated in Australia regularly sends
UPL reports on the latest technical developments in the field of manufacture of fertilizers. This information is
transmitted by Urea Ltd to UPL by electronic mail and is utilised by UPL for its business in Pakistan. The
consideration under the agreement is received by Urea Ltd in Australia. Urea Ltd neither has any presence in
Pakistan, nor have any of its employees ever visited Pakistan.
There is no Tax Treaty between Australia and Pakistan for the avoidance of double taxation.
Required
(i) State, with reasons, whether the income received by Urea Ltd as consideration from UPL is Pakistan-
source income or foreign-source income. (2 marks)
(ii) State the obligations of UPL to withhold tax on making payments to Urea Ltd Australia. (1 mark)
(iii) Explain how your answers to (i) and (ii) above would change if the reports and information received from
Urea Ltd were used by UPL for its business outside Pakistan. Your answer should include a brief outline
of any additional actions that UPL, Urea and/or the Commissioner should take in this case. (3 marks)
(b) Mr Tausif and Mr Nadir entered into a partnership agreement on 1 July 2002 to carry on business as
management consultants under the name of Tausif Associates. The profit of Tausif Associates for the year ended
30 June 2003 as adjusted for tax purposes is Rs.500,000. Each partner is entitled to one-half of the profit of
the firm.
On 31 May 2003 Tausif received Rs.1,800,000 as consideration for vacating possession of his residential flat.
He had paid Rs.600,000 to acquire possession of the flat three years previously, which amount was not allowed
to him as a deduction against his income. On 30 June 2003, he received Rs.9,000 as profit on debt on Defence
Saving Certificates (National Savings Scheme) on which tax had been deducted at source. Mr Tausif paid
Rs.1,000 as Zakat on 23 May 2003.
On 1 March 2003 Nadir received Rs.1,000,000 from his past employer as consideration for agreeing not to enter
into employment with any other firm of management consultants for a period of two years.
Required
(i) State the income to be disclosed by Tausif Associates in its return of income for the relevant tax year,
and calculate the tax payable by Tausif Associates. (1 mark)
(ii) Compute the taxable income of Tausif for the relevant tax year stating reasons for the treatment given
to each of the amounts received, and calculate the tax payable by Tausif. (5 marks)
(iii) Compute the taxable income of Nadir for the relevant tax year stating reasons for the treatment given to
each of the amounts received, and calculate the tax payable by Nadir. (3 marks)
(15 marks)
End of Question Paper
11
Answers

Part 2 Examination – Paper 2.3 (PKN) December 2004 Answers
Business Taxation (Pakistan) and Marking Scheme
Marks
1 (a) ABC Ltd is a resident company since it is a company incorporated in Pakistan under the Companies
Ordinance, 1984. The test of the place of control and management of its affairs does not apply to companies –––
incorporated or formed by or under any law in force in Pakistan. 2
–––
(b) A company whose shares are traded on a registered stock exchange in Pakistan at any time in the tax year and
which remains listed on that stock exchange at the end of the tax year is a public company for tax purposes.
Though the shares of ABC Ltd were traded on the Karachi stock exchange during the tax year 2003, ABC Ltd
does not meet the test of being a public company for tax purposes since its shares were not listed on the –––
Karachi stock exchange on 30 June 2003. ABC Ltd is therefore not a public company for tax purposes. 2
–––
(c) ABC Limited
Income year ended 30 June 2003
Tax year 2003
Computation of taxable income Rs. in
thousands
Accounting profit before taxation 33,650
Add: Accounting depreciation 20,500 0·5
Add: Accounting software (Note 1) 6,300 1
Add: Donation to an approved institution (Note 2) 700 1
Add: Excess cost of perquisites (Note 3) 5,600 0·5
Add: Salary to part time sales representative (Note 4) 800 1
Add: Profit on debt on foreign currency loan (Note 5) 750 1
Add: Tax gain on sale of motor car (Note 6) 650 0·5
Add: Provision for bad debts (Note 8) 850 0·5
Add: Installation cost of plant (Note 10) 5,000 1
––––––– 41,150
–––––––
74,800
Less: Recoveries against bad debts (Note 7) 300 1
Less: Bad debts written off (Note 9) 1,200 1
Less: Amortisation of accounting software (Note 1) 211 2
Less: Accounting profit on sale of car (Note 6) 600 0·5
Less: Initial allowance (Note 11) 6,000 1
Less: Tax depreciation (Note 12) 28,920 4
––––––– 37,231
––––––––
37,569
Less: Dividend income for separate consideration 200 1
––––––––
37,369
Less: Unadjusted business loss brought forward from
Less: assessment year 2002–2003 (income year ended
Less: 30 June 2002) 30,000 0·5
––––––––
Less: Business income being the taxable income 7,369
––––––––
The notes should be considered in allocating the marks against each item. Specific marks are to be given
for the five notes (1) to (5) for ‘Items not included in the computation of income’. (1 mark for each note) 5
–––
23
–––
(d) Tax liability
On taxable income of Rs.7,369 at 43% 3,169 0·5
Tax credit on donation of Rs.700 (Note 13) (301) 1
––––––––
2,868
Tax deducted at source (Note 14) (20,000) 1
––––––––
Balance tax refundable 17,132
––––––––
Dividend income – Rs.200
Tax deducted at source is the final tax 20 0·5
–––––––– –––
3
–––
30
–––
15
Marks
Note (1) Acquisition of the software is an ‘intangible’. As the normal useful life of the software is unascertainable,
the expenditure is amortised over 10 years proportionate to 122 days (1 March to 30 June 2003) the
software is used in the business (Rs.6,300 x 1/10 x 122/365 = Rs.211).
Note (2) Donation to the Board of Education is not a deductible expenditure. A tax credit is allowable on the
amount paid.
Note (3) Expenditure on perquisites and allowances in excess of 50% of the salary of an employee (excluding
the value of perquisites and allowances) is not allowed as a deduction.
Note (4) The expenditure on payment of salary exceeding Rs.5 a month is not deductible since the amount
was not paid by a crossed bank cheque or a direct transfer to the employee’s bank account.
Note (5) The expenditure is not deductible since tax was not deducted at source from the payment of profit on
debt to the non-resident.
Note (6) The accounting profit on the sale of the motor car is not income chargeable to tax. The gain on sale
of the motor car chargeable to tax is Rs.650 (sale consideration Rs.800 less tax written down value
Rs.150).
Note (7) The amount received against debts previously written off is not taxable since the amount when
written off was not allowed as a deduction.
Note (8) Since the provision made for bad debts is not for specific debts, it is not a deductible charge.
Note (9) Rs.1,200 written off as bad debts is a deductible charge on the assumption that the amount written
off has been previously included in the company’s income from business chargeable to tax and
the company has reasonable grounds to believe that the debts are irrecoverable.
Note (10) The amount spent on the installation of the plant is a capital expenditure to be added to the cost of
the plant.
Note (11) Initial allowance
Rs.
Residential quarters for factory workers 12,000
–––––––
Initial allowance at 50% 16,000
–––––––
Note (12) Depreciation
Plant and Residential Factory Other Motor Total
machinery labour building building vehicle depreciation
quarters
Rates of depreciation 10% 10% 10% 5% 20%
Rs. Rs. Rs. Rs. Rs. Rs.
Written down value 225,000 25,000 30,000 10,000
Less: Disposal 11(150)
––––––– ––––––– ––––––– ––––––
225,000 25,000 30,000 19,850
––––––– ––––––– ––––––– ––––––
Depreciation 122,500 12,500 11,500 11,970 28,470
–––––––– ––––––– ––––––– ––––––
Additions 12,000 – 11,000 –
Initial allowance 1(6,000) – – –
––––––– ––––––
Written down value 16,000 – 11,000 –
––––––– ––––––
Depreciation for six months 11,300 – 11,300
Depreciation for nine months – – 11,150 11,150
–––––––
28,920
–––––––
The cost of the new car (Rs.1,200) has been restricted to Rs.1,000 for claiming depreciation.
Note (13) Tax credit is allowed at the average rate of tax on the amount of the donation paid or 15% of the taxable income
whichever is lower; Rs.700 paid as donation is lower than 15% of taxable income. Tax credit allowable is 3169/7369
x 700 = Rs.301 (tax on taxable income before tax credit/taxable income x amount of the donation)
Note (14) The tax deducted on payments received for the sale of goods is taken as a tax credit since ABC Ltd has not opted to be
taxed on the final tax basis.
16
Marks
Items not included in the computation of income:
(1) Cost of sales
Freight expenses paid in cash.
Any expenditure under a single head of account aggregating in excess of Rs.50 paid other than by a crossed
bank cheque or a crossed bank draft is not deductible. One of the exceptions to this rule is expenditure on
account of freight. Therefore, freight paid in cash is an allowable deduction.
(2) Administration expenses
Contribution to the unrecognised provident fund.
The amount contributed to the fund is deductible since arrangements have been made by ABC Ltd to ensure
that tax would be deducted from all payments made from the fund to the employees.
(3) Provision for bad debts
Loan to an employee written off against the provision is not deductible since it is not the business of ABC Ltd
to lend money.
(4) No depreciation can be claimed on the new plant since the plant was not commissioned for use in the tax
year 2003.
(5) Creditors. Unpaid rent.
No adjustment is required in this year. The expenditure for rent was allowed as a deduction in the accounting
year ended 30 June 2002. Any amount remaining unpaid on 30 June 2005 would be treated as taxable
income in the tax year 2006.
2 (a) Irfan would be resident for tax purposes in the tax year 2003. He has been present in Pakistan for 182 days
after his return to Pakistan on 31 December 2002. Furthermore, as an employee of the Federal Government –––
posted abroad in the tax year 2003 he is treated as a resident. 2
–––
(b) Mr Irfan Zaidi

Tax year 2003
Computation of taxable income
Rupees
SALARY INCOME
– From the Federal Government
Service in Saudi Arabia (Rs.300,000 x 6) 1,800,000 0·5
– From XYZ Ltd
Consideration received for agreeing to enter into
the contract for employment (Note 1) 1,000,000 1
Payment to PQR Bank by XYZ Ltd against loan taken
by Irfan (Note 2) 200,000 1
Basic salary for four months (Note 3) 2,000,000 0·5
Utility allowance for four months (Rs.240,000 less
10% of basic salary exempt) 40,000 0.5
Medical allowance – exempt (Note 4) – 0.5
Entertainment allowance for four months 40,000 0·5
School fees for five months (Note 5) 75,000 0.5
Rent free furnished accommodation (Note 6) 95,354 1
Benefit of company maintained car (Note 7) 62,500 1
––––––––– 5,312,854
17
Marks
Rupees
INCOME FROM PROPERTY
Rent chargeable to tax
Rent for 12 months (Rs.150,000 x 12) 1,800,000 0·5
Non-adjustable deposit (Note 8) 30,000 1‚5
––––––––– 1,830,000
Deductions
Repairs (Note 9) 366,000 1
Property tax 25,000 0·5
Ground rent 2,000 0·5
Legal expenses 20,000 0·5
Profit on debt 10,000 0·5
––––––––– 423,000 1,407,000
––––––––
INCOME FROM OTHER SOURCES
Profit on debt (tax deducted at source Rs.20,000) 200,000 0·5
––––––––––
Total income 6,919,854
Zakat paid 250,000 0·5
––––––––––
Taxable income 6,669,854
––––––––––
The notes should be considered in allocating the marks against each item
Specific marks are to be given for the six notes (1) to (6) for ‘Items not included in the
computation of income’ (1 mark for each note). 6
–––
19
–––
(c) COMPUTATION OF TAX LIABILITY

Tax on Rs.700,000 119,000
Tax on balance Rs.5,969,854 at 35% 2,089,449
––––––––––
2,208,449 0·5
Reduction in tax liability on Rs.2,208,449 at 5% (110,422) 0·5
––––––––––
2,098,027
Deducted at source
On salary income by XYZ Ltd 750,000
On profit on debt 20,000
–––––––– (770,000) 1
––––––––––
Balance tax payable 1,328,027
––––––––––
TAX DEDUCTED AT SOURCE CONSIDERED AS FINAL TAX

Gross Tax deducted
receipts is the final tax
Labour contract 500,000 25,000 1
Dividends 150,000 15,000 0·5
Prize on prize bonds 100,000 10,000 0·5
–––
4
–––
25
–––
18
Marks
Note (1) Rs.1,000,000 received as consideration for Irfan’s agreement to enter into the employment
relationship is salary income despite the fact that it was received in Saudi Arabia prior to
commencement of employment.
Note (2) The payment to PQR Bank by XYZ Limited against money owing by Irfan to the bank is a benefit of
employment taxable as salary income.
Note (3) Salary is taxable on a receipt basis. As the company’s policy is to pay salaries of the month on the first
day of the following month, the salary and allowances for June 2003 are paid in July 2003. Salary and
allowances for four months (February to May 2003) are taxable in the tax year 2003.
Note (4) Medical allowance is exempt up to 10% of basic salary since the terms of employment do not provide
for free medical treatment or reimbursement of medical expenses.
Note (5) Payment of school fees for five months is a benefit taxable as salary income. The benefit is calculated
for five months since, the fees for the month are paid in the first week of the said month.
Note (6) The annual value of rent free housing is Rs.199,000 (house on 1000 sq. yards within municipal
limits) plus 15% of Rs.199,000 (Rs.29,850) for the furnished accommodation. Amount chargeable
to tax for five months (February to June) is Rs.95,354 (Rs.228,850 x 5/12).
Note (7) Fair market value of the leased car at the commencement of the lease period is Rs.3,000,000. As
the car is partly for private use Rs.150,000 being 5% of Rs.3,000,000 is the annual benefit.
Amount chargeable to tax for five months (February to June) is Rs.62,500 (Rs.150,000 x 5/12).
Note (8) A non-adjustable deposit received from a tenant is taxable in 10 tax years in equal proportion including
the year in which the deposit is received.
Note (9) One-fifth of the rent chargeable to tax is a deductible charge irrespective of the amount spent
(1/5 x 1,830,000).
Items not included in the computation of income

(1) There is no taxable benefit for the use of the second car since the car is used by Irfan wholly for
the business of the company.
(2) Until such time as Irfan is entitled to pension benefits, he has no right to any part of the
contributions made by XYZ Limited to the pension fund and therefore the annual payment
made to the pension fund is not Irfan’s income.
(3) Reimbursement of expenses incurred by Irfan on a business trip is not a benefit of employment.
(4) No deduction is allowable for unrealised rent since no steps have been taken to compel the
tenant to vacate the house.
(5) Collection charges up to a maximum of 6% of rent is allowable provided the expenditure is
incurred. No deduction is allowable since Irfan has not incurred any expenditure for collecting
the rent.
(6) The income from dividends, prize on prize bonds and the labour contract are not chargeable
to tax under any head of income and are therefore not included in the computation of
taxable income. The deduction of tax on the gross amount received is the final tax on such
income.
The expenditure of Rs.350,000 incurred in the execution of the labour contract is not deductible.
No deduction is allowed for any expenditure incurred where the deduction of tax is the final tax.
19
Marks
3 (a) (i) The input tax claim is to be calculated according to the formula given below by the Apportionment of
Input Tax Rules, 1996 as follows:
Taxable supplies/(Taxable supplies + Exempt supplies) x Input tax
700,000/(700,000 + 800,000) x 150,000 = Rs.70,000
Mr Ali can claim the input tax of Rs.70,000 during the tax period of May 2004. 4
(ii) Under the provisions of s.2(9) of the Sales Tax Act 1990 the sales tax return for the month of
May 2004 would be due to be filed on 15 June 2004. 1·5
Under the provisions of s.26(1) of the Sales Tax Act 1990 monthly sales tax returns are to be filed
with the designated bank specified by the Central Board of Revenue. 1·5
(b) The following services are chargeable to sales tax:

(1) Services provided or rendered by
Hotels
Marriage halls and lawns
Clubs
Caterers
Laundries
Dry cleaners
(2) Services provided or rendered by persons authorised to transact business on behalf of others
Custom agents
Ship chandlers
Stevedores
(3) Courier services
(4) Services provided or rendered for personal care by
Beauty parlours
Beauty clinics
Slimming clinics
(5) Advertisement on T.V. and Radio
Any 8 items at a 1/2 mark each 4
(c) Under the provisions of s.23 of the Sales Tax Act, 1990 the following are the particulars to be included on a
sales tax invoice:
(1) Serially numbered invoice
(2) Date of issue of invoice
(3) Name, address and registration number of the supplier
(4) Name, address and registration number of the recipient
(5) Description and quantity of goods
(6) Value exclusive of tax
(7) Amount of sales tax
(8) Value inclusive of tax
1/ mark per item 4
2
–––
15
–––
20
Marks
4 Mr Idrees
Tax year 2003
Computation of taxable income Rupees
Income from business
Consulting income 850,000 0·5
Set off of brought forward loss (Note 1) (850,000) – 2
–––––––––
Salary
Employee share scheme
– sale of rights (Note 2(i)) 20,000 1
– benefit on acquisition of shares (Note 2(ii)) 150,000 1
––––––––– 170,000
Capital gains
Gain on sale of shares acquired under employee
share scheme (Note 3) 150,000 3
Gain on sale of jewellery (Note 4) 2,250,000 1
Gain on sale of manuscript (Note 5) 5,000,000 1
Gain on sale of shares (Note 6) 56,250 1
––––––––––
7,456,250
Set off of brought forward capital loss (Note 7) (50,000) 1
–––––––––– 7,406,250
––––––––––
Zakat paid (6,000) 0·5
–––––––––
––––––––––
The notes should be considered in allocating the marks against each item. Specific marks are to be given
for the three notes (1) to (3) for ‘Items not included in the computation of income. (1 mark for each note) 3
–––
15
–––
Note (1) Losses brought forward
Rs.1,000,000 includes a speculation loss of Rs.100,000 which can only be set off against
speculation gains. The balance of Rs.900,000 represents a business loss of Rs.300,000 and
unabsorbed depreciation of Rs.600,000. Since a business loss can be carried forward for six years
only, it should be set off first before unabsorbed depreciation.
Business Unabsorbed Speculation
Total Loss Loss Depreciation Loss
Rs. Rs. Rs. Rs.
1,000,000 300,000 600,000 100,000
Loss set-off 1,850,000 300,000 550,000 –
–––––––––– –––––––– –––––––– ––––––––
Loss carried forward 1,150,000 – 150,000 100,000
–––––––––– –––––––– –––––––– ––––––––
Note (2) Employee share scheme
(i) Idrees agreed to accept the offer of the right to purchase 500 shares in Prime Foods plc by
paying £1 per share. The sale of the right for 200 shares for Rs.40,000 resulted in a gain
of Rs.20,000 [Rs.40,000 – Rs.20,000 (£200 = Rs.20,000)]. This gain is not taxable as
capital gains but as salary income.
(ii) 300 shares of Prime Foods plc were acquired at the exercise price of £10 per share. The fair
market value at the date of issue of the shares was £15 per share. The difference of £5 is the
taxable benefit. £5 x 300 = £ 1,500 (Rs.150,000).
21
Marks
Note (3) Gain on disposal of shares acquired under employee share scheme.
Rupees
Consideration on disposal of 300 shares 600,000
Cost of 300 shares
£10 per share paid on acquisition including
£1 paid for the right – £10 x 300 = £3,000 300,000
Amount chargeable to tax as salary income
on acquisition of shares (Note 2) 150,000
–––––––– 450,000
––––––––
Gain on disposal 150,000
––––––––
The entire gain is taxable since the shares were not held for more than one year.
Note (4) Jewellery even if held for personal use is included in the definition of a capital asset and the gain on its
disposal is taxable as capital gains. As the jewellery was held for more than one year, only 75%
of the gain of Rs.3,000,000 is chargeable to tax.
Note (5) The entire gain of Rs.5,000,000 on disposal of the rare manuscript is chargeable to tax since the
manuscript was not held for more than one year.
Note (6) As the shares of the private company were held for more than one year, 75% of the gain of Rs.75,000
is chargeable to tax.
Note (7) A capital loss cannot be carried forward for more than six years immediately succeeding the tax
year in which the loss was incurred. The loss was incurred in the year ended 30 June 1997.
The limit of six years expires on 30 June 2003 and therefore the capital loss can be set off against
capital gains in the tax year 2003.

(1) The loss of Rs.1,000,000 on disposal of the old coins is not recognised as a capital loss for tax purposes.
(2) Immovable property is not a ‘capital asset’ for capital gains purposes. The gain on the house is not
chargeable to tax.
(3) The gain of Rs.750,000 on the sale of shares in PQR Ltd is exempt from tax as PQR Ltd is a public
company. PQR Ltd is a public company because not less than 50% of its shares are held by the Federal
Government.
5 (a) (i) Two persons can be treated as associates where the relationship between them is such that:
– one person may reasonably be expected to act according to the wishes of the other person; or
– both persons may reasonably be expected to act according to the wishes of a third person. 2
(ii) Where the Commissioner is of the view that any transaction between persons who are treated as
associates for tax purposes is not on an arm’s length basis, he has been empowered to distribute,
apportion or allocate income, deductions or tax credits between the persons, so as to arrive at the
income which would have been earned by the persons in an arm’s length transaction. 2
(b) (i) The Central Board of Revenue issues circulars to set out the Board’s interpretation of the provisions of
the Income Tax Ordinance so that there is consistency in the administration of the Ordinance and
also to provide guidance to the officers of the CBR and to taxpayers. 2
(ii) CBR circulars are binding on
– the Regional Commissioner of Income Tax 0·5
– the Commissioner of Income Tax 0·5
CBR circulars are not binding on
– the Commissioner of Income Tax (Appeals) 0·5
– taxpayers. 0·5
22
Marks
(c) (i) An amount becomes due to a person under the accrual basis accounting at the time the person
becomes entitled to receive the amount despite the fact that the receipt of the amount may be
postponed or that the amount is payable in instalments. 2
(ii) An amount becomes payable by a person under the accrual basis accounting when:
(1) all events that determine the liability to pay have occurred; 1
(2) the amount can be ascertained with reasonable accuracy; and 1
(3) economic performance occurs 1
Economic performance occurs:
– in the case of the acquisition of services or assets, at the time the services or assets are provided; 0·5
– in the case of the use of assets, at the time the assets are used; and 0·5
– in any other case, at the time payment is made in full satisfaction of the liability. 0·5
In other words in addition to the conditions listed in items (1) and (2) above, the occurrence of economic
performance is mandatory. 0·5
–––
15
–––
6 (1) The provisions of the tax law relating to assessment on the final tax basis applicable to income arising from
the sale of goods are that:
A prescribed person making a payment to a resident person for the sale of goods is required to deduct tax
under the provisions of s.153(1) of the Income Tax Ordinance 2001 at the rate of 3·5% from the gross
amount of the payment. A prescribed person includes the Federal Government and a company. 1·5
The tax so deducted would be the final tax of the resident person if
– the resident person is the manufacturer of the goods sold; and
– the resident person specifically opts to be assessed on the final tax basis by furnishing to the
Commissioner a declaration in writing of the option to be assessed on the final tax basis within three
months of the commencement of the relevant tax year. The declaration is irrevocable and remains in
force for three years. 1·5
(2) Eligibility of PEPL to be assessed on a final tax basis.

PEPL is eligible to be assessed on a final tax basis on the income from the sale of the circuit breakers since:
– PEPL being a company incorporated under the Companies Ordinance 1984, is a resident person;
– all the circuit breakers sold to the Federal Government have been manufactured by PEPL; and
– the Federal Government being a prescribed person, will deduct tax at 3·5% from the gross amount paid
to PEPL for the sale of the circuit breakers. 1·5
If PEPL wants to be taxed on the final tax basis for the tax year 2004, PEPL is required to furnish to the
Commissioner a declaration in writing of the option to be assessed on a final tax basis within three
months of the commencement of the tax year. For tax year 2004, the last date for furnishing the declaration
is 30 September 2003, as PEPL’s tax year commences on 1 July 2003. The declaration being irrevocable
would remain in force for three years, in other words for the tax years 2004, 2005 and 2006. 1·5
23
Marks
(3) Basis of taxation recommended for PEPL
To determine whether it would be beneficial for PEPL to be assessed on the final tax basis or the regular
basis of assessment on its taxable income, the budgeted figures for the relevant tax years have been
analyzed as under:
Tax year Turnover Tax Taxable Rate of tax Tax liability
deducted income
Rs. Rs. Rs. Rs.
2004 10,000,000 1,350,000 1,500,000 41% 615,000 0·5
2005 12,000,000 1,420,000 1,920,000 39% 748,800 0·5
2006 14,000,000 1,490,000 2,380,000 37% 880,600 0·5
–––––––––– ––––––––––
1,260,000 2,244,400
–––––––––– ––––––––––
Rs.
Tax liability on basis of taxable income 2,244,400
Tax liability if the tax deducted is the final tax 1,260,000
––––––––––
1,984,400 0·5
––––––––––
In the tax year 2007, due to the investment of Rs.10,000,000 in the purchase of new plant and machinery,
PEPL would be entitled to claim initial allowance and depreciation in computing the taxable income.
Rupees
Cost of new plant 10,000,000
Initial allowance at 50% 15,000,000 0·5
Depreciation at 10% on written down value of Rs.5,000,000
(Rs.10,000,000 less Rs.5,000,000) 1,,500,000 0·5
Tax deducted at source at 3·5% on turnover of Rs.16,000,000 1,,560,000 0·5
Taxable profit prior to initial allowance and depreciation (18% of Rs.16,000,000) ,2,880,000
Initial allowance and depreciation (5,000,000 + 500,000) ,(5,500,000)
––––––––––
Loss to be carried forward ,2,620,000 0·5
––––––––––
The Finance Director should be advised as under:
(i) For the tax years 2004, 2005 and 2006 it would be beneficial for PEPL to be assessed on the final tax basis
as against being assessed on the taxable profits as this would result in a saving in tax of Rs.984,400. 1
(ii) Therefore PEPL should before 30 September 2003 submit to the Commissioner in writing, a declaration of the
option to be assessed on the final tax basis for the tax year 2004. As the option is not revocable for three years,
the tax years 2005 and 2006 would also be assessed on the final tax basis. 1
(iii) For the tax years 2004, 2005 and 2006, PEPL should not file a regular return of income on the taxable income
basis but submit a statement prescribed under the law detailing the gross amount of the sale proceeds and the
tax deducted therefrom. 1
(iv) For the tax year 2007 PEPL should not file the declaration of option to be assessed on the final tax basis. PEPL
should submit a return of income on the taxable income basis:
– declaring a loss of Rs.2,620,000 which would represent unabsorbed initial allowance; and
– claiming a refund of Rs.560,000 being the tax deducted at source from the payment received for the sale
of goods. 1·5
Besides the saving in tax in the tax year 2007 the unabsorbed initial allowance of Rs.2,620,000 can be carried
forward until it is completely set-off against the future profits of PEPL. 0·5
–––
15
–––
24
Marks
7 (a) (i) The amount received by Urea Ltd Australia is consideration for fees for technical services (FTS) and
is Pakistan-source income since it is paid by Usman Pakistan Limited (UPL), a resident company
and the technical reports and information obtained from Urea Ltd are not utilized by UPL for any
business carried out by them outside Pakistan. 2
(ii) As the income of Urea Ltd Australia is Pakistan – source income, UPL has to withhold tax at the rate
of 15% of the gross payments made to Urea Ltd. 1
(iii) If the reports and information received from Urea Ltd are used by UPL for their business outside
Pakistan, then the consideration receivable by Urea Ltd would be foreign-source income. As Urea
Ltd is a non-resident company, the foreign-source income is not chargeable to Pakistan tax and no
tax is to be withheld by UPL. 1
However, UPL, before making payment to Urea Ltd has to furnish a notice in writing to the
Commissioner stating the name and address of Urea Ltd, the amount payable and the nature of
the payment. The Commissioner has to pass an order either accepting the contention of UPL or direct
UPL to deduct tax under s.152 of the Income Tax Ordinance at the standard rate of 30% of the
gross payment. On an application to be made by Urea Ltd, the Commissioner may issue a certificate
exempting the amount from tax or requiring deduction of tax at a rate lower than 30%. UPL would then
have to comply with the directions given in the certificate for withholding purposes. 2
(b) (i) Tausif Associates is an ‘association of persons’ (AOP) for tax purposes.
Rupees
Tausif Associates
Tax year 2003
Income from business 500,000
––––––––
Taxable income 500,000 0·5
––––––––
Tax payable
On Rs.400,000 44,000
On balance of Rs.100,000 at 25% 25,000
––––––– 69,000 0·5
––––––––
(ii) Mr Tausif
Tax year 2003
Rupees
Share of income from Tausif Associates
Rs.250,000 – exempt from tax – Note 1 – 0·5
Income from other sources
Consideration for vacating possession of the flat (Note 2) 120,000 1·5
Profit on debt (tax deducted at source Rs,1,000) 10,000 0·5
––––––––
Total income 130,000
––––––––
Taxable income 129,000
––––––––
Tax liability (Note 3(i)) 13,547 1·5
Tax deducted at source 1,000 0·5
––––––––
Tax payable 12,547
––––––––
25
Marks
(iii) Mr Nadir
Tax year 2003
Salary
Consideration received from ex-employer for agreeing to a restrictive covenant 1,000,000 1
Share of income from Tausif Associates
Rs.250,000 – exempt from tax (Note 1) – 0·5
––––––––––
1,000,000
––––––––––
Tax payable (Note 3(ii)) 249,200 1·5
–––
15
–––
Note (1) If tax is paid by an AOP, the share of profit received by a member out of the income of the
AOP is exempt from tax.
Rupees
Note (2) Consideration received for vacating his flat 1,800,000
Amount paid to acquire possession of the flat (600,000)
––––––––––
Income 1,200,000
––––––––––
The income of Rs.1,200,000 is taxable in 10 years in equal proportion including the year
in which the consideration is received. Rs.120,000 (1/10 of Rs.1,200,000) is taxable in
the tax year 2003.
Note (3) The share of profit from the AOP received by Tausif and Nadir is exempt from tax and does
not form part of their taxable income. However, for the purpose of determining the rate of
tax that would be applicable to the taxable income of each individual (other than the share
of profit from the AOP), the respective share of profit from the AOP is included in each of the
individual’s taxable income as if the share of profit was chargeable to tax.
(i) Tausif Rupees
Taxable income (C) 129,000
––––––––
Income if share of profit from AOP was not exempt
from tax (129,000 + 250,000) (B) 379,000
––––––––
Tax on Rs.379,000
On Rs.300,000 24,000
On Rs.79,000 at 20% 15,800
––––––––
(A) 39,800
––––––––
Tax liability
(A/B) x C
39,800/379,000 x 129,000 = 13,547
––––––––
(ii) Nadir
Taxable income (C) 1,000,000
–––––––––
Income if share of profit from AOP was not exempt from tax
(1,000,000 + 250,000) (B) 1,250,000
–––––––––
Tax on Rs.1,250,000
On Rs.700,000 119,000
On Rs.550,000 at 35 % 192,500
–––––––––
(A) 311,500
–––––––––
Tax payable
(A/B) x C
311,500/1,250,000 x 1,000,000 = 249,200
–––––––––
26
Paper 2.3(PKN)
Business Taxation
(Pakistan)
PART 2
WEDNESDAY 8 JUNE 2005
QUESTION PAPER

answered

hall

A. Tax rates for individuals and associations of persons for the tax year 2004
Up to Rs. 80,000 0%
B. Tax rates for individuals and associations of persons for the tax year 2005
Up to Rs. 100,000 0%
C. Reduction in tax liability of salaried individuals where salary income exceeds 50% of taxable income
Up to Rs. 60,000 10%
Rs. –60,001 – Rs. 80,000 70%
Rs. –80,001 – Rs. 100,000 60%
Rs. 100,001 – Rs. 150,000 50%
Rs. 150,001 – Rs. 200,000 40%
Rs. 200,001 – Rs. 300,000 30%
Rs. 300,001 – Rs. 500,000 20%
Rs. 500,001 – Rs. 1,000,000 10%
Rs. 1,000,001 and above 15%
D. Tax rates for companies

2004 44% 35% 41%
E. Tax rates on dividends received from companies

F. Rates of advance collection or deduction of tax at source

Import of goods 6% of the value of the goods determined for
custom purposes
Yield on certificates under the National Savings Scheme
or Post Office Savings Account 10% of the yield paid
G. Capital allowances
Depreciation

Other buildings 5% 

Furniture and fittings 10%  of the tax written down value

Motor vehicles (all types) 20% 
2
H. Value of free unfurnished accommodation where salary is Rs. 600,000 or more
Land area Value for areas outside municipal limits
Up to 250 sq. yards Rs. 27,000
251 to 500 sq. yards Rs. 66,000
501 to 1000 sq. yards Rs. 106,000
1001 to 2000 sq. yards Rs. 198,000
2001 sq. yards and over Rs. 264,000
I. Benchmark rate
For determing the value of the perquisite on loans given to employees, the benchmark rate is:
For the tax year 2003:

A rate of 5% per annum
For subsequent tax years:

The rate for each successive year to be 1% more than the immediately preceding tax year’s rate but not exceeding the rate
if any which the Federal Gevernment may specify for any tax year.
3 [P.T.O.
1 PQR Ltd, an industrial undertaking engaged in the manufacturing of pesticides, requires you to prepare its income tax
return for the accounting year ended 30 June 2004.
The following information has been made available to you:
(1) All amounts are stated in thousands of Rupees (‘000 Rupees)
(2) PQR Ltd is a public company under the Companies Ordinance 1984. The company applied for listing on the
Karachi stock exchange on 1 December 2003 and the shares of the company commenced trading on that
exchange on 1 June 2004. The company remained listed on that exchange until 31 December 2004 on which
date the company was delisted on the exchange
(3) The accounting profit for the year ended 30 June 2004, after providing Rs.3,500 for taxation, is Rs.10,500
(4) Cost of sales include:
Excise duty paid in cash 700
Demurrage paid to the Karachi Port Trust for the late lifting of imported raw materials 300
Tax collected by the Collector of Customs on the value of raw materials imported by the
company for its own use 8,000
Amount paid to the Collector of Customs for an erroneous declaration in a bill of entry 90
Expenditure of Rs.9,600 was incurred for in-house development and creation of a new
process for the faster formulation of pesticides. The process has been used by PQR Ltd
since 1 May 2004. On the basis of the production manager’s report that the process
would be obsolete in three years, the expenditure is being written off equally in three
years (1/3 of Rs.9,600) 3,200
Depreciation charged in the accounts 1,125
(5) Administration expenses include:
Legal expenses incurred in defending the title to the company’s building 165
Legal costs incurred in defending a director of the company for a traffic accident 60
Purchases of items of furniture costing less than Rs.100 each charged off in the accounts,
in accordance with the consistent accounting policy of the company. Purchases of such
items in July 2003 amounted to 750
Amortisation of preliminary expenses incurred on incorporation of the company in 1996. 10%
of the expenditure is being written off each year 650
(6) Selling and distribution expenses include:
A 1600cc motor car was purchased and given to Mr Baig, a dealer, for achieving the highest
sales of ‘Chandi’ pesticides for the six months ended 31 December 2003. No tax was collected
by PQR Ltd from Baig, since the sales director of PQR Ltd and Baig were of the view that the
law envisaged collection of tax only on cash prizes 1,600
(7) Financial charges include:
Profit on a debt paid to Rich Bank, Bahamas on a US Dollar loan. The loan was used by PQR
Ltd for its business in Pakistan. No tax was deducted at source from the payment of the profit
on the contention that the profit was not chargeable to tax in Pakistan since Rich Bank has no
permanent establishment in Pakistan and the profit on the debt has been received by Rich
Bank in the Bahamas where no income tax is payable 9,800
(8) Other income includes:
Recoveries against bad debts written off in prior years which were allowed as a deduction 250
Dividend received (gross amount) from PQR’s wholly owned subsidiary company, which is a
private company 200
Dividend received (gross amount) from a public company 100
(9) Creditors include excise duty which was allowed as a deductible charge in the income year
ended 30 June 2000 900
4
(10) Fixed assets
(i) In the tax year 2003, a second hand mixing machine which had not previously been
used in Pakistan was imported from the UK for Rs.2,500. Due to some major
renovations required before the machine could be used in the business, the machine
could not be commissioned for use in the tax year 2003. In July 2003, the necessary
renovations costing Rs.576 were completed and the machine was commissioned for
use in the month of July 2003. The renovation cost of Rs.576 has been included in
the ‘Cost of sales’.
(ii) The tax written down values of the fixed assets on 1 July 2003 were:
Factory buildings 2,500
Motor vehicles 400
Furniture 250
(iii) One of the office buildings (cost Rs.5,000 and tax written down value Rs.3,200) was
sold on 30 June 2004 for Rs.6,000. The accounting profit of Rs.745 on the sale of the
building has been included in ‘Other income’.
(iv) A new motor vehicle was purchased on 1 July 2003 for Rs.1,500
(11) Unadjusted business loss brought forward: 2,750
This loss was determined for tax purposes in the accounting year ended 30 June 1997
which includes unabsorbed depreciation of Rs.1,500
(12) Tax paid or deducted at source
Tax of Rs.465 was deducted by the customers from payments made to PQR Ltd for the sale of its own
manufactured goods. PQR Ltd has furnished a declaration to be assessed on a final tax basis to the Commissioner
of Income Tax on 30 October 2003.
Rs.8,000 was paid as advance tax for the tax year 2004.
Required:
(a) Briefly state with reasons whether or not you consider PQR Ltd to be a public company for the tax year 2004.
(2 marks)
(b) Compute the taxable income of PQR Ltd for the relevant tax year giving clear explanations for the inclusion
or exclusion in the computation of income of each of the items listed above. (25 marks)
(c) Calculate the tax payable by/refundable to PQR Ltd for the relevant tax year. (3 marks)
(30 marks)
5 [P.T.O.
2 Mr Iqbal is a citizen of Canada and since 1999 he has been working in the United Kingdom as a chemist employed
by Chemicals plc (CPLC). He retired from CPLC on 1 October 2003 having accepted CPLC’s offer to work as the chief
chemist of Pakistan Chemical Ltd (PKC), an associate company of CPLC from 1 January 2004. The directors of CPLC
in appreciation of Iqbal’s agreement to serve PKC, voluntarily informed him that PKC would pay him Rs.500,000 on
his joining the Pakistan company.
Iqbal has approached you to prepare his return of income for the tax year 2004. The following information has been
made available to you for the accounting year ended 30 June 2004.
(1) After returning to Pakistan on 3 October 2003, Iqbal imported a consignment of pharmaceuticals in finished form
from the United Kingdom. The value of the imported goods as determined for custom purposes was
Rs.5,488,500. The landed cost of the consignment including duties and clearing charges was Rs.5,885,000.
The entire consignment was sold for Rs.6,500,000 in December 2003. Rs.60,780 storage charges were
incurred in addition to the landed cost.
(2) His taxable income for the period from 1 July 2003 to 31 October 2003 from CPLC was £12,000 on which tax
of £ 2,000 had been withheld by CPLC and paid to the UK revenue authorities.
(3) Iqbal received the Rs.500,000 as previously promised by the directors’ of CPLC from PKC on joining the
company on 1 January 2004. As the payment was dependent upon the goodwill of CPLC, neither the
employment agreement with CPLC nor PKC provided for this payment.
(4) In accordance with the terms of his employment with PKC the following remuneration and benefits were received
by Iqbal:
- A basic monthly salary of Rs.300,000
- A monthly cash allowance of Rs.30,000 each for cost of living and entertainment respectively
- A one time payment of Rs.308,000 as relocation allowance
- Rs.375,000 for a return business class airfare to Toronto for Mrs. Iqbal
- A fully maintained 2000cc motor car for his business and private use which was purchased by the company
for Rs.4,750,000. A deduction of Rs.3,000 a month is being made from his salary for this benefit.
- Rent free housing in the company’s bungalow on a land area of 1,000 square yards outside the limits of
the Karachi Municipal Corporation. Electricity is provided by the company’s own generator. The number of
units consumed, if purchased from the Karachi Electric Supply Corporation would have cost Rs.210,000.
- Services of a gardener which costs PKC Rs.8,000 a month.
- Reimbursement of all medical and hospitalisation expenses which cost the company Rs.257,000.
(5) On 1 January 2004, Iqbal took a loan of Rs.300,000 from PKC repayable in six yearly installments. No profit
was payable on the loan. On 30 June 2004, 50% of the loan was waived by PKC.
(6) Iqbal had elected to participate in the CPLC employee share scheme (Scheme) and had been granted the right
to purchase 1,000 shares of CPLC at the exercise price £15 for one share. On 1 February 2004, he exercised
his right to purchase 500 shares and remitted £7,500 to the custodian of the Scheme. The rights for the
remaining 500 shares were disposed of for Rs.50,000. The market price of one share of CPLC on the date of
issue of the rights was £22 and on the date when Iqbal exercised his right to purchase the shares it was £23.
(7) Iqbal is the owner of a piece of land. He has allowed B the right to use the land for an annual rent of Rs.100,000.
On 1 July 2003 he collected two years rent in advance and a refundable deposit of Rs.100,000 which is not
adjustable against the rent payable. Iqbal is of the view that the deposit of Rs.100,000 is taxable over a period
of 10 years.
(8) The following amounts were also received by Iqbal in the year ended 30 June 2004 after deduction of tax.
– Rs.7,500 dividend from a private company
– Rs.270,000 profit on saving certificates issued by the National Savings Centre.
(9) Zakat paid by Iqbal was Rs.75,000
(10) Tax deducted at source by PKC on salary income was Rs.1,467,800
(11) The rate of exchange is to be taken as £1 = Rs.100
6
Required:
(a) Compute the total income and taxable income of Iqbal for the tax year relevant to his accounting year ended
30 June 2004 giving reasons/explanations for the inclusion or exclusion in the computation of income for
each of the items listed above. (20 marks)
(b) Calculate the tax payable by/refundable to Iqbal for the relevant tax year. (5 marks)
(25 marks)
7 [P.T.O.
3 (a) Certain persons engaged in making taxable supplies in Pakistan are required to be registered under the Sales Tax
Act 1990 (the Act).
Required:
State when each of the following is required to register under the Act.
(i) a manufacturer; and
(ii) a retailer. (3 marks)
(b) The Collector of Sales Tax, in certain cases can blacklist or suspend the registration of a person under the Sales
Tax Act. 1990.
Required:
List the cases when the Collector of Sales Tax can blacklist or suspend the registration of a person.
(3 marks)
(c) Under s.8 of the Sales Tax Act 1990 the Federal Government, by a notification in the Official Gazette, has
specified certain goods, acquired otherwise than as stock-in-trade, on which input tax shall not be claimed.
Required:
List any four goods which have been so notified by the Federal Government in respect of which input tax
shall not be claimed. (4 marks)
(d) State the basis for calculating the compensation payable to a claimant on a refund of sales tax, when the
refund is not made within the specified time. (1 mark)
(e) On certain payments made, a buyer being a registered person is not entitled to claim input tax credit, if the
payment is made otherwise than in the manner prescribed in the Sales Tax Act 1990.
Required:
Explain with reasons whether a buyer being a registered person, would be entitled to claim input tax on the
following payments made:
(i) Rs.95,000 paid by cash for payment of utility bills.
(ii) Rs.17,000 paid by cash for purchase of aluminum foils used for packing material.
(iii) Rs.75,000 paid for the purchase of spare parts through a crossed bank draft drawn on the personal
bank account of the buyer.
(iv) Payment of Rs.150,000 made, for new materials purchased on credit, after one hundred and eighty
days of the issuance of the tax invoice through a crossed bank draft drawn on the business bank account
of the buyer. (4 marks)
(15 marks)
8
4 Mr Saleem, a member of the Karachi Stock Exchange (Guarantee) Limited, is the sole proprietor of Saleem Sons,
Stocks, Shares and Finance Brokers. The following information has been made available to you by Saleem for his
accounting year ended 30 June 2004.
(1) Transactions in the accounts of Saleem Sons
(i) Brokerage income of Rs.785,000 on transactions effected on behalf of clients
(ii) Disposal of shares held as stock-in-trade
– Gain of Rs.60,000 on the sale of shares in ABC Ltd a public company under the Companies Ordinance
1984. ABC Ltd is not listed on any stock exchange in Pakistan. The sale was within one year of the
acquisition of the shares.
– Loss of Rs.75,000 on the sale of shares in XYZ Ltd a company which is listed on the Karachi Stock
Exchange.
– Loss of Rs.55,000 on the sale of shares in Highland (Private) Ltd
– Gain of Rs.45,000 on the sale of shares in Gogo Limited, a company in which 50% of the shares are
held by the Government of Sindh. The sale was made more than one year after the acquisition of the
shares.
(2) Prior to his self-employment as a broker, Saleem, as the investment manager of Securities Pakistan Limited, a
subsidiary of Securities plc, had participated in an employee share scheme of Securities plc. The details of the
transactions relating to the employee share scheme are as follows:
– On 1 January 2003 (tax year 2003), Saleem had exercised his right to acquire 1,000 shares in Securities
plc by making payment of £5 per share. The market price of one share on that date was £15.
– On 30 June 2004 he disposed of his entire holding of 1,000 shares in Securities plc for Rs.2,000,000.
(3) On the death of Saleem’s father on 1 June 1980, he had inherited the following assets:
– an Italian sculpture;
– two rare postage stamps – one of India and the other of China; and
– 50,000 shares in Bingo (Private) Ltd.
An expert valuer had then valued the sculpture at Rs.700,000 and the two postage stamps at Rs.25,000 each.
The break up value of the shares in Bingo (Private) Ltd on 1 June 1980 was Rs.10 for each share.
(4) On 1 September 2003 Saleem transferred the 50,000 shares in Bingo (Private) Ltd to his wife under an
agreement to live apart. The fair market value of one share on the date of the transfer was Rs.15.
(5) On 1 June 2004 Saleem sold the Italian sculpture for Rs.1,000,000, the Indian postage stamp for Rs.45,000
and the Chinese stamp for Rs.20,000.
(6) In July 2003 Saleem had purchased a motor car for Rs.1,300,000 for the personal use of his wife, He sold the
car in August 2003 for Rs.1,400,000.
(7) Unadjusted losses brought forward
A business loss of Rs.750,000 in Saleem Sons incurred in the tax year 2003. This loss includes a net loss of
Rs.50,000 suffered in the money market on forward contracts for the purchase and sale of US Dollars. All the
contracts were settled by Saleem Sons other than by actual delivery or transfer of US Dollars.
A loss of Rs.1,039,725 sustained under the income head ‘Capital gains’ which is made up as follows:
Accounting year ended Rupees
30 June 2003 1,147,500
30 June 1998 1,637,225
30 June 1997 1,355,000
–––––––––
1,039,725
–––––––––
(8) Zakat paid was Rs.10,000.
1,1,Required:
Compute the taxable income of Saleem for the tax year relevant to the accounting year ended 30 June 2004
giving clear explanations for the inclusion or exclusion of each of the items listed above in the computation of
income.
(15 marks)
9 [P.T.O.
5 (a) On 15 July 2004 Mr Alibaba furnished you with the following information:
– Since 1 July 2004, he has been carrying on the business of selling ice-cream to the general public for the
purpose of consumption.
– The first accounting year for his business will end on 30 June 2005
– The gross receipts from the sale of ice-cream for the year ending on 30 June 2005 is estimated to be
between Rs.2,775,000 and Rs.3,000,000.
He has been informed by his accountant that recently a new s.113A has been inserted in the Income Tax
Ordinance 2001 whereby a retailer has the option to pay income tax at the rate of 0·75% of the total turnover
for a tax year, which payment is treated as the final tax on the income arising from the said turnover. He wants
you to:
(i) state who is considered to be a retailer for the purpose of s.113A;
(ii) state the conditions to be fulfilled by a retailer in order to be eligible to be assessed on the fixed tax basis;
(iii) explain the term ‘turnover’ as would be applicable to his business; and
(iv) state, with reasons, whether he would be eligible to pay income tax at the rate of 0·75% of his turnover
which would be treated as the final tax for the tax year 2005.
Required:
Provide the information requested by Alibaba on the four issues listed above. (8 marks)
Marks to be allocated to the four items as (i) 1 mark, (ii) 3 marks, (iii) 2 marks and (iv) 2 marks.
(b) Mr X is a salaried employee and a taxpayer on record with the Income Tax Department since 1990. In 1994, he
purchased a house in Clifton for Rs.3,000,000 out of his earnings as a part-time property broker which earnings
had not been included by him in any of the tax returns furnished to the tax department.
For the tax year 2004, he had furnished to the Commissioner the Employer’s Certificate in lieu of a return of
income and the statement of assets and liabilities (wealth statement) as at 30 June 2004. The return and the
wealth statement furnished were on the prescribed form and complete in all respects. No amended assessment
order has been framed by the Commissioner for that tax year.
On 5 January 2005, the Commissioner was informed by his Regional Commissioner that a house property
belonging to Mr X had been impounded by the Property Tax Department of the Government of Sindh for non-
payment of water and property taxes for the last ten years.
Required
Explain the steps that the Commissioner can take under the Income Tax Ordinance 2001 to safeguard the
interest of revenue. (7 marks)
(15 marks)
10
6 For the purpose of this question you should assume that today’s date is 15 June 2004.
Aban Akbar has the choice of two offers of employment. Whichever of the two jobs she accepts she will commence
employment on 1 July 2004.
ABC Limited
Under the offer of employment from ABC Ltd, Aban would receive an annual salary of Rs.1,000,000 which would
be structured as under:
Rupees
Basic salary 1,600,000
House rent allowance 1,200,000
Cost of living allowance 1,175,000
Conveyance allowance 1,175,000
Entertainment allowance 1,150,000
––––––––––
1,000,000
––––––––––
Aban requested permission from ABC Limited to restructure the salary to make it more tax efficient. Her request is not
acceded to for the reason that the company has a uniform policy for the salary structure of its employees.
PQR Limited
Under the offer of employment from PQR Ltd, Aban will receive a gross annual salary of Rs.1,000,000. Aban’s
request to restructuring her salary to make it more tax efficient has been accepted by the company. She is however
informed that the company does not provide for free medical treatment or hospitalisation or for the reimbursement of
such charges.
Required
(a) Calculate Aban’s salary income after deduction of tax for the year ended 30 June 2005 if she accepts the
offer of ABC Limited. (5 marks)
(b) Advise Aban as to how she can structure the offer of Rs.1,000,000 from PQR Limited so as to give her the
maximum benefit. Your answer should be supported by explanations for the suggestions made. (8 marks)
(c) Calculate Aban’s salary income after deduction of tax for the year ended 30 June 2005, if she accepts the
offer of PQR Limited on the basis of the salary structure suggested by you in (b). (2 marks)
(15 marks)
11 [P.T.O.
7 (a) Captains Courageous Company (CCC), a company registered in the British Virgin Islands, is in the business of
operating ships which are owned by it. CCC’s operations in Pakistan are limited to the carriage of goods from
Pakistan to destinations outside Pakistan and the carriage of goods imported into Pakistan embarked outside
Pakistan.
You are informed by CCC’s local shipping agent that CCC is of the view that the company’s income from its
Pakistan operations is not taxable in Pakistan as its world income is exempt from tax in the British Virgin Islands.
However on his making inquiries of the tax department he was informed that CCC would be taxable in Pakistan
on the aforesaid operations.
The agent wants you to prepare a comprehensive note explaining:
(i) The tax provisions under which CCC’s income would be chargeable to tax in Pakistan, the basis of computing
the amount chargeable to tax and the tax payable thereon.
(ii) Whether the above basis of computing income and the tax payable would change if some of the ships used
for the carriage of goods are chartered by CCC.
(iii) The requirements to be completed by the master of a ship for income tax purposes before the ship is allowed
to leave a Pakistan port.
(iv) The procedure for obtaining a port clearance certificate allowing a ship to depart from a Pakistan port, when
the master of the ship is unable to complete the requirements referred to in item (iii) above.
The rate of tax on the shipping income of a non-resident person is 8%.
Required
Prepare the note required by the local shipping agent. (11 marks)
Marks will be allocated to the four items as (i) 6 marks; (ii) 1 mark; (iii) 3 marks and (iv) 1 mark.
(b) Under the provisions of s.122A of the Income Tax Ordinance, 2001 the Commissioner can call for the records
of any proceedings in which an order has been passed by certain taxation officers. After making such inquiries
as is necessary, the Commissioner may then make such revision to the order as he deems fit.
Required
(i) State whether or not the Commissioner can revise the following orders:
– an order passed by the Commissioner (Appeals);
– an assessment order framed under the repealed Income Tax Ordinance 1979; and
– an assessment order reducing the amount of a refund determined in an assessment order.
(2 marks)
(ii) List the orders that cannot be revised by the Commissioner under the provisions of s.122A. (2 marks)
(15 marks)
12
Answers

Part 2 Examination – Paper 2.3(PKN) June 2005 Answers
Business Taxation (Pakistan) and Marking scheme
Marks
1 (a) A company may be a public company under the Companies Ordinance 1984 but may not be a public
company for tax purposes. A company whose shares were traded on a registered stock exchange in Pakistan
at any time in the relevant tax year and which remained listed on that exchange at the end of that tax year is a
public company for tax purposes.
The shares of PQR Ltd commenced trading on the Karachi stock exchange on 1 June 2004 and the company
was delisted on that exchange on 31 December 2004. PQR Ltd is a public company for tax purposes in the
tax year 2004 since its shares were traded on a registered stock exchange in Pakistan during the tax year 2004
and PQR Ltd was listed on that stock exchange on 30 June 2004 (the end of the tax year 2004). 2
(b) PQR Ltd

Accounting year ended 30 June 2004
Tax year 2004
Computation of taxable income Rs. in thousands
Accounting profit 10,500
Add: Provision for taxation (Note 1) 3,500 0·5
Tax collected by the Collector of Customs (Note 2) 8,000 1
Penalty paid to the Collector of Customs (Note 3) 90 1
Amortisation of the cost of new process (Note 4) 3,200 0·5
Accounting depreciation 1,125 0·5
Legal costs (Note 5) 60 1
Purchase of furniture (Note 6) 750 0·5
Amortisation of preliminary expenses (Note 7) 650 0·5
Prize for sales promotion (Note 8) 1,600 1·5
Profit on debt (Note 9) 9,800 1·5
Unpaid excise duty (Note 10) 900 1·5
Tax profit on sale of building (Note 11) 1,800 1·5
Renovation cost of mixing machine (Note 12) 576 0·5
–––––– 32,051
–––––––
42,551
Less: Accounting profit on sale of a building (Note 11) 745 0·5
Amortisation of intangible (Note 4) 533 1·5
Initial allowance (Note 13) 1,538 1
Depreciation (Note 14) 1,984 4
–––––– 4,800
–––––––
37,751
Less: Dividend income for separate consideration 300 1
–––––––
37,451
Less: Unadjusted business loss being unabsorbed depreciation (Note 16) 1,500 1
–––––––
Business income being taxable income 35,951
–––––––
The relevant notes will be considered in allocating the marks against each item. In addition, specific marks
will be awarded for the explanations of the treatment of items not included in the computation of income
(I mark for each item) as follows: 4
15
Marks
(1) Any expenditure under a single head of account in excess of Rs.50 paid other than by a crossed bank
cheque or a crossed bank draft is not deductible. One of the exceptions to this rule is payment of duties.
Therefore the excise duty paid in cash is deductible.
(2) Demurrage paid for the late lifting of goods is an expenditure in the normal course of carrying on the
business. It is not in the nature of a fine or penalty for violation of any law, rule or regulation. It is
therefore an allowable deduction.
(3) Legal expenses incurred by PQR Ltd in defending the title to its assets is a deductible expense as it is in
the normal course of carrying on its business. The expenditure has neither added to the value of the assets
nor created a new asset.
(4) PQR Ltd has received Rs.250 against debts which were previously allowed as a deductible charge, therefore,
the loss to that extent has been recouped. Where any expenditure or loss allowed as a deduction in a tax
year against income chargeable to tax under a head of income, is received in cash or kind (recouped in a
subsequent year), then the amount received is to be included in the income chargeable to tax under the
same head of income for the tax year in which it is received. Rs.250 is therefore chargeable to tax as
income from business in the tax year 2004.
–––
27
(c) Tax liability

Rs. in
thousands
On business income of Rs.35,951 at 35% 12,583 0·5
Taxes paid, deducted at source or collected (Note 17) (16,465) 2
–––––––
–––––––
Dividend income – Rs.300
Tax deducted at source is the final tax (Note 15) 15 0·5
––––––– –––
3
–––
30
–––
Note (1) A provision made in the accounts for taxation is not deductible. Any tax paid or payable that is leviable on the
profits of the business is not a deductible charge.
Note (2) Tax collected by the Collector of Customs is not deductible. PQR Ltd is an industrial undertaking and the tax
collected at the customs stage on the import of raw materials for PQR’S own use is not the final tax on the income
arising from the imports but is available to PQR Ltd as a tax credit (Note 17).
Note (3) The amount paid to the Collector of Customs for the erroneous declaration made in a bill of entry is in the nature
of a fine or penalty paid for violation of the customs law and is therefore not deductible.
Note (4) The expenditure on the development of a new formulation process is an ‘intangible’. As the normal useful life of
the new process is three years, the expenditure for tax purposes is to be amortised over three years proportionate
to the number of days the intangible is used in the tax year for the purposes of business. As the intangible has
been used for 61 days in the tax year 2004, the amount deductible is worked out as under:
Cost of intangible Rs.9,600
––––––––
Normal useful life 3 years
––––––––
Amortisation deduction for one whole year Rs.3,200
––––––––
For 61 days in a year of 366 days (leap year) 3,200 x 61/366 Rs.533
––––––––
Rs.3,200 charged in the accounts for amortisation is not a deductible charge.
Note (5) Legal costs incurred in defending a director for a traffic offence is not an expenditure for the purposes of business
and is therefore not deductible.
Note (6) Purchase of furniture is a capital expenditure. The expenditure is not a deductible charge despite it being the
consistent accounting policy of the company to charge off such expenditure. For tax purposes it is treated as a
depreciable asset (Note 14).
16
Note (7) Preliminary expenditure is capital in nature and amortisation of this expenditure is not a deductible charge. (It
does not fall within the definition of an intangible to enable it to be amortised for tax purposes).
Note (8) The law specifically provides that where a prize is not in cash, the person giving the prize has to collect tax on
the fair market value of the prize. Rs.1,600 is not deductible since tax was not collected by PQR Ltd from
Mr Baig.
Note (9) The profit on the debt received by Rich Bank is chargeable to tax in Pakistan. It is a Pakistan-source income of
Rich Bank since the amount has been paid by a resident (PQR Ltd) and the debt has not been used for any
business carried out by PQR Ltd outside Pakistan. The profit on the debt paid by PQR Ltd is not deductible since
tax was not deducted at source from the payment made to Rich Bank.
Note (10) The unpaid expenditure of Rs.900 for excise duty was allowed as a deduction in the accounting year ended
30 June 2000. As the amount has remained unpaid for three years from the end of the year in which the
deduction was allowed (30 June 2001, 2002, 2003) the amount is chargeable to tax in the tax year 2004 (the
first year following the end of the said three years).
Note (11) In the case of the disposal of any immovable property, where the consideration received on disposal exceeds the
cost of the property, the sale consideration received is to be treated as the cost of the property.
As the sale consideration (Rs.6,000) on disposal of the building is more than that its cost (Rs.5,000), Rs.6,000
is to be treated as the cost of building for working out the tax profit or loss on sale of the building.
Depreciation allowed on the building in prior years is Rs.1,800 (actual cost Rs.5,000 less written down value
Rs.3,200).
Tax profit on disposal of building Rs.
Sale consideration 6,000
Less: Tax written down value
Deemed cost 6,000
Depreciation allowed (1,800) 4,200
––––––– –––––
Tax profit on sale of building 1,800
––––––
Note (12) Expenditure on renovations necessary at the time of purchase of an asset to render the asset capable of being
used in the business is capital in nature and adds to the cost of the asset. Rs.576 is not deductible and has to
be added to the cost of the machine.
Rs.
Cost of mixing machine 2,500
Add: Cost of renovation (Note 12) 576
––––––
3,076
––––––
––––––
(Note 14) Depreciation
Plant and Factory Office Motor Furniture Total
machinery building building vehicle depreciation
Rate of depreciation 10% 10% 5% 20% 10%
Written down value 9,500 2,500 8,200 400 250
Disposal – – (3,200) – –
–––––– –––––– ––––––– –––––– –––––
9,500 2,500 5,000 400 250
–––––– –––––– ––––––– –––––– –––––
Depreciation 950 250 250 80 25 1,555
–––––– –––––– ––––––– –––––– –––––
Additions 3,076 – – 1,000 750
Initial allowance (1,538) – – – –
–––––– –––––– ––––––– –––––– –––––
Written down value 1,538 – – 1,000 750
–––––– –––––– ––––––– –––––– –––––
Depreciation for 12 months 154 – – 200 75 429
––––––
1,984
––––––
The cost of the new car (Rs.1,500) has been restricted to Rs.1,000 for the purposes of claiming depreciation.
Note (15) All dividends received by a public company suffer deduction of tax at 5% of the gross amount of dividend. The
tax so deducted is the final tax on such dividend income.
17
Note (16) The unadjusted business loss of Rs.2,750 determined in the accounting year ended 30 June 1997 is made up
as under: Rs.
Business loss (excluding unabsorbed depreciation) 1,250
Unabsorbed depreciation 1,500
––––––
2,750
––––––
The business loss of Rs.1,250 cannot be set off against the income for tax year 2004 as the right to carry forward
the loss had lapsed on 30 June 2003. A business loss cannot be carried forward for more than six years
immediately succeeding the tax year in which it was determined. Unabsorbed depreciation can be carried forward
until it is completely set off. The entire amount of Rs.1,500 is set off against the profits for the tax year 2004.
Note (17) Taxes paid, deducted at source or collected
Rs.
Advance tax paid 8,000
Tax deducted at source on sale of manufactured goods (Note 17A) 465
Tax collected at import stage by the Collector of Customs 8,000
–––––––
16,465
–––––––
Note (17A) PQR Ltd as a manufacturer has the option to be taxed on a final tax basis on the income from its own
manufactured goods. To avail the option PQR Ltd was required to furnish a declaration in writing to the
Commissioner to be assessed on the final tax basis within three months of the commencement of the tax year
(i.e., by 30 September 2003). PQR Ltd cannot be assessed on the final tax basis since the declaration was
submitted after 30 September 2003. Therefore the tax deducted has been allowed as a tax credit.
2 (a) Mr Iqbal
Tax year 2004
Computation of income Rupees
SALARY INCOME
– From Chemicals plc – £12,000 exempt from tax (Note 1) 0 1·5
– From Chemicals Pakistan Ltd
Voluntary / non-contractual payment (Note 2) 500,000 1
Basic salary – six months 1,800,000 0·5
Cost of living allowance (Note 3) 180,000 0·5
Entertainment allowance (Note 3) 180,000 0·5
Relocation allowance (Note 3) 308,000 0·5
Air fare for wife (Note 4) 375,000 1
Rent free accommodation (Note 6) 53,000 0·5
Value of electricity (Note 7) 30,000 1·5
Gardener’s salary (Note 8) 48,000 0·5
Benefit of concessional loan (Note 9) 9,000 1·5
Reimbursement of medical and hospital charges exempt from
tax (Note 10) 0 1
Waiver of loan (Note 11) 150,000 1
– Sale of rights [Note 12 (i)] 50,000 1
– Benefit of acquisition of shares [Note 12(ii)] 400,000 1·5
––––––––– 4,183,750
INCOME FROM PROPERTY
Consideration for the use of land (Note 13) 100,000 1
INCOME FROM OTHER SOURCES

Profit on debt (tax deducted at source Rs.30,000) 300,000 0·5
––––––––––
Zakat paid (75,000) 0·5
––––––––––
––––––––––
18
Marks
(I mark for each item) as follows: 3
(1) There is no taxable event on the grant of the right to purchase 1,000 shares in CPLC at the exercise
price of £15 for one share. Therefore the market price of the share on the date of issue of the rights
is irrelevant.
(2) The refundable deposit of Rs.100,000 which is not adjustable against the rent payable for the land is
not income exigble to tax. However a similar deposit (refundable but not adjustable against rent payable)
received from a tenant by the owner of a building is taxable in 10 years in equal proportion including
the year in which the deposit is received.
(3) The storage charges of Rs.60,780 incurred on the import of pharmaceuticals is not deductible because
when tax is imposed on a final tax basis, no deduction is allowable for any expenditure incurred.
–––
20
–––
(b) COMPUTATION OF TAX LIABILITY Rupees

Tax on Rs.700,000 119,000
Tax on balance of Rs.3,808,750 at 35% 1,333,063
––––––––––
1,452,063 0·5
Reduction in tax liability on Rs.1,452,063 at 5% (Note 14) 72,603 1
––––––––––
1,379,460
Tax deducted at source
On salary income by PKC 1,467,800
On profit on debt 30,000
––––––––– (1,497,800) 1
–––––––––––
–––––––––––
TAX DEDUCTED / COLLECTED AS FINAL TAX Final tax

Import of pharmaceuticals (Note 15) 329,310 2
Dividends – gross receipts Rs.8,333 833 0·5
–––
5
–––
25
–––
Note (1) Iqbal was resident for Pakistan tax purposes in the tax year 2004 on the basis of the number of days he was
present in Pakistan in the tax year. £12,000 is foreign-source salary income of Iqbal because the employment
was not exercised in Pakistan. Such income of a resident individual is exempt from Pakistan tax, if foreign income
tax has been paid on the income or if tax has been withheld by the foreign employer and paid to the revenue
authorities of the foreign country. The above conditions having been fulfilled, £12,000 is exempt from Pakistan
tax.
Note (2) The payment of Rs.500,000 is chargeable to tax as it is a profit of employment. All voluntary payments even
those depending upon the goodwill of a past, future or present employer for services rendered or to be rendered
are taxable even if the recipient would have no right of action in case of non-payment.
Note (3) Where salary income including value of perquisites and benefits in a tax year is Rs.600,000 or more all cash
allowances (except house rent allowance up to 45% of basic salary subject to a maximum of Rs.270,000) are
chargeable to tax. As Iqbal’s salary in the tax year 2004 is more than Rs.599,999, the cash allowances (for six
months) for cost of living, entertainment and relocation are chargeable to tax as salary income.
Note (4) The benefit of free passage for travel is chargeable to tax in its entirely as Iqbal’s salary exceeds Rs.599,999 in
the tax year 2004.
Note (5) As the car is for private and business use, Rs.237,500 being 5% of the cost of the car is the annual benefit. The
amount chargeable to tax for six months is Rs.118,750 which is to be reduced by the monthly payment of
Rs.3,000 made by Iqbal to the company (Rs.118,750 – Rs.18,000 = Rs.100,750).
Note (6) The annual value of rent free housing on a land area of 1,000 sq. yards outside municipal limits is Rs.106,000.
The amount chargeable to tax for six months is Rs.53,000.
19
Note (7) Rs.210,000 would have been the cost of electricity if the units consumed were purchased from the Karachi
Electric Supply Corporation. The value of electricity provided free of charge to an employee is exempt from tax up
to 10% of basic salary. Therefore the benefit chargeable to tax is Rs.30,000 [Rs.210,000 less Rs.180,000 (10%
of basic salary)].
Note (8) The services of a gardener provided to Iqbal is a perquisite chargeable to tax. Salary paid for six months
Rs.48,000 is a perquisite chargeable to tax.
Note (9) As no profit is payable on the loan of Rs.300,000, the amount chargeable to tax is Rs.9,000 being the amount
computed at the benchmark rate of 6% per annum on Rs.300,000 for six months (6% of 300,000 x 6/12).
Note (10) Reimbursement of medical and hospitalisation charges is exempt from tax as the reimbursement of such charges
is in accordance with the terms of employment. It is assumed that the National Tax Numbers of the hospitals or
clinics have been furnished by Iqbal and the employer has certified and attested the medical and hospitalisation
charges.
Note (11) The waiver of an obligation of an employee to repay an amount owing by the employee to the employer, is
chargeable to tax in the tax year, the amount is waived. Therefore the waiver of Rs.150,000 out of the loan
advanced by PKC is a taxable perquisite and is chargeable to tax.
Note (12) Employee share scheme of Chemicals plc (CPLC)
(i) As no payment was made for the right to purchase the shares, the entire amount of Rs.50,000 received for
the sale of 500 rights is chargeable to tax. The gain is taxable as salary income and not as ‘capital gains’.
(ii) 500 shares of CPLC were acquired at the exercise price of £15 per share. The market price on the date
Iqbal exercised his right to purchase the shares was £23. The difference of £8 per share is the taxable
benefit [£8 x 500 = £4,000 (Rs.400,000)].
The above benefit is received not from PKC (Iqbal’s employer) but from CPLC an associate company of PKC.
An amount or perquisite received by an employee is treated as a receipt from employment even if it is paid
or provided inter alia by an associate of the employer.
Note (13) Rent received or receivable for a tax year for the use of land is chargeable to tax in that tax year. Out of the
Rs.200,000 received in advance, Rs.100,000 is for the tax year 2004 which is chargeable to tax in the tax year
2004.
Note (14) As the salary income of Iqbal exceeds 50% of his taxable income he is entitled to a reduction in his tax liability
at the rates given in Clause (1)(1) of Part III of the Second Schedule. On income slab exceeding Rs.1,000,000
the reduction in tax liability is 5%.
Note (15) As the goods imported were finished goods, the tax of Rs.329,310 (6% of Rs.5,488,500 – value of the goods
imported as determined for custom purposes) collected under S.148 by the Collector of Customs is the final tax
on the amount of income/loss arising from the imports.
Marks
3 (a) (i) A manufacturer whose annual turnover from taxable supplies, made in any period during the last twelve
months exceeds five million rupees, is required to be registered under the Sales Tax Act 1990. 1·5
(ii) A retailer whose value of supplies, in any period during the last twelve months ending any period exceeds
five million rupees, is required to be registered under the Sales Tax 1990 1·5
(b) The Collector of Sales Tax may blacklist or suspend the registration of a person if such person is found to:
(i) have issued fake invoices; 1
(ii) evaded tax; or 1
(iii) committed a tax fraud. 1
(c) The following goods acquired otherwise than as ‘stock in trade’ have been notified by the Federal Government
in respect of which input tax shall not be claimed:
(i) vehicles falling within Chapter 87 of the First Schedule to the Customs Act 1969;
(ii) foods;
(iii) beverages;
(iv) garments;
(v) fabrics;
(vi) consumption on entertainment; and
(vii) gifts and give-aways. 4
(d) Where a refund due is not made within the specified time the claimant shall be paid, in addition to the refund
due to him, a further sum equal to 6% per annum of the amount of the refund due from the date following the
expiry of the specified time to the date preceding the date of payment of the refund. 1
20
Marks
(e) (i) Utility bills paid by cash are admissible for claiming input tax. 1
(ii) The payment of Rs.17,000 made by cash for the purchase of aluminum foils is admissible for claiming
input tax as the payment is for a transaction of purchase not exceeding Rs.50,000 1
(iii) The payment of Rs.75,000 made through a crossed bank draft from the personal bank account is not
admissible for claming input tax as the payment has not been transferred through a ‘business bank
account’. A ‘business bank account’ has been defined to mean a bank account utilised by the
registered person for business transactions, declared to the Collector in whose jurisdiction such person
is registered. 1
(iv) The payment transferred through a crossed bank draft from the ‘business bank account’ (as defined in
item (iii) above) of the buyer is inadmissible for claiming input tax since the payment was made after
one hundred and eighty days of the issuance of the tax invoice. 1
–––
15
–––
4 Mr Saleem
Tax year 2004
Brokerage income 785,000 0·5
Set off of brought forward loss (Note 1) 700,000 1
–––––––– 85,000
Capital gains
Gain on disposal of shares held by Saleem Sons (Note 2) 5,000 1·5
Gain on disposal of shares acquired under employee share
scheme (Note 3) 375,000 3
Gain on sale of sculpture (Note 4) 225,000 1·5
Gain on sale of one postage stamp (Note 5) 15,000 1·5
––––––––
620,000
Set off of brought forward capital loss (Note 6) 620,000 0 1·5
–––––––– ––––––
Total income 85,000
Zakat paid (10,000) 0·5
––––––––
––––––––
The relevant notes will be considered in allocating the marks against each item. In addition, specific marks will be
awarded for the explanations of the treatment of items not included in the computation of income (I mark for each
item) as follows: 4
(1) A loss on the disposal of a capital asset is not deductible where a gain on the disposal of such an asset is exempt
from tax. XYZ Ltd is a company listed on the Karachi stock exchange and any profit on disposal of its shares
is exempt from tax. Therefore the loss of Rs.75,000 is not deductible.
(2) A transfer of an asset is treated as a disposal when the transferor parts with the ownership of the asset.
50,000 shares in Bingo (Private) Ltd were inherited by Saleem on 1 June 1980 when the break up value
of one share was Rs.10. Rs.500,000 (50,000 shares x Rs.10) is treated to be the cost of the asset.
On the date of transfer of the shares to Mrs. Saleem, the FMV of one share was Rs.15. Ordinarily the difference
of Rs.250,000 (50,000 shares x Rs.5) would be chargeable to tax as capital gains. However due to the
non-recognition rules [s.79(a)] no gain is taken to have arisen because the disposal of the shares was under
an agreement between the spouses to live apart.
(3) A postage stamp is a capital asset and any gain on its disposal is chargeable to tax; however any loss on
the disposal of postage stamps is not recognised as a capital loss.
(4) A motor car held for personal use by a person or any dependent family member is excluded from the
definition of a capital asset. As capital gains can only arise on disposal of a capital asset, the gain of
Rs.100,000 on the disposal of the car is not chargeable to tax since the car was in the personal use of
Saleem’s wife and the car was sold in August 2003 prior to Saleem’s separation from his wife.
–––
15
–––
21
Marks
Note (1) Business loss brought forward
The loss of Rs.50,000, suffered in the money market, is a loss from speculation business which
business is deemed to be distinct and separate from any other business. This speculation loss
determined in the tax year 2003 cannot be set off against the brokerage income of Saleem Sons.
The loss is to be carried forward and set off only against the profits of speculation business in
subsequent years up to the tax year 2009 (six years immediately succeeding the tax year 2003).
The balance of loss of Rs.700,000 (Rs.750,000 less Rs.50,000) is set off against the brokerage
income.
Note (2) Disposal of shares by Saleem Sons
Rupees
Stock-in-trade is excluded from the definition of a ‘capital asset’. Therefore, any
gain or loss on the sale of stock-in-trade is chargeable to tax as ‘income from business’.
There is one exception. Where stocks and shares are held as stock-in-trade, the gain
or loss on the disposal of such stocks and shares are chargeable to tax under the head
of ‘capital gains’.
ABC Ltd, though a public company under the Companies Ordinance 1984 is not a
public company for tax purposes. It is not listed on any stock exchange in Pakistan. The
gain on disposal of the shares is therefore not exempt from tax. The entire gain is taxable
since the shares were not held for more than one year 60,000
Loss on sale of shares in Highland (Private) Ltd (55,000)
Gogo Limited is a public company under the Income Tax Ordinance 2001 because not less
than 50% of its shares are held by a Provincial Government. The gain on disposal of the
shares is exempt from tax 0
–––––––
–––––––
Note (3) Gain on disposal of shares acquired under employee share scheme
Rupees
Consideration on disposal of 1,000 shares on 30 June 2004 2,000,000
Cost of 1,000 shares
– £5 paid on acquisition of the shares in Securities plc on
1 January 2003 (Tax year 2003) – £ 5 x 1,000 = £ 5,000 500,000
– Amount charged to tax as salary income in the tax year
2003 (Note 3A) 1,000,000 1,500,000
––––––––– –––––––––
–––––––––
As the shares were held for more than one year, Rs.375,000 being 75% of Rs.500,000 is chargeable as income from
capital gain.
Note (3A) 1,000 shares of Securities plc were acquired by Saleem on 1 January 2003 (tax year 2003) at the exercise price of
£5 per share. The fair market value of the shares on 1 January 2003 was £15. The difference of £10 per share is
the taxable benefit, £10 x 1,000 = £10,000 (Rs.1,000,000). Rs.1,000,000 would have been charged to tax as
salary income of Saleem in the tax year 2003.
Note (4) Gain on sale of sculpture
The sculpture, a capital asset, was inherited by Saleem on 1 June 1980. For assets becoming the property of a person
by inheritance, the fair market value (FMV) of the asset on the date the asset become the property of the person is
treated as the cost of the asset. The asset was transferred to Saleem on 1 June 1980. The asset was then valued by
an expert at Rs.700,000. The valuation by the expert at Rs.700,000 is the FMV of the asset and is treated as the cost
of the asset.
Rupees
Sale consideration 1,000,000
Cost being the FMV of the sculpture on the date it was acquired by inheritance (700,000)
–––––––––
Gain on sale 300,000
–––––––––
75% of RS.300,000 is chargeable as income from capital gains, as the sculpture was
held for more than one year 225,000
–––––––––
22
Rupees
Note (5) Gain on sale of one postage stamp
Sale proceeds of the Indian postage stamp 45,000
Cost being the FMV of the stamp on the date it was acquired by inheritance 25,000
–––––––
Gain on sale 20,000
–––––––
75% of RS.20,000 is chargeable as income from capital gains, as the postage stamp
was held for more than one year 15,000
–––––––
Note (6) Capital loss brought forward
A loss incurred under the income head of capital gains can only be set off against profits under the head of capital
gains. The brought forward loss of Rs.355,000 determined in the accounting year ended 30 June 1997 had lapsed
on 30 June 2003 (tax year 2003) because a capital loss cannot be carried forward to more than six years immediately
succeeding the tax year in which the loss was incurred.
As a capital loss can be carried forward for six years only, the loss of the year ended 30 June 1998 should be set off
before the capital loss of the tax year 2003.
Rupees
Loss brought forward 637,225
Set off against capital gains of Rs.620,000 620,000
––––––––
Unabsorbed loss 17,225
––––––––
The unabsorbed capital loss of Rs.17,225 cannot be carried forward to the tax year 2005 as the period of six years
expired on 30 June 2004.
The loss of Rs.47,500 determined in the tax year 2003 is to be carried forward to the tax year 2005.
5 (a) The information required by Alibaba is as under

(i) A ‘retailer’ for the purpose of s.113A means a person selling goods to the general public for the purpose
of consumption. 1
(ii) A retailer to be eligible to be assessed on the fixed tax basis in a tax year must:
- be an individual or an association of persons;
- have a turnover of not more than Rs.5,000,000 in a tax year;
- opt for payment of tax at the rate of 0.75% on his turnover for the tax year; and
- furnish a statement, in the prescribed form, showing the turnover for the tax year and the tax paid
thereon. 3
(iii) Turnover for the purpose of Alibaba’s business would mean the gross receipts derived from the sale
of ice-cream exclusive of sales tax and central excise duty or any trade discounts shown on his invoices
or bills. 2
(iii) Alibaba would be eligible to pay income tax at 0.75% of his turnover for the tax year 2005, which would
be treated as the final tax, since:
– he is an individual; 0·5
– the ice-cream sold is to the general public for the purpose of consumption; and 0·5
– his turnover for the tax year 2005 would not exceed Rs.5,000,000. 1
23
Marks
(b) The Commissioner should check the tax records of Mr X to ascertain whether or not the house property has
been disclosed by Mr X in the statement of assets and liabilities (wealth statement) furnished by him.
As the income of Rs.3,000,000 out of which the house was purchased, has not been shown in any of the
returns of income furnished by Mr X, it is unlikely that the house property would have been declared in his
wealth statements. The Commissioner would then have reasonable grounds to contend that the impounded
house is a ‘concealed asset’. A ‘concealed asset’ means any property or asset which in the opinion of the
Commissioner has been acquired out of income which was chargeable to tax but which has not been taxed. 3
As the tax return furnished to the Commissioner by Mr X for the tax year 2004 was complete in all respects,
the assessment is treated as having been made. To safeguard the interest of revenue, the Commissioner
may issue a provisional assessment order to Mr X for the tax year 2004 (which is the last completed
assessment) and include therein the amount representing the value of the concealed asset and recover the
tax due from Mr X. The Commissioner is then required to finalise the provisional assessment as soon as
practicable. 4
–––
15
–––
6 (a) Offer of employment from ABC Limited. Tax year 2005

Rupees
Salary income after deduction of tax
Basic salary 600,000 0·5
House rent allowance (exempt from tax – Note 1) 0 1
Cost of living allowance 75,000 0·5
Conveyance allowance 75,000 0·5
Entertainment allowance 50,000 0·5
––––––––––
800,000
––––––––––
Income tax
On Rs.700,000 117,500
On Rs.100,000 at 35% 35,000
––––––––––
152,500 0·5
Reduction in tax liability on Rs.152,500 at 10% (Note 2) (15,250) 1
––––––––––
137,250
––––––––––
Gross salary 1,000,000
Tax deduction at source (137,250)
––––––––––
Salary income after deduction of tax 862,750 0·5
––––––––––
(b) Offer of employment from PQR Limited. Tax year 2005

(i) Aban should be advised to structure the annual salary of Rs.1,000,000 as under:
Rupees
Basic salary 608,334
House rent allowance 270,000
Utility allowance 60,833
Medical allowance 60,833
––––––––––
1,000,000
––––––––––
24
Marks
(ii) The annual salary has been structured to include the maximum amount of cash allowances which are
exempt from tax. 1
House rent allowance. A cash allowance up to 45% of basic salary subject to a maximum of
Rs.270,000 is exempt from tax where the salary income (including the value of perquisites and
benefits) exceeds Rs.599,999. 45% of Rs.608,334 is Rs.273,750. Therefore the allocation for
house rent allowance is limited to Rs.270,000. 2
Utility allowance. A cash allowance up to 10% of basic salary is exempt from tax (10% of Rs.608,334). 1·5
Medical allowance. Free medical treatment or hospitalisation or reimbursement of such charges are not
provided under the terms of employment. Therefore a cash allowance up to 10% of basic salary is
exempt from tax (10% of Rs.608,334). 1·5
(iii) Basic salary
Out of the gross salary of Rs.1,000,000, Rs.270,000 has been allocated to house rent allowance.
The balance of Rs.730,000 (Rs.1,000,000 less Rs.270,000) is allocated between basic salary
and 10% of basic salary each for utility allowance and medical allowance (20% of basic salary for
utility and medical allowance). The basic salary on the above basis is Rs.608,334
(Rs.730,000 x 100/120 = Rs.608,334). 2
(c) Salary income after deduction of tax

Rupees
Basic salary 608,334 0·5
House rent allowance (exempt from tax – Note 1) 0
Utility allowance (exempt from tax ) 0
Medical allowance (exempt from tax) 0
––––––––
––––––––
Income tax
On Rs.400,000 42,500
On Rs.208,334 at 25% 52,083
––––––––––
94,583 0·5
Reduction in tax liability of Rs.94,583 at 10% (Note 2) (9,458) 0·5
––––––––––
85,125
––––––––––
Gross salary 1,000,000
Tax deduction at source (85,125)
––––––––––
Salary income after deduction of tax 914,875 0·5
–––––––––– –––
15
–––
Note (1) As the salary income (including the value of perquisites and allowances) chargeable to tax
is in excess of Rs.599,999, an allowance for house rent received in cash is exempt from tax
up to 45% of basic salary subject to a maximum of Rs.270,000.
Note (2) On an income slab between Rs.500,000 to Rs.1,000,000, the tax liability is to be reduced
by 10%.
25
Marks
7 (a) (i) The Income Tax Ordinance, 2001 (s.7) provides for the separate taxation of certain classes of income,
one of which is the income of a non-resident person carrying on the business of operating ships as the
owner or charterer thereof. The income of the non-resident person is not computed on the net-income
basis. Tax is imposed on the gross amount received or receivable for the carriage of passengers, livestock,
mail or goods depending upon whether the shipment is from a port in Pakistan or a port outside Pakistan. 2
CCC would be chargeable to tax in Pakistan despite its tax exempt status in the British Virgin Islands.
CCC would be a non-resident company for Pakistan tax purposes and the amount chargeable to tax is
to be computed as under:
For goods embarked from a port in Pakistan, the amount chargeable to tax is the gross amount received
or receivable by CCC for the carriage irrespective of whether the amount is received in Pakistan or outside
Pakistan.
For goods embarked from a port outside Pakistan, the gross amounts received or receivable by CCC for
the carriage is chargeable to tax only if the amount is received or receivable in Pakistan. 2
Tax at the rate of 8% is imposed on the aforesaid gross amount received or receivable (Amount). The tax
imposed is the final tax on the Amount and:
– the Amount is not chargeable to tax under any head of income of CCC;
– no deduction is allowable for any expenditure incurred by CCC in deriving the Amount;
– the Amount is not to be reduced by any deductible allowances or the set-off of any loss; and
– the tax payable is not to be reduced by any tax credit allowable to CCC. 2
(ii) The above basis of computing income and tax payable would not change if the ships used for the
carriage were chartered by CCC. 1
(iii) Before the departure of a ship from a port in Pakistan, the master of the ship has to furnish to the
Commissioner a return showing the gross amounts specified in item (i) above. He has also to furnish
any particulars, accounts or documents which may be required by the Commissioner. The Commissioner,
after being satisfied that the return furnished is complete in all respects, would determine the amount
of tax due and notify the master in writing of the amount of tax to be paid. The master or the shipping
agent on behalf of the master has to discharge the tax liability before the departure of the ship. In
practice tax is calculated by the master of the ship and paid at the time of furnishing the return. The
Collector of Customs would issue the port clearance certificate allowing the ship to leave the port when
he is satisfied that the tax due has been paid. 3
(iv) When the master of the ship is unable to furnish the above return to the Commissioner before the
departure of the ship from a Pakistan port, the Commissioner has been empowered to allow the return
to be furnished within thirty days of the departure of the ship provided arrangements have been made by
the owners or charterers of the ship that the tax would be paid. The Collector of Customs would issue the
port clearance certificate when he is satisfied that arrangements for the payment of the tax due have been
made to the satisfaction of the Commissioner. 1
(b) (i) An order of the Commissioner (Appeals) cannot be revised by the Commissioner under S.122A. 0·5
The Commissioner can revise an assessment order passed under the repealed Income Tax Ordinance 1979. 0·5
A revised order cannot be passed which is prejudicial to the taxpayer. An order seeking to reduce a
determined refund is prejudicial to the taxpayer and so such an order cannot be passed under S.122A. 1
(ii) An order cannot be revised by the Commissioner if:
– it is an order against which an appeal can be made with the Commissioner (Appeals) or the
Appellate Tribunal and the time within which such an appeal can be made has not expired; or 1
– the order is pending an appeal before the Commissioner (Appeals) or the Appellate Tribunal. 1
–––
15
–––
26
Paper 2.3(PKN)
Business Taxation
(Pakistan)
PART 2
QUESTION PAPER

answered
Tax rates and allowances are on page 3

hall

This is a blank page.
The question paper begins on Page 3.
2
A. Tax rates for individuals and associations of persons for the tax year 2004
Up to Rs. 80,000 0%
B. Reduction in tax liability of salaried individuals where salary income exceeds 50% of taxable income
Up to Rs. 60,000 10%
Rs. –60,001 – Rs. 80,000 70%
Rs. –80,001 – Rs. 100,000 60%
Rs. 100,001 – Rs. 150,000 50%
Rs. 150,001 – Rs. 200,000 40%
Rs. 200,001 – Rs. 300,000 30%
Rs. 300,001 – Rs. 500,000 20%
Rs. 500,001 – Rs. 1,000,000 10%
Rs. 1,000,001 and above 15%

2004 44% 35% 41%
D. Rates of advance collection or deduction of tax

Commission or brokerage 10% of gross payment
Import of goods 6% of value of goods determined for customs
purposes
E. Tax rates on dividends received from companies

F. Capital allowances
Depreciation

Other buildings 5% 
Furniture and fittings 10% 
 of the tax written down value
Motor vehicles (all types) 20% 

Aircraft, aero-engines and aerial photographic apparatus 30%
3 [P.T.O.
1 The provincial government of Sind holding 50 per cent of the shares in XYZ Ltd, a public company under the
Companies Ordinance 1984, is engaged in the manufacture of cellular phones. XYZ Ltd is not listed on any stock
exchange in Pakistan.
The finance director of the company requires you to prepare the income tax return of the company for the tax year
relevant to the accounting year ended 31 December 2003. The following information is furnished to you.
(1) The accounting profit for the year ended 31 December 2003 after providing Rs.105,000 for taxation is
Rs.478,000.
(2) Deductions charged in the accounts include:
Rupees
(i) Anticipated loss on a forward contract for the purchase of raw material ‘X’ on
1 January 2004. 200,000
(ii) Contribution to the staff retirement gratuity fund. The fund is not approved
by the Commissioner and no arrangements are in place to ensure deduction
of tax from payments to the employees out of the fund. 300,000
(iii) Advance to an associated company written off as a bad debt. 300,000
(iv) Payment in cash of salary to a temporary worker. 4,800
(v) Payment in cash to Pakistan International Airways for the sales manager’s
return airfare to London. The trip to London was for business purposes. 120,000
(vi) Payment to a non-resident company for technical advice on the manufacture
of cellular phones in Pakistan. No tax was deducted on the contention that the
non-resident is not chargeable to tax since the advice was rendered from
outside Pakistan by e-mail and the non-resident has no permanent
establishment in Pakistan. 250,000
(vii) Tax collected by the Collector of Customs on the value of plant imported by
the company for its own use. 100,000
(viii) Major renovations to one item of plant, which resulted in substantially increasing
the production capacity of the plant. The renovations were completed in
January 2003. 900,000
(ix) Payment to Zumzum Hotel for holding the annual eid-milan party for the
employees and their families. 215,000
(x) Depreciation 590,000
(xi) Legal costs on the issue of additional share capital. 700,000
(xii) Compensation paid to a customer for failure to deliver goods within the time
stipulated in the contract for the supply of cellular phones. 1,000,000
(3) Income shown in the accounts includes:
(i) The face value of bonus shares received from a listed company in Pakistan
whose shares are held as an investment by XYZ Ltd. 569,000
(ii) Gain on revaluation of the plant. 1,100,000
(iii) Accounting profit on the sale of a motor car. 100,200
(iv) Dividend received (gross amount) from a private company. 90,000
(v) Share of profits received from Bigli Associates, an association of persons
(AOP) in which XYZ Ltd is a member. 800,000
The taxable income of the AOP was Rs.2,000,000 and the tax assessed on
the AOP was Rs.574,000
4
(4) Fixed assets
(i) New machine was purchased on 25 January 2003 for Rs.800,000.
(ii) The tax written down values of the fixed assets on 1 January 2003 were:
Plant and machinery 1,700,000
Factory buildings 1,800,000
Motor vehicles 1,010,000
Furniture 100,000
(iii) The old plant and machinery was revalued on the basis of an expert valuer’s
report. The accounting written down value of the plant and machinery was
enhanced from Rs.1,000,000 to Rs.2,100,000.
(iv) A motor car purchased in January 2002 for Rs.1,200,000 (tax written
down value Rs.800,000) was disposed of for Rs.900,000 in November 2003.
For the purposes of claiming tax depreciation the cost had been restricted to
Rs.1,000,000. On 1 January 2003, a new car was purchased for Rs.2,500,000.
Required:
(a) Briefly explain how the tax year in which the above income is assessed will be determined. (1 mark)
(b) Briefly state with reasons whether or not XYZ Ltd will be a public company for tax purposes. (1 mark)
(c) Compute the taxable income of XYZ Ltd for the relevant tax year giving clear reasons/explanations for the
inclusion or exclusion in the computation of each of the items listed above. The reasons/explanations for the
items not included in the computation of income should be shown separately. (22 marks)
(d) Calculate the tax payable by/refundable to XYZ Ltd for the relevant year. (3 marks)
(27 marks)
5 [P.T.O.
2 Mary and Jane entered into a partnership on 1 July 2003 to carry on business as hairdressers under the name of
Bal-Kaa-Toe sharing profits and losses equally. Jane, due to reasons of health, retired from the firm on 30 September
2003 and the firm ceased doing business on that date. Bal-Kaa-Toe is an AOP for tax purposes. The AOP has paid
income tax on its taxable income for the three months ended 30 September 2003. Rs.150,000 was received by Mary
as her share of the income of the AOP.
Mary took up temporary employment on 1 October 2003 for three months with Charli – a hairdressing establishment
on a monthly salary of Rs.100,000. The terms of employment specifically stated that if Mary should leave the
employment before the end of the three months period, she would pay Charli Rs.100,000 as compensation for breach
of the terms of employment.
Before the end of October 2003, Mary was offered a permanent employment as the senior hairdresser with Styles
(Pakistan) Ltd (Styles PK), an associated company of Styles plc. As an inducement, Styles PK agreed to reimburse
Mary the Rs.100,000 she would have to pay Charli, provided Mary agreed to join the company from 1 November
2003. On Mary’s agreement to the proposal, she received Rs.100,000 from Styles PK on 15 October 2003.
Mary resigned from Charli on 31 October 2003 and commenced employment with Styles PK on 1 November 2003.
Charli did not pay Mary her salary for October 2003 but as instructed by Mary applied the Rs.100,000 against the
compensation payable by her under the terms of employment.
The terms of employment with Styles PK, provided for the following remuneration and benefits:
(i) A basic monthly salary of Rs.100,000 and a monthly cash allowance of Rs.20,000 for utilities and Rs.10,000
for entertainment.
(ii) A house rent allowance of Rs.50,000 per month.
(iii) A special monthly allowance of Rs.5,000 to be paid with the basic salary to meet entertainment expenses wholly
and necessarily to be incurred in the performance of Mary’s duties as a senior hairdresser.
(iv) One return air passage to India for Mary and her spouse once in two years. Mary availed of this benefit in June
2004. The cost to the company was Rs.50,000.
Other information
(1) As a company policy:
(i) the aggregate amount of the basic salary, the special allowance and the house rent allowance is deposited
into the employee’s bank account on the last friday of each month; and
(ii) the allowances for entertainment and utilities are to be collected by each employee from the cashier on the
last working day of each month.
(2) The cash for the utility and entertainment allowances for the month of June 2004 was collected by Mary from
the cashier on 5 July 2004.
(3) Mary was entitled to participate in the Styles plc employee share scheme (Scheme). Under the Scheme a
participant has the free right to transfer the shares acquired under the Scheme only after a minimum holding
period of two years unless permission was granted by the custodian of the Scheme for the transfer of the shares
before the expiry of the holding period.
Mary was granted the right to purchase 1,000 shares at the exercise price of £10 for one share. On 1 January
2004, she exercised her right to purchase 700 shares and remitted £7,000 to the custodian of the Scheme. The
market price of one share on 1 January 2004 was £13. The 700 shares purchased by Mary were in her
possession on 30 June 2004.
(4) Mary has a house, which she had let out to Mr X on 1 July 2002 at a monthly rental of Rs.27,500, which
included Rs.2,500 for the services of a gardener. For tax purposes, Mary accounts for the income from the house
on accrual basis.
Due to a dispute with Mary on certain house maintenance matters, X had not paid Rs.75,000 out of the rent
payable for October, November and December 2002. The Rs.2,500 per month for the services of the gardener
was paid in full. On receiving a legal notice from Mary requiring X either to pay the Rs.75,000 or to vacate the
house, X vacated the house on 30 June 2004.
6
Mary incurred the following expenditure in respect of the house:
Rupees
Repairs 35,000
Profit paid to a bank on a loan utilised for renovating the house 8,000
Legal expenses for preparing a new tenancy agreement 5,000
(5) Mary received Rs.18,000 (after deduction of tax) from the Tourism Department of the Government of Sind as a
commission on the sale of tickets for a whole day excursion to Moenjodaro. Mary paid Rs.5,000 to the girls
working with her who had helped in selling the tickets.
(6) Tax deducted at source by Styles PK was Rs.375,000.
Mary approaches you to prepare her return of income for the year ended 30 June 2004. In addition to the above
information, she informs you that:
– on an average she receives about Rs.4,500 a month as gratuities from the clients of Styles PK which in her view
is not taxable income, since the receipts are not from her employer but are casual and non-recurring receipts
depending upon the goodwill of the clients of Styles PK; and
– the Rs.100,000 paid to Charli as compensation should be claimed as a deductible charge.
Required:
(a) Compute the taxable income of Mary under the relevant heads of income for the tax year 2004 giving clear
reasons/explanations for the inclusion or exclusion in the computation of income of each of the items listed
above. The reasons/explanations for the items not included in the computation of income should be shown
separately. (23 marks)
(b) Calculate the tax payable by Mary for the tax year 2004. (5 marks)
(28 marks)
7 [P.T.O.
3 (a) You should assume that

(i) today’s date is 1 January 2005; and
(ii) all the amounts given are exclusive of sales tax.
Zee Cola Ltd, a beverage firm, is a registered person for sales tax purposes and is the sole manufacturer of the
beverage ‘Zeecola’. Zee Cola Ltd started its business operations on 1 December 2004 and the following
transactions took place in December 2004:
(1) 25,000 bottles of Zeecola valued at Rs.250,000 were distributed as free samples to the dealers at the time
of launching the beverage;
(2) 100,000 bottles of Zeecola were exported to Afghanistan valued at Rs.1,000,000;
(3) Rs.15,000,000 was received as an advance from a dealer for 1,500,000 bottles to be supplied in January
2005; and
(4) Rs.20,000,000 is payable to ZC Inc for the basic ingredient purchased against their invoice dated
15 December 2004. As agreed with ZC Inc, the invoice for Rs.20,000,000 will be due for payment on
31 March 2005.
Required:
Compute the sales tax liability (if any) to be paid along with the sales tax return for the month of December
2004. (7 marks)
(b) Briefly state the difference between zero rating supplies and exempt supplies. (4 marks)
(c) State the responsibility of a person who has collected sales tax in excess of the tax actually payable under a
misapprehension of the law. (2 marks)
(d) State the time of payment of sales tax charged on:

(i) Import of goods (1 mark)
(ii) Taxable supplies. (1 mark)
(15 marks)
8
Question 4 begins on Page 10.
9 [P.T.O.
4 Mr Mohsin, having reached the age of 70 years, disposed of the following assets on 31 March 2004:
(i) Shares in M (Private) Ltd.
(ii) The right to purchase shares under an employee share scheme.
(iii) Movable assets held for personal use.
(iv) Ancestral agricultural land.
(v) Shares in two companies, both listed on the Karachi stock exchange.
The details of the transactions relating to the disposal of the assets by Mohsin are as under:
(1) Shares in M (Private) Ltd.
(i) Mohsin, as the founder member of M (Private) Ltd, was allotted 8,000 shares at the face value of Rs.10
per share.
(ii) 1,000 shares were sold for Rs.20,000.
(iii) 2,000 shares were gifted to his son Abu, who is a citizen of Pakistan and has been in Pakistan since 1 July
2003.
(iv) 2,000 shares were gifted to his son Babu, who is a citizen of Pakistan and has been living in the USA since
1 December 2003.
(v) 3,000 shares were transferred to his wife Seema under an agreement to live apart. Seema is a citizen of
Pakistan and has been living in the USA since 29 December 2003.
(2) The right to purchase shares under an employee share scheme.
(i) At the time of Mohsin’s employment in Eatmore (Pakistan) Ltd, an associated company of Eatmore plc, he
was granted the right to purchase 500 shares in Eatmore plc at the exercise price of £15 per share, which
was inclusive of £2 per share for the right to acquire the shares,
(ii) On 1 April 2003, Mohsin made payment of £1,000 (when the exchange rate was £1 equals to Rs.90) and
acquired the right to purchase 500 shares at the exercise price of £15 per share. The right to purchase the
shares could be exercised at any time after 31 December 2006.
(iii) The right to purchase the 500 shares was sold by Mohsin for Rs.200,000. On 31 March 2004, the market
price of one share was £20 and the exchange rate was £1 equals to Rs.100.
(3) Movable assets held for personal use.
(i) Motor car
The car which had been acquired in January 2004 for Rs.1,200,000 was sold for Rs.1,250,000.
(ii) Paintings
A painting which had been acquired on 1 January 2004 for Rs.100,000 was sold for Rs.500,000. His
father’s collection of paintings which he had inherited in 1974 was sold for Rs.1,000,000. In 1974 the
paintings had been valued by an expert at Rs.2,000,000.
(iii) Manuscript
A manuscript which had been acquired for Rs.100,000 was alleged to be an original document of the East
India Company. The manuscript turned out to be a reproduction and was sold for Rs.1,000.
(4) Ancestral agricultural land
The agricultural land, which Mohsin had inherited in 1974, was sold for Rs.10,000,000. In 1974, the market
value of the land was Rs.700,000.
(5) Shares in two companies both listed on the Karachi stock exchange
(i) Loss of Rs.100,000 on the sale of shares in ABC Ltd.
(ii) Gain of Rs.150,000 on the sale of shares in XYZ Ltd.
10
Other information
(1) The accounting year of Mohsin ends on 30 June.
(2) Income of Rs.90,000 (adjusted for tax purposes) arose for the year ended 30 June 2004 from Mohsin’s self
employed business as a landscape designer for residential gardens.
(3) Unadjusted losses brought forward:
(i) Business loss of Rs.140,000 sustained in the preceding tax year in his business as a dealer in antiques.
Due to a temporary slump in the antiques market there was no activity in this line of business in the tax
year 2004, but the business had not been discontinued.
(ii) Capital loss of Rs.730,000 determined in the accounting year ended 30 June 1997.
Required:
Compute Mohsin’s taxable income tabulated under the appropriate heads of income for the tax year 2004 giving
clear reasons/explanations for the inclusion or exclusion in the computation of income of each of the items listed
above. The reasons/explanations for the items not included in the computation of income should be listed
separately.
(15 marks)
11 [P.T.O.
5 Mr Tahir is self-employed doing business in Lahore under the name of Tahir Pharma. Tahir Pharma is engaged in the
business of:
(1) import and sale of raw materials used in the manufacture of pharmaceuticals;
(2) sale of herbs purchased from the local market; and
(3) acting as an indenting commission agent to a Japanese corporation.
The following transactions appear in the books of Tahir Pharma for the year ending 30 June 2004.
Payments made by Tahir Pharma
(i) For a new building being constructed
(a) An advance payment of Rs.500,000 to Builders Ltd, a company incorporated in Pakistan, for a contract for
the supply of labour.
(b) Rs.50,000 for architect fees to Mr Baber, who is a resident for Pakistan tax purposes.
(ii) A remittance of US$ 100,000 to ABC Ltd (an enterprise of a country which does not have a tax treaty with
Pakistan) for the right to use a secret process only in Pakistan for the formulation of a herbal cough syrup. The
process is not to be used by Tahir Pharma for any business outside Pakistan. Tahir Pharma plans to commence
the manufacture of the cough syrup in Pakistan in the tax year 2005. ABC Ltd has no permanent establishment
in Pakistan and the control and management of its affairs is situated wholly outside Pakistan.
(iii) A remittance of US$ 75,000 to XYZ Hospital Inc (XYZ) for the payment of the charges for Mr Tahir’s medical
treatment at a hospital in Houston. XYZ is a company incorporated in the USA and is a non-resident company
for Pakistan tax purposes. The remittance is in accordance with the regulations of the State Bank of Pakistan.
Receipts by Tahir Pharma
(i) Rent of Rs.1,200,000 for the year ended 30 June 2004 received from a Russian diplomatic mission in Pakistan,
in respect of a house property belonging to Mr Tahir. The rent was paid in advance on 1 July 2003.
(ii) Proceeds received from the Federal Government of Pakistan for the sale of herbs to a government laboratory.
(iii) Realisation of foreign exchange proceeds from an authorised foreign exchange dealer:
(a) on account of the export of herbs to Japan.
(b) on account of indenting commission received from the Japanese corporation.
Tax collected from Tahir Pharma
Tax at the rate of 6 per cent on the ‘value of goods’ (raw materials) imported by Tahir Pharma has been collected by
the Collector of Customs under s.148 of the Income Tax Ordinance, 2001.
12
Required:
(a) For each of the payments made by Tahir Pharma, briefly explain the nature of the payment in the context of
the tax, if any, to be withheld by Tahir Pharma. (5 marks)
(b) For each of the amounts received by Tahir Pharma:

(i) briefly explain the nature of the receipt in the context of the withholding tax (if any) suffered by Tahir
Pharma; and
(ii) if the tax has been deducted in accordance with the law, identify the transactions where such deductions
would be the final tax of Tahir Pharma arising from the relevant receipt. (5 marks)
(c) For the tax collected from Tahir Pharma:

(i) briefly explain what is meant by the ‘value of goods’ which determines the amount on which tax is
collected;
(ii) state whether the tax collected by the Collector of Customs at the import stage on the value of raw
materials imported is the final tax of Tahir Pharma arising from the imports; and
(iii) state if your answer to item (ii) would be different, and if so how, if Tahir Pharma, was an ‘industrial
undertaking’ for the purposes of s.148 and the raw materials imported were for its own use.
(5 marks)
(15 marks)
13 [P.T.O.
6 (a) ABC Ltd, a company listed on the Lahore stock exchange, is engaged in the manufacture of cane sugar. ABC Ltd
sold its crushing plant to DEF Ltd on 31 October 2002 for Rs.10,000,000.
Other information:
(1) The accounting year of ABC Ltd and DEF Ltd both end on 30 September 2003.
(2) The tax written down value of the crushing plant of ABC Ltd on 1 October 2002 was Rs.5,000,000.
(3) On 1 October 2002, ABC Ltd had engaged an expert valuer to determine the current values of its entire plant
and machinery. In the valuer’s report issued on 15 October 2002 the crushing plant was valued at
Rs.15,000,000.
Required:
(i) Explain the tax implications for each of the parties (ABC Ltd and DEF Ltd) to the transaction of the
disposal of the crushing plant. (4 marks)
(ii) Calculate the profit chargeable/loss deductible on the disposal of the crushing plant for the purposes of
computing the taxable income of ABC Ltd for the relevant tax year. (2 marks)
(iii) Calculate the depreciation allowable on the crushing plant for the purposes of computing the taxable
income of DEF Ltd for the relevant tax year. (1 mark)
(b) ABC Garments Inc (ABC), a US Corporation, has established a liaison office in Karachi (LOABC). LOABC does
not conduct any business in Pakistan or engage in any income generating activity. The expenditure of LOABC is
borne by ABC.
The activity of LOABC in Pakistan is limited to acting as an effective conjunction and a link between ABC and
the textile trade in Pakistan, the dissemination of relevant information relating to the textile trade and generally
keeping ABC informed of the textile business in Pakistan.
Required:
(i) State, giving reasons, whether LOABC will be considered to have a permanent establishment in
Pakistan. (1 mark)
(ii) Explain whether or not your conclusion to (i) above would differ if LOABC, in addition to its liaison
activities, also engages in the negotiation of contracts of purchase of Pakistani denim cloth. (2 marks)
(iii) Explain whether or not your conclusions to (i) and (ii) above would differ if LOABC, in addition to its
liaison activities and the negotiation of contracts of purchase of denim cloth, used its office premises as
a permanent sales exhibition for the manufactured garments of ABC. (2 marks)
(c) Mr Q is a partner in the firm of PQR. On 1 June 2004 Mr Q purchased a new car (Honda Civic) for
Rs.1,800,000 for his personal use. The Honda Civic was shown as an asset in Mr Q’s statement of wealth as
at 30 June 2004.
On 1 July 2004, it was mutually agreed between Mr Q and the partners of PQR that the Honda Civic would be
used solely for the business use of the firm.
Required:
Briefly explain how the above transaction would be treated for the tax purposes of PQR. (3 marks)
(15 marks)
14
7 Gas Supply Pakistan Ltd (GPL) is in the business of distribution of natural gas. Since the year 2002, GPL has been
involved in the expansion of its distribution network to the rural areas outside the municipal limits of Quetta. This
expansion activity is hereinafter referred to as ‘the Project’. The Project includes the laying of new pipelines, pumping
machinery, safety equipment and other ancillary plant. GPL closes its accounts on 30 June of each year.
On 1 January 2002, GPL took a loan of US$ 1,000,000 from ABC Bank, Dubai, which was utilised for purchasing
the plant for the Project. The loan is repayable in 10 equal instalment in US Dollars. The rate of exchange on
1 January 2002 was US$ 1 equal to Rs.58 and the loan liability was recorded in the books of account of GPL at
Rs.58,000,000.
Other information:
(1) The Project was completed in June 2003, but was only commissioned for use on 31 July 2003. The total
amount spent by GPL on the plant was Rs.200,000,000.
(2) On 1 July 2003, the Government of Pakistan (GOP) voluntarily paid GPL Rs.10,000,000 as a subsidy in respect
of the plant installed in the Project. GPL treated the Rs.10,000,000 as a capital reserve.
(3) The first instalment of US$ 100,000 towards repayment of the US Dollar loan was paid to ABC Bank on
30 June 2004. The rupee equivalent of US$ 100,000 at the then rate of exchange was Rs.6,000,000 (US$ 1
= Rs.60). The difference in exchange of Rs.200,000 was written off to revenue as a loss on currency exchange.
Assume today’s date is 1 December 2004. The Chief Financial Officer (CFO) of GPL is preparing the income tax return
of the company for the tax year 2004. In respect of the aforesaid transactions relating to the Project, he proposes to:
(i) claim the loss on currency exchange of Rs.200,000 as a deductible charge on the ground that the loss is not
the result of a mere translation difference, but arose on the remittance of US$ 100,000 and is therefore a
determined loss incurred on revenue account; (4 marks)
(ii) claim the subsidy of Rs.10,000,000 received from the GOP as income exempt from tax; and (6 marks)
(iii) claim initial allowance of Rs.100,000,000 being 50% of Rs.200,000,000 (cost of the plant) and depreciation
of Rs.10,000,000 being 10% of Rs.100,000,000 (cost Rs.200,000,000 less initial allowance
Rs.100,000,000). (5 marks)
Required:
Explain with reasons whether or not you agree with each of the above three contentions of the CFO for the
purpose of preparing the return of income for the tax year 2004. If you are not in agreement with any of the
contentions of the CFO, advise the CFO of the treatment to be adopted for the purposes of the return of income
for the tax year 2004.
Note: The allocation of marks is shown against each of the three proposals raised by the CFO.
(15 marks)
15
Answers

Part 2 Examination – Paper 2.3(PKN) December 2005 Answers and
Business Taxation (Pakistan) Marking Scheme
Marks
1 (a) The normal tax year is a period of twelve months ending on 30 June and denoted by the calendar year in
which the date falls. As the accounting period of XYZ Ltd ends on 31 December 2003, it is a special tax
year and the tax year is denoted by the calendar year relevant to the normal tax year in which the closing
date of the special tax year falls i.e. 2004. 1
(b) A company in which not less than 50 per cent of the shares are held by the Federal Government or a
Provincial Government is a public company for tax purposes. Since the provincial government of Sind
holds 50 per cent of the shares in XYZ Ltd, XYZ Ltd is a public company for tax purposes. 1
(c) XYZ Ltd

Accounting year ended 31 December 2003
Tax year 2004
Rupees
Anticipated loss on forward contract (Note 2) 200,000 1·5
Contribution to unapproved gratuity fund (Note 3) 300,000 1
Advance to an associated company written off (Note 4) 300,000 1
Payment to a non-resident for technical advice (Note 5) 250,000 1
Tax collected by the Collector of Customs (Note 6) 100,000 0·5
Cost of major renovations to plant (Note 7) 900,000 1
Accounting depreciation 590,000 0·5
Legal cost on issue of additional share capital (Note 8) 700,000 1
––––––––––
3,445,000
––––––––––
3,923,000
Less: Face value of bonus shares (Note 9) 569,000 1
Gain on revaluation of plant (Note 10) 1,100,000 1·5
Accounting profit on sale of car (Note 11) 100,200 0·5
Tax loss on sale of car (Note 12) 50,000 1·5
Depreciation (Note 14) 752,000 3
Dividend income for separate consideration (Note 15) 90,000 0·5
––––––––––
3,061,200
––––––––––
––––––––––
(1 mark for each item) as follows: 5
–––
22
(1) Any salary in excess of Rs.5,000 per month paid other than by a crossed cheque or a direct transfer
of funds to the employee’s bank account is not deductible. As the salary payment to the temporary
employee is less than Rs.5,000, the payment is deductible.
(2) Any expenditure under a single account head which, in aggregate exceeds Rs.50,000 paid other than
by a crossed bank cheque or a crossed bank draft is not deductible except expenditure not exceeding
Rs.5,000. One of the other exceptions to this rule is a payment on account of travel fare. Therefore
the airfare of Rs.120,000, though paid in cash, is deductible.
(3) The expenditure incurred on the annual eid-milan party is in the nature of an amenity provided to the
employees motivated by business reasons. The expenditure which is in the nature of staff welfare is
deductible as it is incurred wholly and exclusively for the purposes of the business.
(4) Payment of compensation due to failure to deliver the goods within the time specified in the contract
is a normal expenditure in the carrying on of the business and is deductible. The payment is not in the
nature of a penalty or fine for the violation of any law, rule or regulation.
(5) The share of profits received by a company from an association of persons (AOP) is to be added to the
taxable income of the company and has therefore been correctly included in the profits of the company.
However as the AOP has paid tax on its profits, XYZ Ltd is allowed a tax credit against the tax payable
(Note 16).
19
Marks
(d) Tax liability
On taxable income of Rs.861,800 at 35% 301,630 0·5
Tax credit for tax paid by the AOP (Note 16) 229,600 1·5
––––––––
72,030
Tax collected at customs stage (Note 6) 100,000 0·5
––––––––
––––––––
Dividend income – Rs.90,000
Tax deducted at source is the final tax (Note 15) 4,500 0·5
––––––––
–––––––– –––
3
–––
27
–––
Note (1) A provision for taxation made in the accounts is not deductible. Any tax paid or payable that is
leviable on the profits of the business is not a deductible charge.
Note (2) Deductions are admissible only for business losses, which are incurred, in the relevant accounting
year and not for future losses. Anticipated losses in the future however probable or certain cannot
be claimed. As the forward contract would be executed in January 2004, the gain or loss on the
forward contract would be included in the computation of income for the tax year 2005
(accounting year 31 December 2004).
Note (3) A contribution to an approved gratuity fund is an admissible deduction. Contributions made to any
unrecognised provident fund or any other unapproved fund established for the benefit of employees
are deductible only if the employer has made effective arrangements to ensure that tax would be
deducted from any payment made by the fund in respect of which the recipient is taxable under
the income head ‘salary’.
Note (4) The advance of Rs.300,000 to an associated company written off as a bad debt is not deductible,
since making an advance to an associated company is not in the normal course of XYZ’s business.
Note (5) The payment to the non-resident company for rendering technical advice on the manufacture of
cellular phones is chargeable to tax in Pakistan as income from fees for technical services. It is a
Pakistan-source income of the non-resident since the amount has been paid by a resident
(XYZ Ltd) and the technical advice received has not been used for any business carried out by
XYZ Ltd outside Pakistan through a permanent establishment. Rs.250,000 is not deductible
since tax was not deducted at source from the payment made to the non-resident.
Note (6) The tax collected by the Collector of Customs is not deductible. XYZ Ltd is an industrial undertaking
and the tax collected at the custom stage on the import of a new plant for XYZ’s own use is not
the final tax but is available to XYZ Ltd as a tax credit.
Note (7) Rs.900,000 spent on the renovation to the existing plant is capital in nature since the expenditure
has substantially increased the production capacity of the plant – it has added value to the plant.
The expenditure is not in the normal course of carrying on the business and is therefore not
deductible. Rs.900,000 has been added to the cost of the plant (Note 14).
Note (8) Legal expenditure on raising additional share capital is not deductible since it is not an expenditure
in the normal course of carrying on the business. The expenditure is a capital expenditure.
Note (9) The amount representing the face value of the bonus shares issued to XYZ Ltd is not income
chargeable to tax. For tax purposes, ‘income’ does not include, in the case of a shareholder of a
company, the face value of any bonus shares issued by the company to its shareholders.
Note (10) There is no concept of revaluation of assets for tax purposes and therefore the gain on the
revaluation of plant is not a taxable income.
Note (11) The accounting profit on sale of the car is not income chargeable to tax. The tax profit or loss on
disposal of a depreciable asset is chargeable to tax or allowable as a deduction in computing
income under the head ‘income from business’.
Note (12) Tax loss on sale of motor car:
Rupees
Consideration * 750,000
Less: Tax written down value 800,000
Tax loss 50,000
* The actual cost of the car sold was Rs.1,200,000 (C). As the actual cost, for the purpose of
claiming depreciation, has been restricted to Rs.1,000,000 (B), the amount of Rs.900,000 (A)
20
Marks
received on the sale of the car has to be proportionally reduced to arrive at the sale consideration
for the purposes of calculating the tax profit or loss on sale of the car. The sale consideration is
arrived as under:
A x B/C
900,000 x 1,000,000/1,200,000 = Rs.750,000
Rupees
Cost of new machine 800,000
machinery buildings buildings vehicles depreciation
Written down value 1,700,000 1,800,000 400,000 1,010,000 100,000
Disposal – – – (800,000) –
Renovation cost 900,000 – – – –
–––––––––– –––––––––– –––––––– –––––––––– ––––––––
2,600,000 1,800,000 400,000 210,000 100,000
–––––––––– –––––––––– –––––––– –––––––––– ––––––––
Depreciation 260,000 180,000 20,000 42,000 10,000 512,000
–––––––––– –––––––––– –––––––– –––––––––– ––––––––
Additions 800,000 1,000,000*
Initial allowance (400,000)
–––––––––– –––––––––– –––––––– –––––––––– ––––––––
Written down value 400,000 1,000,000
–––––––––– –––––––––– –––––––– –––––––––– ––––––––
Depreciation 40,000 200,000 240,000
–––––––––
752,000
–––––––––
* The cost of the new car (Rs.2,500,000) has been restricted to Rs.1,000,000 for the purpose
of claiming depreciation.
Note (15) All dividends received by a public company suffer deduction of tax at 5% of the gross amount of
the dividend. The tax so deducted is the final tax on the dividend income.
Note (16) Tax credit is calculated as under:
Rupees
Share of profit received from the AOP by XYZ Ltd (A) 800,000
Taxable income of the AOP (B) 2,000,000
Tax assessed on the AOP (C) 574,000
A/B x C
800,000/2,000,000 x 574,000 = 229,600
21
Marks
2 (a) Ms Mary
Tax year 2004
Salary
From Charli (Note 1) 100,000 1·5
From Styles PK
Consideration for agreeing to enter into employment (Note 2) 100,000 1
Basic salary of eight months 800,000 0·5
Entertainment allowance (Note 3) 80,000 0·5
Utility allowance (Note 3) – Rs.160,000 less 10% of basic
salary exempt from tax 80,000 0·5
House rent allowance (Note 4) 130,000 1·5
Special allowance (Note 5) 40,000 1·5
Passage for travel abroad (Note 6) 50,000 1·5
––––––––
1,380,000
Income from Business
Share of income from Bal-Kaa-Toe
Rs.150,000 – exempt from tax (Note 7) 0 1·5
Income from Property
Rent chargeable to tax (Note 8) 300,000 1
Deductions
Profit paid on money borrowed for renovation of the
house (Note 10) 8,000 1·5
Unpaid rent (Note 11) 75,000 1·5
––––––––
143,000
––––––––
157,000
Income from Other Sources
Income for providing the services of a gardener connected
with renting of the house (Note 8) 30,000 1
Gratuities from clients of Styles PK (Note 12) 36,000 1
––––––––
66,000
––––––––––
––––––––––
––––––––––
(2 marks for item (i) and 1 mark each for the remaining four items). 6
–––
23
(i) In an employee share scheme, where there is any restriction on the transfer of the shares, the benefit
accruing to an employee on the purchase of the shares is not chargeable to tax until the time the
employee has the free right to transfer the shares or when the person actually disposes of the shares,
whichever is earlier. Mary acquired 700 shares in Styles plc at the exercise price of £10 when the
market price of the shares was £13. The difference of £3 per share equivalent to Rs.210,000 [£3 x 700
= £2,100 (Rs.210,000)], though a benefit of employment is not chargeable to tax until the expiry of
the two years holding period or the time Mary disposes of the shares (if so allowed by the custodian of
the Scheme).
(ii) No deductions are allowable for any expenditure incurred by an employee in deriving income chargeable
under the head ‘salary’. The payment to Charli of Rs.100,000 as compensation for leaving his
employment before the end of three months is therefore not deductible
(iii) Legal expenses for preparing a new tenancy agreement are not deductible against income from property.
Only the expenditure for legal services acquired to defend the title to the property or any suit connected
with the property in a Court, is an admissible deduction.
(iv) The tax deducted at source from the gross amount of the commission received from the Tourism
Department is the final tax on such income. Therefore the commission income is not chargeable to tax
under any head of income and is not included in the computation of income.
(v) Rs.5,000 paid to the girls who helped Mary to sell the tickets is not deductible. The expenditure is
against the commission earned by Mary from the Tourism Department. As the tax deducted at source
from the gross amount of the commission is the final tax, no deduction is allowable for any expenditure
incurred.
22
Marks
(b) Computation of tax liability
Rs.150,000 received from the AOP is included in Mary’s taxable income only for the purpose of determining
the rate of tax applicable to her taxable income other than the income from the AOP.
Rupees
Taxable income (C) 1,603,000
––––––––––
Taxable income if the share of profit from the AOP received by Mary was not
exempt from tax (Rs.1,603,000 + Rs.150,000) (B) 1,753,000
––––––––––
Tax on Rs.1,753,000
On Rs.700,000 119,000
On Rs.1,053,000 at 35% 368,550
––––––––––
(A) 487,550
––––––––––
Tax liability
(A/B) X C
487,550/1,753,000 X 1,603,000 445,831 3
Less: Reduction in tax at 5% of Rs.445,831 (Note 13) 22,291 1
––––––––––
423,540
Less: Tax deducted at source 375,000 0·5
––––––––––
Balance tax payable 48,540
––––––––––
Tax deducted considered as final tax
Final Tax
Commission – gross Rs.20,000 2,000 0·5
–––
5
–––
28
–––
Note 1 A person is treated as having received an amount inter alia if it is applied on behalf of the person
at the instructions of the person. The salary of Rs.100,000 earned by Mary for the month of
October 2003 is treated as received by her as it was applied by Charli towards the compensation
of Rs.100,000 payable to him by Mary under the terms of employment.
Note 2 An amount received as consideration to enter into an employment relationship is a profit in lieu
of salary and is taxable as salary income. Rs.100,000 paid by Styles PK to Mary as a
reimbursement of the compensation payable by her to Charli is treated as consideration for her
agreement to enter into employment on 1 November 2003.
Note 3 Salary including perquisites and allowances is taxable on receipt basis. A person is treated as
having received an amount if it is made available to the person. As per the company’s policy,
Mary should have collected the cash allowances from the company on the last working day in
June 2004. The allowances were thus made available to her in June 2004 and are treated to
have been received by her in June 2004 despite the fact that the allowances were collected by
her in July 2004.
Where salary income including the value of perquisites and benefits in a tax year is Rs.600,000 or
more, all cash allowances (except house rent allowance up to a certain limit) are chargeable to tax.
As Mary’s salary including the value of perquisites exceeds Rs.599,999, the cash allowances for
entertainment and utility are chargeable to tax as salary income.
Note 4 House rent allowance (HRA) is exempt from tax up to 45% of basic salary subject to a maximum
of Rs.270,000. HRA received by Mary is Rs.400,000 (Rs.50,000 x 8). As 45% of basic salary
(45% of Rs.800,000) is Rs.360,000, the amount exempt from tax is limited to Rs.270,000.
The HRA chargeable to tax is Rs.130,000 (Rs.400,000 less Rs.270,000).
Note 5 A special allowance granted to meet expenses wholly and necessarily incurred in the performance
of the duties of an office is exempt from tax except entertainment or conveyance allowance. The
special allowance granted to meet entertainment expenses is thus chargeable to tax.
Note 6 The benefit of free passage for travel is exempt from tax subject to certain conditions, if the
employee’s salary including the value of perquisites does not exceed Rs.599,999. As Mary’s
salary and perquisites exceeds Rs.599,999, she is not entitled to any exemption from tax for the
benefit of the free passage. The amount of Rs.50,000 is chargeable to tax.
Note 7 As the income of the AOP has suffered tax, the share of profit received by Mary from the AOP
does not form part of her taxable income. However, for determining the rate of tax that would be
23
Marks
applicable to the taxable income of Mary (other than the share of profit from the AOP) the profit
from the AOP is to be included in Mary’s taxable income as if the share of profit was chargeable
to tax.
Note 8 The amount chargeable to tax as income from property is Rs.300,000 (Rs.25,000 x 12). Income
from the provision of amenities, utilities or other services connected with the renting of a building
is taxable under the head ‘income from other sources’. Rs.30,000 (Rs.2,500 x 12) received for
providing the services of a gardener, connected with the renting of the building, is taxable as
‘income from other sources’.
Note 9 One fifth of the rent chargeable to tax is a deductible charge for repairs irrespective of the amount
spent (1/5 x Rs.300,000).
Note 10 Any profit paid or payable in the tax year on money borrowed to acquire, construct, renovate,
extend or reconstruct the property is a deductible charge.
Note 11 Unpaid rent of Rs.75,000 is allowable as a deduction, since:
– the unpaid rent has been included in the property income of Mary in the tax year 2003 on
accrual basis;
– reasonable steps were taken by Mary to institute legal proceeding for recovering the rent; and
– the defaulting tenant Mr X has vacated the house.
Note 12 As the gratuities received by Mary have not been paid either by her employer or a past or a
prospective employer or a third party under an arrangement with her employer, the amount
cannot be treated as a receipt from an employment. However, since the gratuities were received
by Mary by reason of her employment with Styles PK, the Rs.36,000 is taxable. As the income
is not from her employment, but by reason of her employment, the amount is chargeable to tax
under the head ‘income from other sources’ and not as income under the head ‘salary’.
Note 13 As the salary income of Mary exceeds 50% of her taxable income she is entitled to a reduction in
her tax liability at the rates given in Clause (1)(1) of Part III of the Second Schedule. On income
slab exceeding Rs.1,000,000, the reduction in tax liability is 5%.
3 (a) Value Sales Tax

Rupees Rupees
Output Tax
Samples (Sales tax is leviable on free samples) 250,000 37,500 1·5
Exports (no sales tax on exports as it is a zero rating supply) 1,000,000 0 1·5
Advance from a dealer (against 1,500,000 bottles to be supplied
in January 2005) 15,000,000 2,250,000 1·5
––––––––––
2,287,500
Input tax
Supplies (input tax claimed on accrual basis) 20,000,000 3,000,000 1·5
––––––––––
Excess input tax to be carried forward to the next tax period 712,500 1
––––––––––
––––––––––
(b) Exempt supplies are outside the ambit of the Sales Tax Act, 1990 and as such exempt supplies are not
subjected to sales tax. No input tax can be claimed on exempt supplies. 2
Zero rating supplies are charged to sales tax at the rate of zero per cent. Since such supplies are charged to
tax, input tax can be claimed. 2
(c) If any person has collected tax in excess of what is actually payable and the incidence of which has not been
passed on to the consumer, the person is required to pay the amount of the tax to the Federal Government. 2
(d) The tax on goods imported into Pakistan shall be paid in the same manner and at the same time as if it were
custom duties payable under the Customs Act. 1
The tax in respect of taxable supplies made during a tax period shall be payable at the time of filing the sales
tax return for the relevant tax period. 1
–––
15
–––
24
Marks
4 Mr Mohsin
Tax year 2004
Salary
Sale of the right to purchase shares (Note 1) 110,000 1·5
Income from Business
Landscape designing 90,000 0·5
Set off of brought forward loss (Note 2) (90,000) 0·5
––––––––
0
Capital Gains
Shares in M (Private) Ltd
Gain on sale of 1,000 shares (Note 3) 10,000 0·5
Gain on transfer of 2,000 shares gifted to Babu (Note 4) 20,000 1·5
Gain on transfer of 3,000 shares to wife (Note 4) 30,000 1·5
Personal assets
Gain on sale of a painting (Note 5) 400,000 1·5
Gain on sale of shares in XYZ Ltd – exempt (Note 6) 0 0·5
––––––––
460,000
––––––––
570,000
––––––––
The relevant notes will be considered in allocating the marks against each item. In addition, specific marks will be
awarded for the explanations of the treatment of items not included in the computation of income (2 marks for
item (I) and 1 mark each for the other five items) as follows: 7
–––
15
–––
(1) Under the non-recognition rules (s.79), no gain or loss is taken to have arisen on the disposal of a capital
asset, inter alia, by reason of a gift of the asset, provided the person receiving the gift is a resident person for
Pakistan tax purposes.
The shares gifted by Mohsin to Abu fall within the ambit of the said non-recognition rules since Abu is a
resident person for the tax year 2004. There is thus no need to calculate the gain or loss on the disposal of the
2,000 shares since any gain or loss on this account is not taken to have arisen for tax purposes. (Abu is
resident for tax purposes since his presence in Pakistan in the tax year 2004 was more than 181 days)
(2) A motor car held by a person for his personal use is excluded from the definition of a ‘capital asset’ for capital
gains purposes. As a capital gain or loss can only arise on the disposal of a capital asset, the gain of
Rs.50,000 made by Mohsin on the disposal of his motor car is not chargeable as income from capital gains.
(3) Movable assets consisting inter alia of paintings and manuscripts even though held for personal use are
considered to be capital assets and any gain on its disposal is chargeable as income from capital gains.
However, any loss on the disposal of a painting or manuscript is not recognised as a loss. The loss of
Rs.1,000,000 on the disposal of the paintings, which Mohsin had inherited from his father, and the loss of
Rs.99,000 on the disposal of the manuscript are therefore not capital losses.
(4) Any immovable property is excluded from the definition of a capital asset. Since a capital gain or loss can only
arise on the disposal of a capital asset, the gain on the sale of the agricultural land is not chargeable as
income from capital gains.
(5) A loss on the disposal of a capital asset is not deductible where the gain on the disposal of such an asset is
not chargeable to tax. ABC Ltd is a company listed on the Karachi stock exchange and any gain on the
disposal of the shares in ABC Ltd is not chargeable to tax. Therefore the loss of Rs.100,000 sustained on the
disposal of the shares in ABC Ltd is not a capital loss.
(6) A capital loss cannot be carried forward to more than six years immediately succeeding the tax year in which
the loss was incurred. The capital loss of Rs.730,000 sustained in the accounting year ended 30 June 1997
lapsed on 30 June 2003 (tax year 2003) and is therefore not available to be set off against the capital gains
of the tax year 2004.
25
Marks
Note (1) Gain on the sale of the right to purchase shares under employee share scheme:
Rupees
Consideration on disposal of the right to purchase 500 shares 200,000
Cost of the right [(£2 x 500 = £1,000 (£1 = Rs.90)] (90,000)
––––––––
––––––––
The gain is taxable as income from ‘salary’ and not as ‘capital gains’.
Note (2) The business loss of Rs.140,000 sustained in the tax year 2003 in the business of dealing in antiques
is available for set off against any business income of Mohsin. Out of the brought forward business loss
of Rs.140,000, only Rs.90,000 can be set-off in the tax year 2004. The balance amount of Rs.50,000
is to be carried forward and is available for setting off against any income from business of Mohsin up
to the tax year 2009 since a business loss can be carried forward for a period of six years immediately
succeeding the tax year in which the loss was incurred.
Note (3) Gain on the disposal of 1,000 shares in M (Private) Ltd
Rupees
Consideration received (Rs.20 x 1,000) 20,000
Cost (Rs.10 x 1,000 shares) (10,000)
––––––––
Gain 10,000
––––––––
Note (4) Gain on the transfer of shares in M (Private) Ltd to Babu and Seema:
No gain or loss is taken to arise on the disposal of an asset, inter alia, by reason of a gift or between
spouses under an agreement to live apart provided the person acquiring the asset is a resident person
for Pakistan tax purposes (s.79 – non-recognition rules). Both Babu and Seema are non-resident persons
since their presence in Pakistan during the tax year 2004 was less than 182 days (Babu’s and Seema’s
presence in Pakistan in the tax year 2004 was 153 days and 181 days respectively.).
As no amount was received by Mohsin on the transfer of the shares to Babu and Seema, the fair market
value (FMV) of the share on 31 March 2004 is to be taken as the consideration received. The FMV of
one share is Rs.20 – the price per share obtained by Mohsin on sale of 1,000 shares (Note 3).
Gain on the gift of 2,000 shares to Babu:
Rupees
Cost (Rs.10 x 2,000) (20,000)
––––––––
Gain 20,000
––––––––
Gain on the transfer of 3,000 shares to Seema:
Rupees
Cost (Rs.10 x 3,000) (30,000)
––––––––
Gain 30,000
––––––––
Note (5) Gain on the sale of a painting
Movable assets (with certain exceptions) held for personal use are excluded from the definition of a
capital asset and are therefore outside the ambit of capital gains. One of the exceptions is a painting
held for personal use. As a painting is a ‘capital asset’ for capital gain purposes, the gain of Rs.400,000
(sale proceeds Rs.500,000 less cost Rs.100,000) is chargeable as income from capital gains.
Note (6) Gain on the sale of the shares in XYZ Ltd
A gain on the disposal of the shares in a company listed on any stock exchange in Pakistan is presently
exempt from tax up to the tax year 2007. As XYZ Ltd is a company listed on the Karachi stock
exchange, the gain of Rs.150,000 on the disposal of the shares in XYZ Ltd is exempt from tax.
26
Marks
5 Payments by Tahir Pharma:
(i) Under the provisions of s.153 only a ‘prescribed person’ making a payment to a resident person in full or
part including a payment by way of an advance inter alia for the rendering of services or on the execution
of a contract is required, at the time of making the payment, to deduct tax from the gross amount payable.
An individual is not a ‘prescribed person’ for the purposes of s.153. Tahir Pharma for tax purposes has the
status of an individual.
Builders Ltd and Mr Baber are both resident persons for Pakistan tax purposes. The payment of Rs.500,000
to Builders Ltd is on account of an execution of a contract. The payment of Rs.50,000 to Mr Baber is for
the rendering of services. However, since Tahir Pharma is not a prescribed person for the purposes of s.153,
no tax is to be deducted from the aforementioned payments. 2
(ii) A payment for the right to use a secret process falls within the definition of ‘royalty’. ABC Ltd is a non-resident
company for Pakistan tax purposes. The payment of US$ 100,000 is the royalty income of ABC Ltd. This
income is a Pakistan-source income of the non-resident ABC Ltd since the payment is made by a resident
(Tahir Pharma) and the process is not to be used by Tahir Pharma for any business outside Pakistan through
a permanent establishment. The payment of the royalty to ABC Ltd is therefore chargeable to tax and Tahir
Pharma is required to deduct tax at the applicable rate from the gross amount of US$ 100,000. 1·5
(iii) Every person paying an amount to a non-resident person is normally required to deduct tax at the time of the
payment unless the non-resident person is not chargeable to tax in respect of the amount paid. A non-resident’s
business income is chargeable to tax only if the business income is a Pakistan-source income.
XYZ Hospital Inc (XYZ) is a non-resident company. The business income of XYZ derived from the payment of
US$ 75,000 by Tahir Pharma is not a Pakistan-source income since the entire activity of the medical
treatment provided to Mr Tahir was outside Pakistan and the payment of US$ 75,000 is not attributable to
any business activity of XYZ in Pakistan. The remittance of US$ 75,000 to XYZ is therefore not chargeable
to tax and consequently Tahir Pharma is not required to deduct tax from the payment. 1·5
Receipts by Tahir Pharma:
(i) Every ‘prescribed person’ making a payment to any person on account of rent of immovable property is
required to deduct tax provided the annual rent, exceeds Rs.200,000. (After 1 July 2004, tax is required to
be deducted if the annual rent exceeds Rs.300,000). A ‘prescribed person’ for the purposes of tax withholding
on a payment of rental income of immovable property (s.155) includes a diplomatic mission of a foreign state.
The Russian diplomatic mission making payment of the rent to Tahir Pharma would deduct tax from the gross
amount of the rent at the applicable rate. The tax so deducted is not the final tax of Tahir Pharma on the
rental income. The tax deducted would be allowable as a tax credit to Tahir Pharma. 1·5
(ii) Every ‘prescribed person’ making a payment to a resident person for the sale of goods is required to deduct tax.
A ‘prescribed person’ for the purposes of tax withholding on a payment for the sale of goods (s.153) includes
the Federal Government.
The Federal Government would deduct tax at the applicable rate from the gross amount payable for the sale
of herbs. As Tahir Pharma is a resident, the tax deducted shall be the final tax of Tahir Pharma on the
income arising from the sale of herbs. 1·5
(iii) The authorised dealer in foreign exchange at the time of realisation of the foreign exchange proceeds would
deduct tax at the applicable rate from the proceeds:
– on account of the export of the herbs; and
– on account of the indenting commission.
The tax deducted from the proceeds of the export of the herbs shall be the final tax of Tahir Pharma on the
income arising from the export.
The tax deducted from the proceeds of the indenting commission is not the final tax of Tahir Pharma on the
amount of the indenting commission. The tax deducted would be allowable as a tax credit to Tahir Pharma. 2
Tax collected from Tahir Pharma
(i) The ‘value of goods’ means the value of the goods as determined for customs purposes under the Customs Act
increased by the custom duty and the sales tax payable in respect of the import of goods. 1·5
(ii) The tax collected by the Collector of Customs on the import of raw materials is the final tax of Tahir Pharma
on the income arising from the sale of the raw materials. 1
27
Marks
(iii) In the case of an ‘industrial undertaking’ (as defined for the purposes of s.148) importing goods as raw
materials, plant, machinery and equipment for its own use, the tax collected by the Collector of Customs is
not the final tax of the importer. Therefore if Tahir Pharma was an ‘industrial undertaking’ for the purposes of
s.148, importing raw materials for its own use, the tax collected by the Collector of Customs on the import of
the raw materials would not be the final tax of Tahir Pharma on the income arising from the imports. The tax
collected would be allowable as a tax credit to Tahir Pharma. 2·5
–––
15
–––
6 (a) (i) The tax implications of the transaction for ABC Ltd and DEF Ltd relating to the disposal of the
crushing plant are as under:
– On the basis of the expert’s valuation report, there would be strong grounds to contend that the
transaction of the disposal of the plant was not on an arm’s length basis especially since the
valuation done by the expert was at the instance of ABC Ltd. There is apparently no reason for
ABC Ltd to sell the plant to DEF Ltd for Rs.10,000,000 when the expert had valued the plant at
Rs.15,000,000 just fifteen days prior to the sale. 2
– Rs.15,000,000 would be considered to be the fair market value (FMV) of the plant and since this
amount is higher than the actual consideration received of Rs.10,000,000, Rs.15,000,000 is
treated to be the consideration received by ABC Ltd for tax purposes. 1
– As the plant has been disposed of in a non-arm’s length transaction, Rs.15,000,000 which is
treated to be the consideration received by ABC Ltd is also treated to be the cost of plant for
DEF Ltd who has acquired the plant. 1
(ii) ABC Ltd
Tax year 2004
Accounting year ended 30 September 2003
Disposal of plant Rupees
Consideration received – FMV of plant 15,000,000 0·5
Tax written down value (WDV) (Note) (5,000,000) 1·5
–––––––––––
Tax profit on disposal of the plant 10,000,000
–––––––––––
Note. As no depreciation deduction is allowable in the year a depreciable asset is disposed of, the WDV
of the crushing plant as on the first day of the tax year 2004 (1 October 2002) amounting to
Rs.5,000,000 is the WDV of the plant on the date of its disposal.
(iii) DEF Ltd
Tax year 2004
Accounting year ended 30 September 2003
Rupees
Cost of crushing plant (Note) 15,000,000 0·5
Depreciation at 10% 1,500,000 0·5
Note. The amount of Rs.15,000,000 treated as the consideration received by ABC Ltd is also treated to
be the cost of the asset acquired by DEF Ltd.
(b) (i) Despite the fact that the definition of a permanent establishment includes an office, which LOABC has
in Pakistan, LOABC will not be considered to have a permanent establishment in Pakistan since the
said definition specifically excludes a liaison office. 1
(ii) A liaison office is not considered as having a permanent establishment unless the liaison office engages
in the negotiation of contracts except contracts of purchase.
As LOABC besides its usual liaison functions engages only in the negotiation of contracts of purchase,
LOABC will not be considered to have a permanent establishment in Pakistan. 2
(iii) Any person (not necessarily a liaison office) using its office premises for a permanent sales exhibition will
be considered to have a permanent establishment in Pakistan. LOABC will be considered to have a
permanent establishment in Pakistan if LOABC uses its office premises for the purpose of a permanent
sales exhibition for the manufactured garments of ABC. 2
(c) For tax purposes, the application of a personal asset to business use is treated as an acquisition of the asset
by the business. For PQR, the Honda Civic would be a depreciable asset and the cost thereof would be the
fair market value of the car on 1 July 2004 – the date the car was put to business use. 3
–––
15
–––
28
Marks
7 (i) Loss on currency exchange
The loss of Rs.200,000, due to the change in the rate of exchange of the US Dollar has been incurred on the
part repayment of the loan of US$ 1,000,000. As the foreign loan was utilised for the purposes of a capital
nature viz. the purchase of the plant, the loss of Rs.200,000 is on capital account and is not deductible in
computing business profits. 1
However, where a person has acquired an asset with a foreign currency loan (repayable in foreign currency)
and before the loan is fully repaid, there is an increase or decrease in the loan liability of the person in terms
of Pakistan rupees, due to a change in the rate of exchange of the foreign currency, the amount by which the
liability has increased or decreased is to be added to or reduced from the cost of the asset. In other words,
the cost of the asset acquired with the foreign currency loan is recomputed for tax purposes [s.76(5)]. 2
The Chief Financial Officer (CFO) should be advised that:
– the loss on currency exchange of Rs.200,000 should not be claimed as a deductible in the return of
income, as the loss is on capital account; and 0·5
– Rs.200,000 is to be added to the cost of the plant for tax purposes. 0·5
(ii) Subsidy of Rs.10,000,000 received from the Government of Pakistan (GOP)
The amount of Rs.10,000,000 is not income for tax purposes but is a capital receipt on the grounds that:
– the amount was voluntarily paid by the GOP without any consideration;
– GPL neither asked nor angled for the subsidy;
– the amount received did not arise out of any legal or any contractual obligation; and
– the amount is neither traceable nor even remotely connected to any source of income. 2·5
However, in determining the cost of an asset for tax purposes the actual amount spent by a person in
acquiring an asset is required to be reduced by the amount of any grant, subsidy, rebate, commission or any
other assistance received or receivable by the person in respect of the acquisition of the asset except where
the said amount received is chargeable to tax [s.76(10)]. 1·5
The CFO should be advised that:
– the subsidy of Rs.10,000,000 is a capital receipt and is not income for tax purposes. The subsidy should
not be claimed as exempt from tax in the return of income since only an amount which is income in the
first place, can be claimed as exempt from tax; and 1
– the actual amount spent on acquiring the plant has to be reduced by Rs.10,000,000 representing the
subsidy received from the GOP towards the cost of the plant. 1
(iii) Initial allowance and depreciation
For reasons given in items (i) and (ii), the cost of the plant for tax purposes is not Rs.200,000,000 and
therefore the amount of initial allowance and depreciation proposed to be claimed by the CFO on the cost of
Rs.200,000,000 is erroneous. 1
The CFO should be advised that:
– for tax purposes the cost of the plant is Rs.190,200,000 (Note 1) 2
– Rs.95,100,000 is to be claimed as initial allowance (Note 2); and 1
– Rs.9,510,000 is to be claimed as depreciation (Note 3) 1
–––
15
–––
Note (1) Recomputed cost of plant
Rupees
Actual amount spent by GPL 200,000,000
Loss on currency exchange 200,000
Subsidy received from the GOP (10,000,000)
––––––––––––
190,200,000
––––––––––––
Note (2) Initial allowance on plant
50% of cost of Rs.190,200,000 95,100,000
Note (3) Depreciation on plant
10% of Rs.95,100,000 – written down value
[Cost of Rs.190,200,000 less initial allowance Rs.95,100,000] 9,510,000
29
Paper 2.3(PKN)
Business Taxation
(Pakistan)
PART 2
QUESTION PAPER

answered

hall

2
A. Tax rates for individuals where salary income exceeds 50% of taxable income for the tax year 2006
Up to Rs. 100,000 0%
B. Tax rates for companies

2005 41% 35% 39%
2006 38% 35% 37%
C. Rates of advance collection or deduction of tax

Commission or brokerage 10% of gross payment
Import of goods 6% of value of goods determined for customs
purposes
Profit on Special Savings Certificates issued by the National
Saving Scheme 10% of the profit

E. Capital allowances
Depreciation
Buildings (all types) 10% ⎫
Furniture and fittings 15% ⎪
⎬ of the tax written down value
Plant and machinery (not otherwise specified) 15% ⎪
Motor vehicles (all types) 15% ⎭
3 [P.T.O.
1 For the purpose of this question, you should assume that today’s date is 1 July 2006.
CPL Ltd, an industrial undertaking engaged in the manufacture of electrical goods, requires you to prepare its income
tax return for the accounting year ended 31 December 2005. The following information is furnished to you.
(1) All amounts are stated in thousands of Rupees (’000).
(2) CPL is a company incorporated under the Companies Ordinance, 1984 and is not listed on any stock exchange
in Pakistan. 50 per cent of the shares in CPL are held by ABC Ltd, a company incorporated in Saudi Arabia. The
Kingdom of Saudi Arabia holds 90% of the shares in ABC Ltd.
(3) The accounting profit for the year ended 31 December 2005 after transferring Rs.5,000 to general reserve
account is Rs.780,000.
Rupees
(i) Accounting depreciation 136,000
(ii) Tax collected by the Collector of Customs on the import of electric ceiling fans for sale. 750
(iii) Expenditure on the provision of perquisites and allowances to the chief executive officer
in excess of 50% of his salary. 2,450
(iv) Provision for taxation. 70,000
(v) Lump sum paid to a non-resident company for securing the exclusive rights to manufacture
‘Coolair’ fans in Pakistan for a period of five years commencing from 1 November 2005.
CPL commenced manufacturing ‘Coolair’ fans on 1 December 2005. Tax was deducted at
the time of the payment to the non-resident. 10,000
Rupees
(i) Commission received from the Federal Government for arranging a direct supply of electric
fittings from a company in the United Kingdom (net of tax deducted at source). 900
(ii) Dividend received from a private company (net of tax deducted at source). 9,000
(iii) Net income on sale of imported ceiling fans. The fans were sold in the same condition they
were in when imported. 6,500
(iv) Compensation received from a customer for failure to deliver goods within the time stipulated
in the contract for the supply of spare parts. 200
(v) Accounting profit on sale of office building. 750

(vi) Recoveries from a debtor whose debt had been written off in the prior years but was not
allowed as a tax deduction. 545
(vii) Share of profits received from an association of persons (AOP) in which CPL Ltd is a member.
The taxable income of the AOP was Rs.20,000 and the tax assessed on the AOP was
Rs.5,725. 8,000
(6) The provision for bad debts comprises:
Rupees Rupees
Balance on 1 January 2005 1,500
Provision made during the year (5% of debtors) 500
––––––
2,000
Trading debts written off 600
Advance to a subsidiary company written off 700 1,300
––––– ––––––
Balance on 31 December 2005 700
––––––
––––––
4
(7) Fixed assets:
Rupees
(i) The tax written down values on 1 January 2005 were:
Factory and workers’ residential buildings 2,500
Motor vehicles 400
Furniture 250
(ii) An investment of Rs.8,000 was made in the construction of a new building for the
residence of factory workers. The workers occupied the building on 30 December 2005.
The Rs.8,000 does not include Rs.500 for architect’s fees, which amount has been
charged as an expenditure in the profit and loss account.
(iii) A new motor car was purchased on 1 September 2005 for Rs.2,000.
(iv) One of the office buildings (cost Rs.3,000 and tax written down value Rs.2,500) was sold
on 30 June 2005 for Rs.7,500.
(8) Creditors include:
(i) Rs.750 for rent payable which was allowed as a deduction against the income for the
year ended 31 December 2003.
(ii) Rs.140 for profit on a loan taken from an associated company which amount was allowed
as a deductible charge against the income for the year ended 31 December 2001.
(9) Advance tax paid was Rs100,000.
Required:
(a) Briefly state with reasons whether or not CPL Ltd will be a public company for tax purposes. (2 marks)
(b) Compute the taxable income of CPL Ltd for the relevant tax year. Your answer should show clear reasons/
explanations for the inclusion or exclusion in the computation of each of the items listed above. The reasons/
explanations for the items not included in the computation of income should be shown separately.
(24 marks)
(c) Calculate the tax payable by/refundable to CPL Ltd for the relevant year. (4 marks)
(30 marks)
5 [P.T.O.
2 For the purpose of this question you should assume that today’s date is 31 July 2006.
(1) Mr Ring is a citizen of Pakistan who on reaching the age of 50 years, retired from the employment of TeleBell
Ltd (TBL) on 31 December 2005 despite the fact that the retirement age under the company’s terms of
employment was 60 years. TBL is a company engaged in the manufacture of telephone instruments. On 1
January 2006, TBL paid Ring Rs.695,000 as consideration for consenting to a restrictive covenant refraining
him from entering into employment with any other telephone manufacturing company for a period of two years.
(2) For the period from 1 July 2005 to 31 December 2005 (date of retirement), Ring’s terms of employment as the
sales manager of TBL provided for the following:
(i) Basic salary of Rs.300,000 per month.
(ii) Cash allowances per month for:
– Utilities Rs.25,000
– Children’s education Rs.20,000
– Cost of living Rs.10,000
– House rent equal to 45% of basic salary.
(iii) Services of household servants. The monthly cost to the company was Rs.40,000.
(iv) Two company–maintained motor cars. A new car was leased on 1 July 2005 exclusively for Ring’s private
(non-business) use. Another car was purchased for Rs.1,500,000 which was exclusively for his business
use. The fair market value of the leased vehicle at the commencement of the lease period was
Rs.2,000,000. Rs.2,000 each month is deducted from Ring’s salary for the private use of the leased car.
(v) One return air passage to London once in two years. Ring availed of this benefit in December 2005. The
cost to TBL was Rs.80,000.
(vi) Reimbursement of hospital charges for Ring and his wife. Rs.375,000 was reimbursed to Ring during the
six months ended 31 December 2005 against hospital bills submitted by him.
(3) On 31 December 2005, TBL voluntarily and not under any terms of employment allowed Ring to purchase a
Civic Honda car from the company’s fleet of cars for Rs.300,000. The fair market value of the car on
31 December 2005 was Rs.900,000.
(4) The following amounts were received by Ring in the year ended 30 June 2006, after deduction of tax, where
applicable.
– Rs.200,000 as a friendly loan free of profit from his brother who paid him the loan in cash.
– Rs.90,000 as dividend from a private company incorporated in Pakistan.
– Rs.180,000 as dividend from companies whose shares were traded on the Karachi Stock Exchange on
30 June 2006.
– Rs.5,400 profit on Special Savings Certificates issued by the National Savings Scheme purchased after
1 July 2001.
(5) Tax deducted at source by TBL was Rs.1,300,000.
(6) Zakat paid was Rs.60,000.
(7) Ring approaches you to prepare his return of income for the year ended 30 June 2006. He also informs you
that:
(i) The Rs.695,000 received from TBL should not be included in his taxable income as it is a capital receipt
since the restrictive covenant bond signed by him prohibits him from seeking employment with any
telephone manufacturing company for a period of two years.
(ii) He wants to claim a deduction of Rs.15,000 for profit paid to a bank on a loan obtained to acquire the
shares in companies on which he has earned dividend income.
(iii) TBL transfered Rs.75,000 every month into his bank account as his pension effective from 1 January 2006.
6
(iv) Ring had participated in the employee share scheme (Scheme) of Telephones plc (an associated company
of TBL).
– On 1 September 2005, the custodian of the Scheme granted Ring the right to acquire 2,000 shares in
Telephones plc at the exercise price of £10 per share.
– The right to acquire the shares could be exercised at any time before 31 August 2006.
– There was no payment to be made for the rights. The custodian estimated the value of one right to be
£2 and the exchange rate was £1 equals Rs.100.
– On retirement from the employment of TBL, Ring disposed of the rights for Rs.30,000 on 31 December
2005.
(v) Ring invested Rs.1,000,000 in the purchase of new shares in ABC Ltd, a public company listed on the
Karachi stock exchange. ABC Ltd had offered the new shares to the public and Ring is an original allottee
of the shares.
Required:
(a) Compute the taxable income of Mr Ring under the appropriate heads of income for the relevant tax year
giving clear reasons/explanations for the inclusion or exclusion in the computation of income of each of the
items listed above. The reasons/explanations for the items not included in the computation of income should
be shown separately. (21 marks)
(b) Calculate the tax payable by or refundable to Mr Ring for the relevant tax year. (4 marks)
(25 marks)
7 [P.T.O.
3 (a) Master Petrochemicals Ltd is engaged in the manufacture of synthetic fabrics. Their business transactions for the
month of May 2006 are summarised as follows:
– Purchases of raw materials of Rs.805,000 (inclusive of sales tax at the normal rate of tax).
– Exempt supplies in local market of Rs.5,000,000.
– Taxable supplies in local market of Rs.1,150,000 (inclusive of sales tax at the normal rate of tax).
Additional information:
– Creditors’ payable as at 31 May 2006 include Rs.575,000 (inclusive of sales tax at the normal rate of tax)
on account of purchases of raw materials from a registered supplier in November 2005. The input tax on
the said purchases was claimed in the monthly sales tax return of November 2005 and related to taxable
supplies only.
– The normal rate of sales tax as referred to above is 15%.
Required:
Compute the sales tax liability of Master Petrochemicals Ltd in respect of the sales tax return for the month
of May 2006. (5 marks)
(b) Under the Sales Tax Act 1990 (Act), a person who is required to maintain any record or documents, shall retain
such record and documents for a prescribed period of time.
Required:
State the period for which a person is required to retain the record and documents under the Act.
(2 marks)
(c) There are certain types of manufactured goods which are chargeable to sales tax at the rate of 15% of the retail
price. Such goods have been listed in the Third Schedule to the Sales Tax Act 1990.
Required:
List any FOUR types of goods on which sales tax is chargeable at the rate of 15% of the retail price.
(2 marks)
(d) Mr Khan, a registered person, when preparing his monthly sales tax return for May 2006, discovers that due to
a careless mistake in casting, he had inadvertently claimed Rs.300,000 in excess as input tax resulting in a short
payment of Rs.300,000 in the monthly sales tax return of April 2006. He is of the view that since the short
payment in tax was an inadvertent error and was not a wilful act or a tax fraud, he should neither be penalised
nor required to pay default surcharge, if he pays the tax due of Rs.300,000 along with the monthly sales tax
return for May 2006 which would be submitted by 15 June 2006.
Required:
(i) State with reasons whether or not you are in agreement with Mr Khan’s contention. (2 marks)
(ii) Assuming that the default surcharge is payable, state the rates at which it will be levied and calculate
the amount payable along with the monthly sales tax return for May 2006. (2 marks)
(e) A supply shall be deemed to have taken place at the earlier of the time of the delivery of goods or the time when
any payment is received by the supplier in respect of that supply.
Required:
State in the case of goods supplied under a hire purchase agreement, when the supply is deemed to have
taken place. (2 marks)
(15 marks)
8
4 (a) Mung Inc (MI), a company resident in a country which has no tax treaty with Pakistan for the avoidance of double
taxation, holds 51% of the shareholding in XYZ Ltd, a company incorporated under the Companies Ordinance
1984. XYZ Ltd is engaged in the distribution of chemicals and is not a public company for Pakistan tax purposes.
MI’s only income in Pakistan is from dividends received from XYZ Ltd. In March 2005, MI disposed of its entire
shareholding in XYZ Ltd to an enterprise in the United States of America and made a gain of US$1,000,000 on
the transaction.
MI is of the view that there are no tax implications in Pakistan in respect of the gain of US$1,000,000, since
the entire transaction of the sale of the shares in XYZ Ltd took place outside Pakistan with another non-resident
company and the sale consideration was also received outside Pakistan.
Required:
State, giving reasons, whether or not the aforesaid view of Mung Inc is correct. (3 marks)
(b) The following information is furnished to you on 1 July 2005 by the executor to the estate of the late Mr Tikam
Das:
(i) The last return of income filed by Tikam was for the year ended 30 June 2004.
(ii) Tikam expired on 30 April 2005.
(iii) On 15 June 2005, the executor, in accordance with the last will and testament of Tikam, transferred the
following assets to the beneficiaries of the will:
– 10,000 shares in Das (Private) Ltd to Tikam’s daughter, Shirin. Shirin is an employee of the Pakistan
Government and was posted to Iran during the year ended 30 June 2005.
– 10,000 shares in Das (Private) Ltd to Tikam’s son, Govind. Govind has been staying with his sister
Shirin in Iran and was in Pakistan for only 30 days in the tax year 2005.
– Rs.179,496 by a crossed bank cheque in favour of Shirin, drawn on Tikamís account in Azad Bank,
Karachi. Rs.179,496 was the credit balance in Tikam’s bank account on 30 April 2005.
(iv) Other information:
(1) Tikam, as the founder member of Das (Private) Ltd, had acquired 20,000 shares in the company at
Rs.10 per share on 1 April 2000. The break-up value of one share on 30 April 2005, as determined
by a reputable firm of chartered accountants, was Rs.13.
(2) As an employee of ABC plc, Pakistan Branch, Tikam had acquired 400 shares in ABC plc on 31 May
2004 (tax year 2004) under an employee share scheme at the exercise price of £10 per share when
the price quoted for one share on a stock exchange in the United Kingdom was £13. The rate of
exchange on 31 May 2004 was £1 equals Rs.100. Tikam resigned from his employment with ABC plc
on 30 June 2004 and on 1 July 2004, he sold the 400 shares to an employee of ABC plc, Pakistan
Branch for Rs.1,000,000.
(3) Tikam was an amateur collector of rare postage stamps. He had inherited a rare postage stamp from
his father’s estate in 1981 which was then valued by an expert at Rs.50,000. Just prior to his death,
Tikam sold the postage stamp for Rs.100,000.
(4) On 31 March 2005, Tikam received Rs.200,000 for vacating the possession of a building which he
had taken on a yearly rental of Rs.60,000. Tikam had paid Rs.150,000 to the previous tenant to
acquire possession of the building.
(5) Sale of shares on 31 March 2005 which were acquired by Tikam in the year 2001.
– Gain of Rs.3,000 on the sale of shares in PQR Ltd, a company incorporated under the Companies
Ordinance 1984, in which 50% of the shares are owned by the Government of Sind.
– Loss of Rs.40,000 in DEF Ltd, a company whose shares were traded on the Karachi stock
exchange in the tax year 2005 and which remained listed on that exchange on 30 June 2005.
Required:
Compute the taxable income of Tikam Das under the appropriate heads of income for the relevant tax year
giving clear reasons/explanations for the inclusion or exclusion in the computation of income of each of the
items listed above. The reasons/explanations for the items not included in the computation of income should
be shown separately. (12 marks)
(15 marks)
9 [P.T.O.
5 (a) Mr Bee was self employed as a retailer dealing in different brands of honey. His accounting year ended on
30 June of each year. On 21 March 2003, there was a fire in his shop and the entire stock of honey valued at
Rs.100,000 (at cost) was destroyed. His insurance company refused to entertain the claim for Rs.100,000 for
the loss of the stock-in-trade. Bee ceased doing business as and from 30 June 2003. In the return of income
furnished for the tax year 2003, Bee claimed the Rs.100,000 as a deductible business loss in computing his
income under the head ‘Income from business’. The loss was allowed as a deductible charge in that tax year.
During the tax year 2005, the insurance company, on receiving a legal notice from Bee, made a payment of
Rs.75,000 against the claim for the loss of stock-in-trade which Bee accepted in full settlement. In June 2005,
Bee also received Rs.27,000 as a dividend from a public company on which tax was deducted at source. Bee
is exempted from payment of Zakat.
Other information furnished by Bee:
(i) In the return of income furnished to the Commissioner for the tax year 2005, the receipt of Rs.75,000 from
the insurance company was neither included in the computation of total income nor was the amount
claimed as exempt from tax. Bee was of the view that the receipt was a capital receipt since it was not
traceable to any source of income in the tax year 2005. The receipt related to his retail business which had
ceased on 30 June 2003 i.e. before the commencement of the tax year 2005.
(ii) Bee was of the view that there was no need to furnish any information or statement to the Commissioner
for the dividend income of Rs.27,000 since the income had suffered withholding tax at the applicable rate
which tax was the final tax on the dividend income.
Required:
Explain with reasons whether or not you are in agreement with each of the above two contentions of Bee. If
you are not in agreement with either of the contentions, advise Bee of the treatment to be adopted to rectify
the position.
Marks will be allocated to the two items as (i) 5 marks and (ii) 3 marks. (8 marks)
(b) Bee wants to restart his retail business operating this time as a private limited company. He recalls that in the
budget speech on the Finance Act, 2005, the Finance Minister had referred to a new category of a limited
company styled as a ‘small company’ which appeared to be beneficial to small enterprises.
Required:
Provide a comprehensive note to Bee informing him of:
(i) the requirements for the formation of a small company; and (4 marks)
(ii) the advantages, if any, that are available to a small company from the tax viewpoint. (3 marks)
(15 marks)
10
6 (a) The following information is made available to you by Murtaza who is the owner of a house property in
Islamabad.
(i) Murtaza accounts for the income from the house on the accrual basis and his accounting year ends on 30
June of each year.
(ii) On 1 July 2002, Murtaza had rented the house to Jack on a monthly rental of Rs.50,000 and had also
received from Jack a deposit of Rs.1,000,000 which is not adjustable against the rent payable. On 1 July
2004, Jack vacated the house and the Rs.1,000,000 was returned to him.
(iii) On I July 2004, Murtaza lets the house to Jill on a monthly rental of Rs.60,000 which includes Rs.10,000
for the services of a security guard. Murtaza received from Jill a deposit of Rs.1,500,000 which is not
adjustable against the rent payable
(iv) In the accounting year ended 30 June 2005, Murtaza:
– incurred expenditure of Rs.79,600 on repairs to the house; and
– received Rs.50,000 from Jack being rent for June 2003, which had remained unpaid. The unpaid rent
of Rs.50,000 had been allowed as a deductible charge to Murtaza against the ‘Income from property’
in the tax year 2004.
Required:
Compute the taxable income of Murtaza under the appropriate heads of income for the tax year 2005, giving
explanations for the treatment in the computation of income of each of the items listed above. (7 marks)
(b) The following information is furnished to you by Nadir, a resident individual, relating to his accounting year ended
30 June 2005:
– He is the owner of agricultural land in Sind. On 1 January 2005 he entered into an agreement with Bashir
for the sale of the land for Rs.1,000,000. Under the terms of the agreement, Bashir paid a deposit of
Rs.100,000 and the balance of Rs.900,000 was payable on 31 January 2005. The agreement also
provided that if Bashir failed to make payment of the balance of Rs.900,000 by 31 January 2005, the
deposit of Rs.100,000 paid under the contract would be forfeited and the agreement for the sale of land
would be treated as cancelled. Bashir failed to make payment of Rs.900,000 on 31 January 2005. The
deposit amount of Rs.100,000 was retained by Nadir.
– He purchased a new building ‘Ataghar’ in which a new flour milling plant had been installed and leased the
property on the same day to Bashir on a composite lease rent of Rs.400,000 per month. The consideration
paid for ‘Ataghar’ as specified in the purchase deed was Rs.9,000,000 for the building and Rs.5,000,000
for the plant installed in the building.
Nadir wants you to:
(i) explain the tax treatment in respect of the receipt of Rs.100,000 being the deposit amount forfeited under
the terms of the contract for the sale of the land;
(ii) explain the provisions under which the income from ‘Ataghar’ would be assessed to tax and briefly state the
permissible deductions in computing the income from ‘Ataghar’ chargeable to tax; and
(iii) advice whether or not he is entitled to claim one-fifth of the lease rent received for ‘Ataghar’ as a deduction
for repairs to the building.
Required:
Provide the information and advice requested by Nadir relating to the three issues stated above.
Marks will be allocated to the three items as (i) 2 marks; (ii) 4 marks and (iii) 2 marks. (8 marks)
(15 marks)
11 [P.T.O.
7 (a) Under the provisions of s.153(1) of the Income Tax Ordinance 2001, every prescribed person making a payment
in full or part including a payment by way of an advance to a resident person or a permanent establishment in
Pakistan of a non-resident person:
(i) for the sale of goods;
(ii) for the rendering of or providing of services;
(iii) on the execution of a contract, other than a contract for the sale of goods or the rendering of or providing of
services,
shall, at the time of making the payment, deduct tax at the applicable rate.
Required:
(i) State the conditions to be met to ensure that a prescribed person making payment for the sale of
imported goods does not deduct tax under s.153(1) of the Income Tax Ordinance 2001. (3 marks)
(ii) List any FOUR persons (i.e. a person as defined for Pakistan tax purposes), who are required to deduct
tax at the time of making a payment under s.153(1) to a permanent establishment in Pakistan of a non-
resident person on the execution of a contract for building an irrigation canal. (2 marks)
(iii) If tax is to be deducted by a prescribed person on payment of an amount under s.153(1), is the tax to
be deducted when the amount is credited to the account of the recipient or when it is actually paid?
(1 mark)
(b) SkyAdverts is a non-resident company incorporated in a country which does not have a tax treaty with Pakistan
for the avoidance of double taxation. SkyAdverts is in the process of submitting a bid to Chaiwalla (Pakistan) Ltd
[CPL] for providing, under a contract (TV Contract), advertisement services which would be rendered by ‘TV
Satellite Channels’ owned and managed by them. CPL is a company incorporated under the Companies
Ordinance 1984 and is not a ‘small company’ as defined for tax purposes.
SkyAdverts has been informed by CPL that all payments to them under the TV Contract would suffer withholding
tax and there are certain provisions under the Pakistan tax statute whereby the tax deducted could be considered
to be the final tax on their income arising from the TV Contract.
SkyAdverts wants you to:
(i) explain the tax provisions under which CPL is required to deduct tax from the payments made to SkyAdverts
under the TV Contract;
(ii) state whether it is mandatory that the tax deducted from the payments made under the TV Contract would
be the final tax of SkyAdverts or can SkyAdverts be taxable on its net income;
(iii) explain the steps to be taken by SkyAdverts to ensure that the tax deducted from the payments made by
CPL would be the final tax on the income arising from the TV Contract; and
(iv) explain how the tax deducted on payments made by CPL would be treated for SkyAdverts’ tax assessment
in Pakistan if for some reason, SkyAdverts is unable to meet the requirements for being assessed on the final
tax basis.
Required:
Provide the information required by SkyAdverts relating to the four issues stated above.
Marks will be allocated to the four items as (i) 3 marks; (ii) 1 mark; (iii) 4 marks; and (iv) I mark.
(9 marks)
(15 marks)
12
Answers

Business Taxation (Pakistan) and Marking scheme
Marks
1 (a) A public company for Pakistan tax purposes, inter alia, means a company in which not less than 50% of
the shares are held by a foreign government or a foreign company owned by a foreign government. 50% of
the shares in CPL are owned by ABC Ltd, which is a foreign company but ABC Ltd is not wholly owned by
the Kingdom of Saudi Arabia (foreign government). Therefore CPL is not a public company for Pakistan tax
purposes. 2
(b) CPL Ltd

Tax year 2006
Rs. in
thousands
Add: Transfer to general reserve (Note 1) 5,000 0·5
Accounting depreciation (Note 2) 136,000 0·5
Tax collected by the Collector of Customs (Note 3) 750 1
Excess cost of perquisites and allowances (Note 4) 2,450 0·5
Provision for taxation (Note 5) 70,000 0·5
Acquisition of manufacturing rights (Note 6) 10,000 1
Provision for bad debts (Note 7) 500 0·5
Architect’s fee for new building (Note 8) 500 1
Unpaid liability for profit on debt (Note 9) 140 1·5
Tax profit on sale of building (Note 10) 500 2
––––––– 225,840
––––––––––
1,005,840
Less: Amortisation of an intangible (Note 6) 170 1·5
Accounting profit on sale of office building (Note 10) 750 0·5
Recovery against bad debts written off (Note 11) 545 1·5
Trading bad debts written off (Note 13) 600 0·5
Depreciation (Note 15) 3,068 4·5
––––––– 9,383
––––––––––
996,457
Less: Income for separate consideration (Note 12)
– Commission from the federal government 900 0·5
– Dividend 9,000 0·5
– Sale of imported fans 6,500 0·5
––––––– 16,400
–––––––––
Business income being taxable income 980,057
–––––––––
–––––––––
The notes will be considered in allocating the marks against each item. Specific marks will be awarded for
the explanations of the treatment of items not included in the computation of income (I mark for each item)
as follows: 4
–––
24
(1) Compensation of Rs.200 received from a customer under the terms of the supply contract is a taxable
receipt as it was received in the normal course of carrying on the business and has therefore been
correctly included as the taxable income of CPL.
(2) The share of profit received from the association of persons (AOP) is to be added to the taxable income
of the company and has correctly been included in the taxable income of CPL. As the AOP has paid
tax on its profits, CPL is allowed a tax credit against tax payable (Note 16).
(3) No adjustment in the computation is required for the unpaid rent of Rs.750. The amount was allowed
as a deduction in the year ended 31 December 2003 i.e. tax year 2004. Any amount remaining unpaid
out of Rs.750 will be treated as taxable income in the tax year 2008. This is because any such amount
remaining unpaid for three years from the end of the year it was first allowed, is treated as income
chargeable to tax in the first year following the end of the said three years i.e. in the tax year 2008.
15
Marks
(4) The advance of Rs.700 to CPL’s subsidiary company written off against the provision for bad debts
account is not deductible as it is not the business of CPL to advance money.
(c) Tax liability Rupees in thousands

On business income of Rs.980,057 at 37% 362,621 0·5
Tax credit on tax paid by the AOP (Note 16) (2,290) 1·5
––––––––
360,331
Less: Advance tax paid 100,000 0·5
––––––––
Balance tax payable 260,331
––––––––
––––––––
Tax deducted/collected considered as the final tax (Note 12)
Commission – Rs.1,000
– Tax deducted at 10% is the final tax 100 0·5
––––––
Dividend income – Rs.10,000
– Tax deducted at 10% is the final tax 1,000 0·5
––––––
Income on sale of imported ceiling fans
– Tax collected at the customs stage is the final tax 750 0·5
––––––
–––––– –––
4
–––
30
–––
Note (1) Any amount transferred from the accounting profit to any reserve account is an appropriation of
the profit and is not a deductible charge.
Note (2) Accounting depreciation is not a deductible charge. For tax purposes deduction is allowable for
depreciation and initial allowance on depreciable assets at the rates prescribed in the Third
Schedule.
Note (3) As the ceiling fans imported are for sale, the tax collected at the customs stage is the final tax on
the income arising on the sale of fans.
Note (4) Expenditure on the provisions of perquisites and allowances in excess of 50% of the salary of
an employee (excluding the value of perquisites and allowances) is not deductible.
Note (5) Provision for taxation is not deductible. Any tax paid or payable that is leviable on the profits of
the business is not deductible.
Note (6) Rs.10,000 paid for the acquisition of the right to manufacture Coolair fans (Right) is an intangible
for tax purposes and is not a deductible charge. Any expenditure on an intangible is to be
amortised over its useful life for the business, proportionate to the number of days, the intangible
is used in the tax year for the purposes of the business. As the Right is for a period of five years
and was utilised in the business for 31 days (December 2005) in the tax year 2006, the
amount deductible is worked out as under:
Cost of intangible Rs.10,000
–––––––––
Normal useful life of the Right 5 years
–––––––––
Amortisation for one whole year Rs.2,000
–––––––––
For 31 days (2,000 x 31/365) Rs.170
–––––––––
Note (7) Since the provision of Rs.500 is not against specific debts, the Rs.500 is not a deductible charge.
Note (8) Architect’s fee on the new building is a capital expenditure to be added to the cost of the building.
Note (9) The unpaid expenditure of Rs.140 for profit on debt was allowed as a deduction in the year ended
31 December 2001. As the amount has remained unpaid for three years from the end of the year the
deduction was allowed (31 December 2002, 2003 and 2004), Rs.140 is chargeable to tax in the
tax year 2006 (i.e. the accounting year ended 31 December 2005 which is the first tax year
following the end of the said three years).
16
Marks
Note (10) The accounting profit or loss on the sale of a depreciable asset is not considered for tax purposes.
It is the tax profit or loss on disposal of the depreciable asset that is chargeable to tax or allowed
as a deduction. In the case of the disposal of any immovable property, where the consideration
received on disposal exceeds the cost of the property, the sale consideration received shall be
treated as the cost of the property.
As the sale consideration (Rs.7,500) on the disposal of the building is more than that its
cost (Rs.3,000), Rs.7,500 is to be treated as the cost of the building for working out the tax profit
or loss on sale of the building. Tax depreciation allowed on the building in prior years is
Rs.500 (actual cost Rs.3,000 less written down value Rs.2,500).
Tax profit on disposal of building Rupees
Less: Deemed cost 7,500
Less: Depreciation allowed (500) 7,000
–––––– ––––––
Tax profit on sale of building 500
––––––
––––––
Note (11) Rs.545 received against debts previously written off is not to be included in the taxable income,
since the amount when written off was not allowed as a deductible charge.
Note (12) Income for separate consideration:
(i) Rs.100 being the tax deducted on the commission income of Rs.1,000 (net income Rs.900)
received from the Federal Government is the final tax on such income.
(ii) Rs.1,000 tax deducted on the dividend income of Rs.10,000 (net income Rs.9,000) is
the final tax on such income.
(iii) Rs.750 tax collected by the Collector of Customs at the customs stage (Note 3) is the
final tax on the income (Rs.6,500) derived from the sale of the imported ceiling fans.
The above income from commission, dividend and sale of ceiling fans is not chargeable to tax
under any head of income since the tax deducted or collected is the final tax on such income.
Note (13) Trading debts written off is a deductible charge in the carrying on the business. It is assumed
that the amount written off has previously been included in the taxable income and the company
has reasonable grounds to believe that the debts are irrecoverable.
Rupees
Cost of residential building for workers 8,000
Add: Cost of architect’s fee (Note 8) 500
––––––
8,500
––––––
––––––
––––––
17
(Note 15) Depreciation
machinery and buildings vehicles depreciation
workers’
residential
buildings
Written down value 9,500 2,500 8,200 400 250
Disposal – – (2,500) – –
–––––– –––––– –––––– –––––– ––––
9,500 2,500 5,700 400 250
–––––– –––––– –––––– –––––– ––––
Depreciation 1,425 250 570 60 38 2,343
–––––– –––––– –––––– –––––– ––––
Additions – 8,500 – 2,000 –
Initial allowance – (4,250) – – –
–––––– –––––– –––––– –––––– ––––
Written down value – 4,250 – 2,000 –
–––––– –––––– –––––– –––––– ––––
Depreciation for 12 months – 425 – 300 – 725
––––––
3,068
––––––
Note (16) Tax credit is calculated as under:
Rs.
Share of profit received from the AOP (A) 8,000
Taxable income of the AOP (B) 20,000
A/B x C
Rs.8,000/Rs.20,000 x Rs.5,725 = Rs.2,290
18
Marks
2 (a) Mr Ring
Tax year 2006
Salary income
Consideration for agreeing to a restrictive covenant (Note 1) 695,000 2
Basic salary (6 months) 1,800,000 0·5
Cash allowances:
Utilities (Note 2) – Rs.150,000 – exempt from tax 0 1
Children’s education (Note 2) 120,000 0·5
Cost of living (Note 2) 60,000 0·5
House rent (Note 2.1) 540,000 1·5
Household servants (Note 3) 240,000 1
Benefit of company maintained car (Note 4) 88,000 1·5
Reimbursement of hospital charges exempt from tax (Note 6) 0 1
Benefit on purchase of car (Note 7) 600,000 1
Pension exempt from tax (Note 8) 0 1
Employee share scheme – sale of rights (Note 9) 30,000 2
–––––––– 4,253,000
Amount of loan received in cash (Note 10) 200,000 2
Profit on Special Savings Certificates (Note 11) 6,000 206,000 0·5
–––––––– ––––––––––
Zakat paid (60,000) 0·5
––––––––––
––––––––––
––––––––––
The relevant notes will be considered in allocating marks against each item. In addition, specific marks will
be awarded for the explanations of the treatment of items not included in the computation of income
–––
21
(1) The value of a right or option granted to an employee under an employee share scheme (Scheme) is
normally a benefit since the holder of the right is entitled to purchase the shares offered under the
Scheme at a price usually below its market value. However, the Pakistan tax statute has specifically
legislated that ‘the value of a right or option to acquire shares under an employee share scheme granted
to an employee shall not be chargeable to tax’ [s.14(1)]. Accordingly the value of the rights at £2 for
one right, as estimated by the custodian of the Scheme, is not treated as income in the computation.
(2) As the company-maintained car purchased for Rs.1,500,000 is used by Ring exclusively for the business
use of TBL, there is no taxable benefit for Ring.
(3) The tax deducted at source from the gross amount of the dividend income is the final tax on such income.
The dividend income is therefore not chargeable to tax under any head of income and correspondingly is
not included in the computation of income.
(4) As the tax deducted on the dividend income is the final tax, no deduction is allowable for any expenditure
incurred in earning such income. Rs.15,000 which Ring wants to claim as profit paid against the
dividend income is therefore not deductible.
19
Marks
(b) Computation of tax liability Rupees
Tax thereon
Tax on Rs.700,000 102,500
–––––––––– 1,212,200 0·5
Tax credit on purchase of new shares in ABC Ltd (Note 12) (41,334) 2
––––––––––
1,170,866
Tax deducted at source
On salary income 1,300,000
On profit on special savings certificates (Note 11) 600
–––––––––– 1,300,600 1
––––––––––
––––––––––
––––––––––
Tax deducted as final tax
Final tax
Dividends – gross amount Rs.300,000 (Note 13) 30,000 0·5
–––––––––– –––
4
–––
25
–––
Note (1) Any amount received as consideration for an employee’s agreement to a restrictive covenant in
respect of any past, present or prospective employment is a profit in lieu of or in addition to salary
and is taxable as salary income. The Rs.695,000 received by Ring for his agreement not to enter
into employment with any other telephone manufacturing company is chargeable to tax as salary
income. Normally under the general law, such a receipt would be a capital receipt; however, the tax
statute has specifically legislated that such a receipt is chargeable to tax [s.12(2)(e)(v)].
Note (2) All cash allowances (except house rent allowance upto a certain limit and utility allowance up to
10% of basic salary) are chargeable to tax if the salary income including the value of perquisites
and benefits in a tax year is Rs.600,000 or more. As Ring’s salary income including perquisites
and benefits exceeds Rs.599,999, the cash allowances for utilities, children education, cost of
living and house rent (Note 2.1) are chargeable to tax as salary income.
Note (2.1) As Ring’s salary including perquisites and allowances exceeds Rs.599,999, house rent allowance
(HRA) is exempt from tax up to 45% of basic salary subject to a maximum of Rs.270,000.
Rupees
HRA – 45% of basic salary (45% of Rs.1,800,000) 810,000
Exempt from tax 270,000
––––––––
Chargeable to tax 540,000
––––––––
Note (3) The cost of household servants borne by TBL is a benefit of employment and is therefore chargeable
to tax as salary income.
Note (4) The fair market value (FMV) of the car, taken on lease, at the commencement of the lease period is
Rs.2,000,000. As the car is exclusively for Ring’s private (non-business) use, Rs.200,000 being
10% of the FMV of the car is the annual benefit. The amount chargeable to tax is Rs.88,000 made
up as under:
Rupees
Annual benefit 200,000
––––––––
For 6 months 100,000
Less: Deduction from Ring’s salary (Rs.2,000 x 6) 12,000
––––––––
––––––––
Note (5) The benefit of free passage for travel abroad is exempt from tax (subject to certain conditions), if the
employee’s salary including the value of perquisites and benefits does not exceed Rs.599,999. As
Ring’s total salary exceeds Rs.599,999, the amount of Rs.80,000 paid by TBL for the passage cost
is chargeable to tax as salary income.
Note (6) The reimbursement of hospital charges is exempt from tax as the reimbursement of such charges is
in accordance with the terms of employment of Ring. It is assumed that the national tax numbers of
the hospitals or clinics have been furnished by Ring and TBL has certified and attested the hospital
bills [Clause 139(a) of Part I of the Second Schedule].
20
Marks
Note (7) Where any asset is transferred by an employer to an employee, the amount chargeable to tax is the
fair market value (FMV) of the asset on the date of its transfer as reduced by any payment made by
the employee. The FMV of the Civic Honda car purchased by Ring from TBL on 31 December 2005
was Rs.900,000 as against the amount of Rs.300,000 paid by Ring. The difference of Rs.600,000
is a benefit chargeable to tax as salary income. A benefit to be chargeable to tax need not be in
accordance with the terms of employment.
Note (8) Any pension received by a citizen of Pakistan from a former employer is exempt from tax provided the
person receiving the pension does not continue to work for the former employer or an associate of the
former employer. The exemption is neither dependent on the age of the person receiving the pension
nor the retirement age under the terms of employment. As the above requirements are fulfilled, the
monthly pension received by Ring is exempt from tax [Clause 8 of Part I of the Second Schedule].
Note (9) The gain on the disposal of rights or options entitling the holder to acquire shares under an employee
share scheme is chargeable to tax as salary income and not as ‘capital gains’. As no payment was
made by Ring for the rights, the entire amount of Rs.30,000 is chargeable to tax as salary income
[s.14(5)].
Note (10) An amount received by a person, inter alia, as a loan from another person (not being a banking
company or financial institution) which is not paid by a crossed bank cheque or through a banking
channel from a person holding a national tax number card, is treated as the income of the recipient
chargeable to tax in the tax year of receipt under the head ‘Income from other sources’. As the loan
was received by Ring in cash, Rs.200,000 is treated as Ring’s income chargeable to tax [s.39(3)].
Note (11) Profit on Special Savings Certificates issued by the National Savings Scheme purchased after
1 July 2001 are taxed at 10% of the gross amount of the profit.
Rupees
Net amount of profit received after deduction of tax 5,400
Gross amount of the profit 6,000
Tax deducted at source (available as a tax credit) 600
––––––
Note (12) The tax credit on the investment of new shares [s.62(1) and (2)] in ABC Ltd is calculated as under:
Rupees
– Tax assessed before allowance of tax credit (A) 1,212,200
– Taxable income for the year (B) 4,399,000
– Amount of investment on which tax credit is to be
– calculated (Note 12A) (C) 150,000
Tax credit allowable
A/B x C
Rs.1,212,200/Rs.4,399,000 x Rs.150,000 41,334
Note (12A) The amount of the investment on which tax credit is calculated is the lesser of:
– the cost of acquiring the shares;
– 10% of the taxable income; or
– one hundred and fifty thousand.
The cost of acquiring the shares is Rs.1,000,000
10% of taxable income is Rs.439,900.
As both the above amounts are more than Rs.150,000, the amount of the investment on which
tax credit is to be calculated is Rs.150,000.
Note (13) Dividend income of an individual is taxed at 10% of the gross amount of the dividend irrespective
of whether the dividend is received from a public or private company.
Rupees
Net amount of dividend after deduction of tax (Rs.90,000 + Rs.180,000) 270,000
Gross amount of the dividend 300,000
Tax deducted at source 30,000
––––––––
Rs.30,000 being the tax deducted at source is the final tax on the dividend income.
21
Marks
3 (a) The sales tax liability for the month of May 2006 would be computed as follows:
Output tax Rupees
Exempt supplies – 0 0·5
Taxable supplies in local market (Rs.1,150,000 x 100/115 = 1,000,000 x 15%). 150,000 0·5
As the credit purchases of Rs.575,00 remains unpaid on 31 May 2006 (i.e. the
payment of Rs.575,000 has not been made within 180 days) the input tax previously
claimed needs to be reversed [s.73(2)]
(Rs.575,000 x 100/115 x 15%) 75,000 2
––––––––
225,000
Input tax
Purchases of raw materials (inclusive of sales tax) Rs.805,000
Input tax (Rs.805,000 x 100/115 = 700,000 x 15%) Rs.105,000
Apportionment of input tax on purchases
Taxable supplies/(Taxable supplies + exempt supplies) x input tax
1,000,000/(1,000,000 + 5,000,000) x 105,000 (17,500) 2
––––––––
Sales tax payable 207,500
––––––––
(b) A person is required to retain the record and documents for a period of three years after the end of the tax
period to which such record or documents relate. [s.24] 2
(c) The following goods are chargeable to sales tax at the rate of 15% of the retail price:
1. Fruit and vegetable juices
2. Ice cream
3. Aerated waters or beverages
4. Syrups and squashes
5. Cigarettes
6. Toilet soap
7. Detergents
8. Shampoo
9. Toothpaste
10. Shaving cream
11. Perfumery and cosmetics
12. Biscuits
13. Confectionery
14. Tea
15. Powder drinks
16. Milky drinks
17. Footwear
Any 4 items at 1/2 mark each. 2
(d) (i) M Khan’s contention is not correct. Payment of default surcharge (which has been substituted for
additional tax) is mandatory if a registered person does not pay the tax due or any part thereof whether
wilful or otherwise, in time. 2
(ii) As the default was not on account of a tax fraud, default surcharge is
payable at the rates given below:
Rate per month
– For the first six months of default 1%
– From the seventh month onwards till such time as the entire liability
including default surcharge is paid. 1·5% 1
As the tax due for the month of April 2006, which was due for payment on 15 May 2006, is intended
to be paid along with the monthly sales tax return for May 2006 to be submitted on 15 June 2006,
the default surcharge at the rate of 1% per month would be Rs.3,000 (1% of Rs.300,000). 1
(e) Where goods are supplied under a hire purchase agreement, the time of supply shall be the time at which the
agreement is entered into [s.2(44)(b)]. 2
–––
15
–––
22
Marks
4 (a) Mung Inc is a non-resident company for Pakistan tax purposes and its income under any head of income is
to be computed by taking into account its Pakistan-source income only.
Section 101 (geographical source of income) specifies the conditions under which different sources of income
are Pakistan-source income. Under the provisions of s.101(13) any gain arising on the disposal of shares
in a resident company shall be Pakistan-source income.
As the gain arose on the disposal of shares in XYZ Ltd which is a resident company, Mung Inc is chargeable to
tax on the US$ 1,000,000 under the head ‘Capital gains’, irrespective of whether or not the sale took place
outside Pakistan with another non-resident person or that the sale consideration was received outside Pakistan. 3
(b) Mr Tikam Das (Deceased)

Tax year 2005
Capital gains
Transfer of shares in Das (Private) Ltd to Govind (Note 1) 22,500 2
Gain on sale of shares in ABC plc (Note 2) 480,000 3
Gain on sale of postage stamp (Note 3) 37,500 1·5
Gain on sale of shares in PQR Ltd – exempt (Note 4) 0 0·5
–––––––– 540,000
Income on vacating possession of a building (Note 5) 50,000 1
––––––––
Total income being the taxable income 590,000
––––––––
[2 marks for item (a) and one mark each for items (b) and (c)] as follows: 4
–––
15
–––
(a) Transmission of 10,000 shares in Das (Private) Ltd to Shirin.
Under the non-recognition rules [s.79(1)(b) and s.79(2)] no gain or loss is taken to have arisen on the
disposal of an asset, by reason of the transmission of the asset to an executor or a beneficiary on the
death of a person, provided the person acquiring the asset is not a non-resident person for Pakistan tax
purposes at the time of the acquisition.
The transfer of the shares to Shirin on 15 June 2005 (tax year 2005) falls within the ambit of the non-
recognition rules, as Shirin was not a non-resident person for Pakistan tax purposes in the tax year 2005.
Shirin was a resident individual, since she was an employee of the Federal Government in the tax year
2005 [s.82(c)]. Therefore the question of any gain or loss on the transfer of the 10,000 shares does not
arise.
(b) The transfer of Rs.179,496 from Tikam’s bank account to Shirin, also falls within the ambit of the non-
recognition rules (s.79) referred to in item (a), since Shirin is not a non-resident. Furthermore in a transfer
of cash in Pakistan rupees, there is no gain or loss on the transfer.
(c) A loss on the disposal of a capital asset is not deductible where a gain on the disposal of such an asset is
exempt from tax. As DEF Ltd is a public company for tax purposes, any gain on the disposal of its shares
is exempt from tax up to the tax year 2007. Therefore, the loss of Rs.40,000 on the disposal of the shares
in DEF Ltd is not deductible. DEF Ltd is a ‘public company’ since its shares were traded on the Karachi
stock exchange in the tax year 2005 and DEF Ltd remained listed on that exchange on 30 June 2005.
23
Marks
Note (1) Transmission of 10,000 shares in Das (Private) Ltd to Govind.
The non-recognition rules [s.79(1)(b) and s.79(2) referred to in item (a) of ‘Items not included in the
computation of income’] under which no gain or loss is required to be computed on a disposal
of an asset by reason of transmission of the asset to a beneficiary on the death of a person, is not
applicable to the transfer of 10,000 shares in Das (Private) Ltd to Govind since he was a non-
resident individual at the time of acquiring the shares. He was a non-resident individual since he was
neither present in Pakistan for at least 182 days in the tax year 2005 nor was he an employee of the
Federal or a Provincial Government posted abroad in the tax year 2005 [s.82].
As no consideration was paid by Govind for the shares, the fair market value (FMV) of the shares at
the time of its transmission to him is treated as the consideration for the shares [s.77(1)]. The FMV
of an asset shall be the price, which the asset would ordinarily fetch on sale in the open market
[s.68(1)]. Das (Private) Ltd being a private company, its shares were not quoted on any stock
exchange. In the circumstances, the break-up value of the shares at Rs.13 per share, as determined
by the firm of chartered accountants, is taken as its FMV.
Rupees
Consideration – FMV of the 10,000 shares (Rs.13 x 10,000) 130,000
Cost – Rs.10 per share (Rs.10 x 10,000) 100,000
––––––––
Capital gain 30,000
––––––––
As the shares were held by Tikam for more than one year, 75% of the gain is
chargeable to tax. 22,500
––––––––
Note (2) Gain on the disposal of 400 shares in ABC plc acquired under an employee share scheme
Rupees
Consideration received on the disposal of the 400 shares on 1 July 2004 1,000,000
Cost of 400 shares (Note 2A) (520,000)
–––––––––
–––––––––
–––––––––
As the shares were held for less than one year, the entire gain of Rs.480,000 is chargeable to tax
as income from capital gains.
Note (2A) The cost of the shares acquired under an employee share scheme is the sum of (i) the consideration,
if any, paid by the employee for the shares; (ii) the consideration, if any, paid by the employee for the
right or option to acquire the shares; and (iii) the amount chargeable to tax as the salary income of
the employee on acquiring the shares [s.14(4)].
Rupees
(i) £10 paid on the acquisition of 400 shares on 31 May 2004 (Tax year
2004) – £10 x 400 = £4,000 (£1 = Rs.100) 400,000
(ii) Amount charged to tax as salary income in the tax year 2004.
400 shares were acquired at the exercise price of £10 per share when
the FMV of one share was £13. The difference of £3 per share equal
to Rs.120,000 (£3 x 400 = £1200 i.e. Rs.120,000) is the taxable
benefit which would have been taxed under the head ‘salary’ in the
tax year 2004. 120,000
––––––––
520,000
––––––––
––––––––
24
Marks
Note (3) Gain on sale of one postage stamp
A gain or loss under the head ‘capital gains’ can only arise on the disposal of a ‘capital asset’.
Moveable assets held for personal use (with certain exceptions) are excluded from the definition of a
‘capital asset’ and therefore any gain or loss on the disposal of such moveable assets (which are not
in the list of the exceptions) are outside the ambit of capital gains. One of the exceptions to the above
is a postage stamp. A postage stamp even if held for personal use is treated to be a ‘capital asset’
and any gain on its disposal is chargeable to tax as income from capital gains. However, any loss on
the disposal of a postage stamp is not recognised as a capital loss.
For assets acquired by inheritance (there is no cost of acquisition for the person acquiring the asset),
the FMV of the asset at the time of its transfer is treated as the cost of the asset [s.37(4A)]. The
postage stamp inherited by Tikam in 1981 was valued by an expert to be worth Rs.50,000 which
can be taken to be the FMV of the postage stamp at the time of its transfer to Tikam in 1981.
Rs.50,000 is accordingly treated to be the cost of the postage stamp.
Rupees
Sale consideration of the postage stamp 100,000
Cost being the FMV of the postage stamp in 1981 (50,000)
–––––––
Gain on sale 50,000
–––––––
–––––––
75% of Rs.50,000 is chargeable to tax since the postage stamp was held by
Tikam for more than a year. 37,500
Note (4) A gain on the disposal of shares in a company which is a ‘public company’ for tax purposes is
presently exempt from tax up to the tax year 2007. PQR Ltd is a ‘public company’ for tax purposes,
since not less than 50% of its shares are held by a Provincial Government. Therefore the gain of
Rs.3,000 on the disposal of the shares is exempt from tax.
Note (5) Any amount received by a person as consideration for vacating the possession of a building as
reduced by the amount paid by the person to acquire the possession of the said building is
chargeable to tax as ‘Income from other sources’ [s.39(1)(k)]. Rs.50,000 [Rs.200,000 –
Rs.150,000] is the amount chargeable to tax as ‘Income from other sources’.
5 (a) (i) Bee’s contention for not treating the Rs.75,000 as taxable income in the tax year 2005 is erroneous. 1
The tax law specifically provides that if there is any income that has been derived by a person in a tax
year from a business, activity, investment or other source that has either ceased before the commencement
of that year or during the year and if that income would have been taxable had there been no cessation,
then the provision of the tax statute would apply as if there was no cessation [s.72]. 2
In other words, s.72 deems the business, activity, investment or other source to have been carried on by
the person in the tax year in which the income was derived despite the cessation of the business,
activity, investment or other source. 1
To rectify the above error, Bee should furnish a revised return of income to the Commissioner [s.114(6)]
showing the Rs.75,000 as taxable income under the head ‘Income from business’. 1
(ii) Bee’s contention that the tax deducted at source from the dividend income is the final tax on such income
is correct. Such dividend income is not chargeable to tax under any head of income and is therefore not to
be included in the return of income under s.114. However, Bee was required to file a statement of final
taxation in respect of the dividend income in the prescribed form [s.115.(4)].
To rectify the above error, Bee should furnish the statement under s.115(4) to the Commissioner 3
(b) (i) The requirements for the formation of a ‘small company’ are:
(a) the company has to be registered under the Companies Ordinance, 1984 on or after 1 July 2005;
(b) its paid up capital plus undistributed reserves should not exceed Rs.25 million;
(c) its annual turnover should not exceed Rs.200 million; and
(d) it is not formed by the splitting up or the reconstitution of a company already in existence. 4
(ii) The advantages of a small company are:
(a) The corporate rate of tax on its taxable income is 20% for the tax year 2006 and onwards as
against the rate of 35% for public companies and 37% for private companies for the tax year 2006;
(b) small companies are not required to withhold tax at the time of making a payment to a resident
person or a permanent establishment in Pakistan of a non-resident person for the sale of goods, for
the rendering of or providing of services or on the execution of a contact, other than a contact for the
sale of goods or the rendering of or providing of services; and
25
Marks
(c) small companies are exempted from the provisions of payment of minimum tax which is applicable
to a resident company, where no tax is payable or paid for a tax year or the tax payable or paid for
a tax year, is less than 1/2% of the company’s turnover from all sources. [The exemption from the
payment of minimum tax is given in clause (11) (XV) of part IV of the Second Schedule]. 3
–––
15
–––
6 (a) Mr Murtaza
Tax year 2005
Income from property
Rent for 12 months (Note 1) 600,000 1
Non-adjustable deposit treated as rent (Note 2) 130,000 3
––––––––
730,000
Deduction for repairs (Note 3) 146,000 1
––––––––
584,000
Recovery of unpaid rent (Note 4) 50,000 1
–––––––– 634,000
Income connected with renting of the house (Note 5) 120,000 1
––––––––
Total income which is also the taxable income 754,000
––––––––
Note (1) Rent for 12 months
Where the rent receivable by an owner of a building includes an amount for the provision of
amenities, utilities or any other services which are connected with the renting of a building such
amount is not chargeable to tax under the head ‘Income from property’. As the monthly rent of
Rs.60,000 payable by Jill includes Rs.10,000 for the provision of the services of a security guard,
the amount chargeable to tax as ‘Income from property’ is Rs.600,000 [Rs.60,000 less Rs.10,000
for the services of the security guard (Rs.50,000 x 12)].
Note (2) Non-adjustable deposit treated as rent
(i) An amount (Amount) received by an owner of a building from a tenant which is not adjustable
against the rent payable is treated as rent chargeable to tax under the head ‘Income from
property’. The Amount is taxable over a period of 10 years in equal proportion including the year
in which the Amount is received [s.16(1)]. If the Amount is refunded to the tenant before the
expiry of the 10 years, no portion of the Amount is chargeable to tax in the tax year in which the
Amount is refunded or in any subsequent year [s.16(2)].
(ii) Non-adjustable deposit received from Jill on 1 July 2004:
Rupees
Amount received 1,500,000
Portion of amount charged to tax out of the deposit of Rs.1,000,000
received from Jack (Note 2A) 200,000
–––––––––
1,300,000
–––––––––
1/10 chargeable to tax in the tax year 2005 130,000
–––––––––
Note (2A) Non-adjustable deposit of Rs.1,000,000 (Previous Deposit) received from Jack on 1 July 2002
(tax year 2003) was charged to tax as under:
Tax year 2003: 1/10 of Rs.1,000,000 100,000
Tax year 2004 1/10 of Rs.1,000,000 100,000
Tax year 2005: Not chargeable to tax as the amount was refunded
on 1 July 2004 0
––––––––
200,000
––––––––
26
Marks
As the Previous Deposit was refunded before the expiry of 10 years, the Rs.200,000 charged to tax
out of the Previous Deposit is required to be deducted from Rs.1,500,000 [Subsequent Deposit]
received from Jill on 1 July 2004 (tax year 2005) to arrive at the amount chargeable to tax over a
period of ten years in equal proportion including the tax year 2005 in which the Subsequent Deposit
was received [s.16(3)].
Note (3) An amount equal to one-fifth of the ‘rent chargeable to tax’ is allowed as a statutory deduction in
computing income chargeable as ‘Income from property’ irrespective of whether or not any amount
has been spent on repairs to the house property. The statutory allowance is to be calculated on the
amount of the ‘rent chargeable to tax’ and not on the amount of the rent received or receivable. The
rent chargeable to tax also includes Rs.130,000 being the portion of the deposit amount received
from Jill which is not adjustable against the rent payable. Therefore the deductions for repairs is
Rs.146,000 being one-fifth of Rs.730,000 (Rs.600,000 + Rs.130,000)
Note (4) Where any unpaid rent, which has been allowed as a deduction in any year in computing income
chargeable as ‘Income from property’, is subsequently wholly or partly recovered, the amount
recovered is chargeable to tax in the tax year in which it is recovered [s.17(2)]. The unpaid rent of
Rs.50,000 for June 2003 received from Jack in the tax year 2005 is therefore chargeable to tax
under the head ‘Income from property’ in the tax year 2005.
Note (5) Income from the provision of amenities or any other service connected with the renting of a building
is chargeable to tax under the head ‘Income from other sources’ [s.39(1)(fa)]. Out of the monthly rent
of Rs.60,000, Rs.10,000 is for the services of a security guard. Therefore Rs.120,000 (Rs.10,000 x
12) is chargeable to tax as ‘Income from other sources’.
(b) (i) ‘Rent’ received or receivable by the owner of a building or land for the use or occupation of, or the right to
use or occupy the land or building is chargeable to tax under the head ‘Income from property’. ‘Rent’ also
includes any forfeited deposit paid under a contract for the sale of land or a building [s.15(1) and (2)].
The amount of Rs.100,000 paid by Bashir against the contract for the sale of land which was forfeited
under the terms of the contract for the sale of the land is rent chargeable to tax under the head ‘Income
2
from property’.
(ii) A composite rent of Rs.400,000 per month is receivable as consideration for the lease of the property
‘Ataghar’ since the letting of the building is inseparable from the letting of the plant. The income from such
letting is chargeable to tax under the head ‘Income from other sources’ [s.39(1)(f)].
In computing the income arising from the lease of ‘Ataghar’ in a tax year, the permissible deductions are:
(a) deductions for any expenditure paid by Nadir in the relevant tax year in deriving the income from the
lease other than any expenditure of a capital nature [s.40(1)]. Expenditure is considered to be of a
capital nature for the purposes of s.40 if it has a normal useful life of more than one year; [s.40(6)];
(b) a deduction for the depreciation of the building and the plant [s.40(3)(a)]; and
(c) an initial allowance for the plant [s.40(3)(b)].
No deduction is allowed for an expenditure which is not deductible in computing income under the head
‘Income from business’ [s.40(5)]. 4
(iii) Nadir is not entitled to claim one-fifth of the lease rent as a deduction for repairs to the building. Such a
deduction for repairs is allowable only against rent chargeable to tax as ‘Income from property’. As the
income from ‘Ataghar’ is chargeable to tax under the head ‘Income from other sources’, only the
expenditure which has been paid in deriving such income would be deductible. The actual amount paid
for repairs to the building would be a deductible charge. 2
–––
15
–––
27
Marks
7 (a) (i) The following conditions have to be met to ensure that no tax is deducted under s.153(1) from the
payments made for the sale of imported goods:
(i) the sale should be made by the same person who has imported the goods;
(ii) the person who has imported the goods should have paid advance tax at the customs stage under
s.148 on the value of the goods imported as determined for customs purposes; and
(iii) the goods should be sold in the same condition they were in when it was imported. 3
(ii) The following persons are ‘a prescribed person’ for the purposes of s.153(1):
– the Federal Government;
– a company other than a ‘small company’ as defined for tax purposes;
– an association of persons constituted by or under any law;
– a foreign contractor or consultant;
– a consortium; or
– a joint venture.
Any four persons at a 1/2 mark each 2
(iii) The tax is to be deducted when the amount is actually paid and not when it is credited to the account
of the recipient [s.158(b)]. 1
[Note: The only exception to the above rule is in the case of deduction of tax on a payment for profit on
a debt (s.151) in which case the tax is to be deducted at the time the amount is paid or credited to the
account of the recipient, whichever is earlier [s.158(a)].
(b) (i) SkyAdverts is a non-resident person for Pakistan tax purposes. A prescribed person making a payment to
a non-resident person inter alia on the execution of a contract for advertisement services by ‘TV Satellite
Channels’, is required to deduct tax [s.153(3)(e)] at the rate of 6% of the gross amount payable. A
company, other than a ‘small company’ is a prescribed person and therefore Chaiwalla Pakistan Ltd (CPL)
would deduct tax from the gross amount payable under the contract. 3
(ii) It is not mandatory that the tax deducted from the payments to SkyAdverts would be its final tax on the
income arising from the TV Contract. SkyAdverts can be taxed on the net income basis if it does not opt
for assessment on the final tax basis. 1
(iii) The tax deducted under s.153(3)(e) by CPL will be the final tax of SkyAdverts if SkyAdverts specifically
opts to be assessed on the final tax basis by furnishing to the Commissioner a declaration in writing of
the option to be assessed on the final tax basis within three months of the commencement of the relevant
tax year. The declaration is irrevocable and remains in force for three years i.e. the tax year in which
the option is furnished and the succeeding two years [clause (41) of Part IV of the Second Schedule]. 4
(iv) If SkyAdverts is unable to comply with any of the requirements for being assessed on the final tax
basis (say if the declaration is not furnished to the Commissioner in time), the tax assessment of
SkyAdverts would be on its net taxable income and the tax deducted by CPL would be allowed as
a tax credit. 1
–––
15
–––
28
Paper 2.3(PKN)
Business Taxation
(Pakistan)
PART 2
QUESTION PAPER

answered

hall

2
Up to Rs.100,000 0%
Rs.100,001 – Rs.200,000 3·5% of the amount exceeding Rs.100,000
Rs.200,001 – Rs.400,000 Rs.3,500 plus 12% of the amount exceeding Rs.200,000.
Rs.400,001 – Rs.700,000 Rs.27,500 plus 25% of the amount exceeding Rs.400,000.
Rs.700,001 and above Rs.102,500 plus 30% of the amount exceeding Rs.700,000.

Tax year Banking Public company other Private company other
2006 38% 35% 37%

Prize on prize bonds 10% of gross payment

Depreciation
Plant and machinery (not otherwise specified) 15% ⎬ of the tax written down value
Motor vehicles (all types) 15% ⎪
Computer hardware 30% ⎭
F. Benchmark rate
For determining the value of the perquisite on loans given to employees, the benchmark rate is:
For the tax year 2006

A rate of 8% per annum of the loan amount
3 [P.T.O.
1 Jingo Ltd, an industrial undertaking engaged in the manufacture of textiles, requires you to compute its taxable income
for the year ended 30 June 2006. The following information is furnished to you:
(1) Jingo Ltd is a public company under the Companies Ordinance 1984. 50% of the shares are held by ABC Ltd,
a company incorporated in Saudi Arabia which is wholly owned by the Kingdom of Saudi Arabia. Jingo Ltd is
not listed on any stock exchange of Pakistan.
(2) The control and management of the affairs of Jingo Ltd was situated partly outside Pakistan during the year ended
30 June 2006.
(3) The accounting profit for the year ended 30 June 2006, prior to the transfer of Rs.500,000 to general reserve
account was Rs.1,960,000.
(4) Deductions charged in the accounts include: Rupees
(i) Tax collected by the Collector of Customs on the value of the import of an item of
second-hand plant for the company’s own use. 20,000
(ii) Payment to a supplier to prematurely terminate a forward contract for the purchase of cotton
bales to avoid a loss expected to arise. 300,000
(iii) Legal expenses in connection with the issue of Term Finance Certificates which is a long-term
loan for working capital requirements. 900,000
(iv) Telephone and electricity bills paid in cash. 200,000
(v) Depreciation on the company’s owned assets written off in the books. 855,507
(vi) First yearly instalment of the lease rental paid to a scheduled bank (lessor) in respect of an
item of plant taken on lease which is used by Jingo Ltd for its business. The ownership of the
plant would be transferred to Jingo Ltd by the lessor on payment of the final sixth yearly
instalment of the lease rental. 700,000
(vii) Depreciation written off on the leased plant. 100,000
(viii) Donation to a medical university established by the Federal Government. 350,000
(5) Income shown in the accounts includes dividends received (net of tax deducted at source) from:
– a private company; and 90,000
– a public company listed on the Karachi stock exchange. 195,000
(6) Creditors include
Rs.1,000,000 received from Mr Chamanlal in cash as a loan in June 2006.
(7) Fixed assets
(i) The tax written down values of the fixed assets on 1 July 2005 were:
Buildings 5,000,000
Motor vehicles 500,000
Computer hardware 600,000
Furniture 400,000
(ii) An item of second-hand plant (previously used in Pakistan) was imported in October 2005
at a cost of Rs.3,000,000. Rs.660,000 was incurred on repairs to bring the plant up to
the standard required and render it serviceable. The plant was commissioned for use on
15 June 2006. The Rs.660,000 on repairs has been claimed as deductible expenditure.
(iii) New computers were purchased on 1 September 2005 for Rs.250,000.
(iv) During the year ended 30 June 2006, Rs.4,000,000 was expended on the construction
of workers’ residential quarters which includes Rs.1,000,000 for the cost of land.
4
Rupees
(v) One of the office buildings was sold on 29 June 2006 for Rs.9,000,000. The cost of the
building sold was Rs.5,000,000 and its tax written down value at the time of the sale was
Rs.3,500,000. The accounting profit of Rs.2,000,000 on the sale of the building has been
included in the profit and loss account under the heading ‘Other income’.
(8) During the year ended 30 June 2006, 10,000 shares in Cleangas Ltd were acquired from
the Privatisation Commission of Pakistan for Rs.600,000.
(9) Other information:
(i) Rs.1,250,000 was expended on the in-house development of computer software for
textile designs. The Rs.1,250,000 has been shown as an asset in the balance sheet.
The software has been used in the business since 31 March 2006 and its normal
useful life has been estimated by the company’s engineering department to be twelve years.
(ii) It is the company’s consistent accounting policy that any item of furniture costing less than
Rs.50,000 is charged off immediately in the accounts. Purchases of such items in the
accounting year ended 30 June 2006 amounted to Rs.250,000.
(iii) Provisions for bad debts comprises:
Balance on 1 July 2005 700,000
Provision made during the year (3% of debtors) and charged to the profit and loss account 300,000
Received against a debt written off in the tax year 2003 which was allowed as a deduction
under the head ‘Income from business’. 350,000
––––––––––
1,350,000
Trading debts written off during the year 250,000
––––––––––
Balance on 30 June 2006 1,100,000
––––––––––
(iv) Advance tax paid in quarterly instalments for the relevant tax year 400,000
Required:
(a) Briefly state with reasons whether or not Jingo Ltd will be a public company for tax purposes. (2 marks)
(b) Briefly state with reasons whether you consider Jingo Ltd to be a resident company or a non-resident
company. (1 mark)
(c) Compute the taxable income of Jingo Ltd for the relevant tax year under the appropriate heads of income.
Your answer should give clear reasons/explanations for the inclusion or exclusion in the computation of each
of the items listed above. The reasons/explanations for the items not included in the computation of income
should be shown separately. (23 marks)
(d) Calculate the tax payable by/refundable to Jingo Ltd in the relevant tax year. Taxes deducted or collected at
source which are considered as the final tax should be shown separately. (4 marks)
(30 marks)
5 [P.T.O.
The following information is furnished to you by Mr Sultan for his accounting year ended 30 June 2006.
(1) Sultan is a citizen of Pakistan and until 30 June 2005 he was an employee of PQR Ltd
(i) On reaching the age of 50 years, he opted for early retirement on 1 July 2005 under the PQR Early
Retirement Scheme (Scheme). The management accepted his resignation and under the terms of the
Scheme he received Rs.1,000,000 for loss of employment on 2 July 2005.
(ii) On retirement, he also received:
– Rs.500,000 as a gratuity from the PQR Gratuity Fund. The Fund has been approved by the
Commissioner under Part III of the Sixth Schedule.
– Rs.1,600,000 being the accumulated balance in his account in the recognised PQR Employee’s
Provident Fund.
(iii) He is also eligible for a monthly pension of Rs.75,000 which is paid by PQR Ltd by the direct transfer of
funds to his bank account.
(2) ABC Ltd is a wholly owned subsidiary of PQR Ltd. Both companies are anxious that Sultan should take over as
the chief financial officer of ABC Ltd. Sultan agreed to join ABC Ltd from 1 September 2005. Prior to issuing a
letter of appointment, ABC Ltd, as a gesture of goodwill, voluntarily made a gratis payment of Rs.300,000 to
Sultan on 15 July 2005. In the records of ABC Ltd the payment is described as a gift and not attributable to any
services rendered or to any right to receive the amount on the part of Sultan.
(3) Sultan’s terms of employment with ABC Ltd provided for the following from 1 September 2005:
(i) A basic salary of Rs.200,000 per month
(ii) Monthly cash allowance of:
– Rs.20,000 for leave fare assistance
– Rs.50,000 for house rent
– Rs.20,000 for utilities
– Rs.30,000 for medical expenses (the terms of employment do not provide for free medical treatment
or hospitalisation, or any reimbursement for such expenses)
(iii) A company maintained motor car for personal and business use. Rs.3,000 to be reimbursed each month
by Sultan towards the cost of personal use of the car.
(4) In order to provide the benefit of the company car to Sultan, a new Honda Accord was leased by ABC Ltd on
1 October 2005. The market value of the car on that date was Rs.4,000,000.
(5) On 1 January 2006, Sultan took a loan of Rs.500,000 from ABC Ltd repayable in 10 equal yearly instalments.
No profit on the loan is payable. On 30 June 2006, Rs.127,000 of the loan amount was waived by ABC Ltd.
(6) Salaries and allowances of all employees for each month are disbursed by ABC Ltd on the first working day of
the following month.
(7) Tax deducted at source by ABC Ltd on the salary income of Sultan was Rs.1,200,000.
(8) On 1 July 2005 Sultan leased a piece of land from A for an annual rent of Rs.100,000 payable in advance. On
the same day, he sub-leased the land to B for an annual rent of Rs.150,000 payable in advance.
(9) Sultan is the owner of a house
(i) He rented out the house on 1 July 2005 to Mr Dee and received:
– Rs.300,000 as rent for six months in advance; and
– Rs.600,000 as a refundable deposit which is not adjustable against the rent.
On 31 December 2005, Dee vacated the house and the deposit of Rs.600,000 was returned to him.
(ii) The house remained vacant for three months from 1 January 2006 to 31 March 2006.
6
(iii) The house was let out to Mr Cee on 1 April 2006. Sultan received Rs.150,000 as rent for three months in
advance and he also collected Rs.600,000 as a refundable deposit which is not adjustable against the rent.
(iv) Sultan wants to claim the following deductions:
– Rs.150,000 at the rate of Rs.50,000 per month for the three months the house remained vacant.
– Rs.60,000 for legal expenses for defending his title to the house.
(10) Sultan approaches you to prepare his return of income for the year ended 30 June 2006. He informs you that
prior to 30 June 2006:
(i) He has invested Rs.600,000 in the acquisition of shares in Cleangas Ltd from the Privatisation Commission
of Pakistan.
(ii) He has elected to be taxed on the amount of the compensation for loss of employment received from PQR
Ltd at the average rate of tax paid by him on his total income for the preceding three years, which is at the
rate of 25%.
(iii) He received Rs.90,000 (net of tax deducted at source) as a prize on a prize bond.
Required:
(a) Compute the taxable income of Mr Sultan under the relevant heads of income for the relevant tax year giving
clear reasons/explanations for the inclusion or exclusion in the computation of income of each of the items
listed above. The reasons/explanations for the items not included in the computation of income should be
shown separately. (20 marks)
(b) Calculate the tax payable by/refundable to Mr Sultan for the relevant tax year. (5 marks)
(25 marks)
7 [P.T.O.
Section B – THREE questions ONLY to be attempted
3 (a) Cinderella Ltd is engaged in the manufacture of ready-to-wear clothing. The company’s business transactions for
the month of May 2006 are summarised as follows:
Rupees
(i) Purchase of raw materials used exclusively in making taxable supplies 1,350,000
(ii) Purchase of raw materials used in making both taxable and exempt supplies, the payments
for which were made as under: 2,285,000
Online transfer of funds from the business bank account of the company to
the business bank account of the supplier 1,150,000
Cash payment into the business bank account of the supplier 65,500
Payment by credit card into the business bank account of the supplier 1,069,500
––––––––––
2,285,000
––––––––––
(iii) Purchase of raw materials used exclusively in making exempt supplies 900,000
(iv) Raw material and spare parts purchased exclusively for making zero rated supplies 1,600,000
(v) Payment to a courier company 365,000
(vi) Sale of taxable goods 6,850,000
(vii) Sale of exempt goods 1,175,000
(viii) Sale of zero rated goods 2,220,000
(ix) Goods sold in January 2006 to Mr Bee were returned by him in May 2006 due to defective
workmanship for which the company issued credit notes to Bee and received debit notes
from Bee. 694,000
(x) Advance payment received in May 2006 for the supply of goods to be made in
September 2006 750,000
Note
All payments for the purchases and the payment to the courier company are stated inclusive of sales tax at the
rate of 15%. The figures for the sales, the advance payment received and the credit notes issued are stated
exclusive of sales tax.
Required:
Calculate the sales tax payable by Cinderella Ltd in respect of the sales tax return for the month of May
2006. (10 marks)
(b) Section 7 of the Sales Tax Act, 1990, determines the liability of a registered person to pay sales tax. A registered
person is not entitled to deduct the input tax from the output tax for the purposes of payment of sales tax unless
he holds certain documents required under the law.
Required:
Specify the documents that a registered person should hold for the purposes of claiming input tax in the case
of:
– a taxable supply made;
– goods imported into Pakistan; and
– goods purchased in an auction. (3 marks)
8
(c) A registered person is preparing his sales tax return for the month of May 2006. He finds that he has omitted to
claim input tax paid on goods purchased in the month of August 2005.
Required:
State whether or not it is still possible to claim the omitted input tax for August 2005 and if so, the procedure
for claiming it. (2 marks)
(15 marks)
9 [P.T.O.
4 For the purpose of this question, you should assume that today’s date is 2 September 2006.
Mr Jamshed is preparing his return of income for the tax year 2006 and furnishes you with the following information
for his accounting year ended 30 June 2006.
(1) Airaids plc (AAP) employee share scheme (Scheme).
As an employee of AAP Karachi branch he had participated in the Scheme and on 1 July 2005 he was given
the option to purchase 500 shares in AAP at the exercise price of £10 per share. The value of the option, as
given by the custodian of the Scheme, was to be calculated at the rate of £1 for every share offered. (The rate
of exchange to be taken as £1 = Rs.100.)
Jamshed’s contention in respect of the transaction
As the option was acquired free of cost, it is a perquisite of employment and its monetary value is a taxable
income. As the price of one option as declared by the custodian of the Scheme was £1 for every share offered,
£500 is chargeable to tax under the income head of ‘salary’. (2 marks)
(2) Sale of the option to acquire 500 shares in AAP.
On 7 June 2006 Jamshed sold the option for Rs.100,000.
As the option to acquire the 500 shares was held for less than one year, the entire gain is chargeable to tax
under the income head of ‘Capital gains’. (2 marks)
(3) 300 shares in XYZ plc.
Prior to joining Airaids plc, as an employee of XYZ plc, Jamshed had in the tax year 2005, acquired 300 shares
in XYZ plc under an employee share scheme at the exercise price of £10 per share when the price of one share
on the stock exchange in the UK was £15. On 31 May 2006, he gifted the 300 shares to his son Sorab, who
had left Pakistan on 28 December 2005 to reside in India and has been living in India ever since. For the purpose
of the deed of gift, the shares were valued at £20 per share being the price quoted on the stock exchange in the
UK on 31 May 2006. (The rate of exchange to be taken as £1 = Rs.100)
There are no tax implications on this transaction due to the non-recognition rules [s.79] which provide that
no gain or loss shall be taken to have arisen on the disposal of an asset, inter alia, by reason of a gift of the
asset. (5 marks)
(4) Moveable assets consisting of jewellery and an antique vase held for personal use.
(i) The jewellery was inherited by Jamshed in the year 1960, when it was valued by the family jeweller at
Rs.700,000. The jewellery was sold for Rs.1,300,000 on 7 June 2006.
(ii) Jamshed was a partner in a firm dealing in antiques. The vase became his property on the dissolution of
the firm in the year 2000, when it was valued by an expert at Rs.300,000. The vase was sold for
Rs.200,000 on 7 June 2006.
A capital gain can only arise on the disposal of a ‘capital asset’. As jewellery held for personal use is excluded
from the definition of a ‘capital asset’, the gain of Rs.600,000 on the disposal of the jewellery is not income
chargeable to tax as capital gains. However, the loss of Rs.100,000 on the sale of the vase is to be claimed
as a capital loss. (2 marks)
(5) Shares in Zee Ltd
Jamshed suffered a loss of Rs.50,000 on the sale of 1,000 shares in Zee Ltd. Zee Ltd is a public company for
tax purposes
The loss of Rs.50,000 on the sale of the shares is to be claimed as a capital loss. (2 marks)
(6) Unadjusted loss
A capital loss of Rs.40,000 determined in the accounting year ended 30 June 1999 remains unadjusted.
The capital loss of Rs.40,000 is to be adjusted against the capital gains for the tax year 2006 and the balance
of the loss is to be carried forward. (2 marks)
10
Required:
State, giving reasons, whether or not you agree with each of the six contentions of Mr Jamshed. If you are not in
agreement with any of his contentions, explain the correct treatment to be adopted (including if necessary
computation of the income/loss for the particular transaction) for the determination of income under the correct
heads of income for the tax year 2006.
Note: The allocation of marks is as shown against each of the six contentions of Mr Jamshed.
(15 marks)
5 Q Ltd is a company incorporated under the Companies Ordinance, 1984 and is not a ‘small company’ for tax
purposes. The following payments were made by Q Ltd during its accounting year ended 30 June 2006:
(1) Rs.100,000 to Mr PlusMinus for providing accounting services. The payment was made under a contract dated
1 June 2006. During the period from 1 July 2005 to 31 May 2006, PlusMinus was not present in Pakistan. He
was serving in Dubai as an employee of the Ministry of Foreign Affairs, Government of Pakistan. (4 marks)
(2) Rs.750,000 to Retailers Pakistan Ltd (RP) for goods purchased from them. RP is operating in Pakistan as a
branch of Retailers Inc, a company incorporated in a country outside Pakistan which has no tax treaty with
Pakistan. (3 marks)
(3) Rs.1,000,000 to Builders Associates (BA) as an advance towards the execution of a civil contract for the
construction of a building. The payment was made at the time of signing the agreement between Q Ltd and BA
and no work on the building had commenced at the time of payment. BA is a firm registered under the
Partnership Act and the control and management of its affairs was situated partly in Pakistan during the tax year
2006. (3 marks)
(4) Rs.400,000 to Mr Property being rent of a building paid in advance for the year ended 30 June 2006. The
Rs.400,000 includes Rs.50,000 for rent of the furniture and fixtures in the building. (2 marks)
(5) £100,000 remitted through regular banking channels to Machinery Suppliers plc (MSP) for the cost of a packing
machine inclusive of sea freight. The title in the machine passed to Q Ltd at the time the machine was handed
over to the ship at the London docks for transportation to Karachi. Dealing in packing machines is the business
of MSP. MSP has neither any presence in Pakistan, nor any activity in Pakistan. (3 marks)
Required:
For each of the payments made by Q Ltd:
(a) briefly explain the nature of the payment in the context of the relevant provisions relating to the deduction
of tax, if any, at the time of the payment; and
(b) identify the transactions where the tax deducted, if any, would be the final tax of the recipients on the income
arising from the transaction.
Note: The allocation of marks is as shown against each of the five scenarios given in the question.
(15 marks)
11 [P.T.O.
6 (a) The following information is provided to you:
(1) GoldFinger Ltd (GL) is a non-resident company incorporated in a country which has no tax treaty with
Pakistan for the avoidance of double taxation.
(2) GL is a private company wholly owned by Diamond Jim and his family members.
(3) GL has been operating in Pakistan since 1 June 2000 as a branch.
(4) GL entered into an agreement on 1 June 2000 with the provincial government of Balochistan under which
GL was given the right to explore and exploit mineral deposits in a specified area of Balochistan for a period
of ten years.
(5) In June 2006 Diamond Jim and his family members sold their entire shareholding in GL to an enterprise in
the United Kingdom and made a gain of £100,000.
(6) Diamond Jim and his family members were non-residents for Pakistan tax purposes in the tax year 2006.
Diamond Jim is of the view that since he and his family were non-residents in the tax year 2006 and the gain
arose from the sale of the shares in a non-resident company (GL), the gain of £100,000 is not chargeable to tax
in Pakistan.
Required:
(i) State, giving reasons, whether or not the view of Diamond Jim is correct. (6 marks)
(ii) Explain whether or not your conclusion would be different and if so how, if the branch in Pakistan of
GoldFinger Ltd was engaged in the distribution of petroleum products and its income was principally
from the distribution of petroleum products. (4 marks)
(b) Under the concept of ‘group relief’, a subsidiary company, owning and managing an industrial undertaking or an
undertaking engaged in providing services can surrender its assessed loss for the tax year, other than brought
forward losses, to its holding company, if such company is a public company listed on a stock exchange in
Pakistan and the holding company owns or acquires 75% or more of the share capital of the subsidiary company.
The loss surrendered by the subsidiary company will be available to the holding company for set off against its
‘Income from business’.
Required:
(i) State whether the concession for the set-off of the loss (surrendered by the subsidiary company) by the
holding company is subject to any conditions and if so, state the conditions. (2 marks)
(ii) State the limitation period within which the holding company should set-off the loss surrendered by the
subsidiary company. (1 mark)
(iii) State what would happen to any part of the loss surrendered by the subsidiary company which cannot
be adjusted by the holding company within the limitation period. (2 marks)
(15 marks)
12
7 You are furnished with the following information by the local agent of Skylines Air (SA).
(1) SA is a company incorporated in Australia. Pakistan does not have an agreement for the avoidance of double
taxation with Australia. SA is in the business of operating aircraft which are owned by it.
(2) SA intends to commence operations in Pakistan which would be limited to the carriage of goods embarked from
Pakistan to destinations outside Pakistan and the carriage of goods imported into Pakistan embarked outside
Pakistan.
(3) The world income of SA is taxed in Australia.
The local agent of SA wants you to prepare a comprehensive note explaining:
(I) The tax provisions under which SA’s income would be chargeable to tax in Pakistan, the basis of computing
the amount chargeable to tax and the tax payable.
(ii) Whether the above basis for the computation of income would change if some of the aircraft used for the
Pakistan operations are chartered by SA.
(iii) The basis to be adopted for the apportionment of the expenditure incurred in deriving SA’s world income
(including Pakistan operations) which can be claimed as a deduction in determining the income chargeable
to tax in Pakistan.
(iv) Whether proportionate tax credit, in respect of the tax paid in Australia by SA on its world income would be
allowed against the tax assessed in Pakistan.
(v) The procedure for filing the return of income and the payment of tax.
Required:
(a) Prepare the note required by the local agent.
Marks will be allocated to the five items as (i) 5 marks; (ii) 1 mark; (iii) 1 mark; (iv) 1 mark and (v) 3 marks.
(11 marks)
(b) Briefly state with reasons whether your answer to item (a) above regarding the taxability of SA’s income in
Pakistan would be different, and if so how:
(i) If SA was incorporated in a country where its income was exempt from tax. (1 mark)
(ii) If SA was incorporated in a country which has a tax treaty with Pakistan and the treaty provides that
the income from the operation of aircraft would not be taxable except in that country. (3 marks)
(15 marks)
13
Answers

Part 2 Examination – Paper 2.3(PKN) December 2006 Answers
Marks
1 (a) A public company for Pakistan tax purposes, inter alia, means a company in which not less than 50%
of the shares are held by a foreign government or a foreign company owned by a foreign government
[s.2(47)(ab)]. 50% of the shares in Jingo Ltd are owned by ABC Ltd, which is a foreign company
wholly owned by the Kingdom of Saudi Arabia (foreign government). Therefore, Jingo Ltd is a public
company for Pakistan tax purposes. 2
(b) Jingo Ltd is a resident company since it is a company incorporated in Pakistan under the Companies
Ordinance, 1984. The test of the place of control and management of the company’s affairs does not
apply to a company incorporated or formed by or under any law in force in Pakistan [s.83]. 1
(c) Jingo Ltd

Tax year 2006
Rupees
Accounting profit 1,960,000
Add: Tax collected by the Collector of Customs (Note 1) 20,000 0·5
Depreciation on leased asset (Note 3) 100,000 1
Donation (Note 4) 350,000 1
Repairs to imported plant (Note 5) 660,000 1
Tax profit on sale of building (Note 6) 1,500,000 2
Cost of furniture written off (Note 7) 250,000 1
Provision for bad debts (Note 8) 300,000 0·5
Recovery against bad debts written off (Note 9) 350,000 1
––––––––––
4,385,507
Less: Accounting profit on sale of building (Note 6) 2,000,000 0·5
Amortisation of intangible (Note 10) 31,507 1
Bad debts written off (Note 11) 250,000 0·5
Initial allowance (Note 12) 1,625,000 1
Depreciation (Note 13) 1,509,000 3·5
Dividend income (net of tax deducted) for separate consideration (Note 14) 285,000 0·5
––––––––––
(5,700,507)
––––––––––
645,000
Loan received in cash (Note 15) 1,000,000 1·5
––––––––––
––––––––––
–––
23
(1) No adjustment is required in the computation of income for the Rs.500,000 transferred to general
reserve since the transfer is after determination of the net profit of Rs.1,960,000. Rs.500,000
transferred to general reserve is an appropriation of the profit.
(2) Any expenditure incurred to terminate a disadvantageous contract or a trading relationship in order to
avoid monetary losses or commercial inconveniences occurring in the future or to remove a difficulty in
the carrying on of the business is a revenue expenditure. The payment of Rs.300,000 paid for the
premature termination of the contract for the purchase of cotton bales to avoid a loss expected to arise,
is a deductible expenditure.
(3) Legal expenses in connection with a loan taken for working capital requirements is an expenditure
incurred wholly and exclusively for the purposes of the business and is a deductible expenditure.
17
Marks
(4) Any expenditures paid or payable under a single account head which, in aggregate exceed Rs.50,000
made other than by a crossed bank cheque or a crossed bank draft are not deductible except
expenditure not exceeding Rs.10,000. One of the other exceptions to this rule is a payment on account
of utilities. Therefore Rs.200,000 for telephone and electricity bills, though paid in cash, is deductible.
(5) The entire amount of the instalment of the lease rent incurred by a taxpayer (lessee), inter alia, to a
scheduled bank (lessor), for the lease of an asset to be used by the taxpayer for the purposes of its
business, is an allowable deduction [s.28(1)(b)]. Rs.700,000 paid as the first instalment of the lease
rental is deductible.
(6) A tax credit is allowable to a person, except a company, on the investment in new shares offered to the
public by a public company listed on a stock exchange in Pakistan provided the person is an original
allottee of the shares or the shares are acquired from the Privatisation Commission (s.62). Jingo Ltd
being a company is not entitled to the tax credit and therefore the investment of Rs.600,000 has no
impact on the computation of income or the tax liability.
(d) Computation of tax liability

Tax on Rs.1,645,000 at 35% 575,750 0·5
Tax credit on donation of Rs.350,000 (Note A) (86,362) 2
–––––––––
489,388
Taxes deducted/collected at source:
Collected by the Collector of Customs 20,000 0·5
Advance tax paid 400,000 0·5
–––––––––
(420,000)
–––––––––
Balance of tax payable 69,388
–––––––––
Tax deducted treated as the final tax (Note 14) 0·5
Dividend income – gross amount Rs.300,000
Tax deducted at 5% – Rs.15,000 –––
4
–––
30
–––
Note (A) Tax credit on specified charitable donations is allowed at the average rate of tax (before allowance
of any tax credit) on the amount of the donation paid or 15% of the taxable income
whichever is lower [s.61(2)].
Tax credit is calculated as under:
Rupees
Tax on taxable income before tax credit (A) 575,750
Taxable income (B) 1,645,000
Lower of amount of donation (Rs.350,000) or 15% of taxable income
(15% of Rs.1,645,000 = Rs.246,750) (C) 246,750
A/B x C
Rs.575,750/Rs.1,645,000 x Rs.246,750 86,362
Note (1) As Jingo Ltd is an industrial undertaking, the tax of Rs.20,000 collected at the customs stage on
the import of the second-hand plant for its own use is not the final tax on the income arising out
of the import [s.148(7)]. Rs.20,000 is available to Jingo Ltd as a tax credit.
Note (2) For tax purposes accounting depreciation is not a deductible charge. Depreciation is allowable on
depreciable assets at the rates prescribed in the Third Schedule.
Note (3) Depreciation on the plant taken on lease is not deductible as the ownership of the plant has not
been transferred by the scheduled bank (lessor) to Jingo Ltd (lessee).
Note (4) The donation of Rs.350,000 to the medical university is not deductible but Jingo Ltd is entitled
to a tax credit calculated under a prescribed formula [s.61(1)(b) and (2)]. The tax credit available
is Rs.86,362. (The calculation of the tax credit has been given in the computation of tax liability).
Note (5) Rs.660,000 spent on repairs to the imported second-hand plant at the time of its purchase to
render the plant serviceable is a capital expenditure. The amount is added to the initial cost of the
plant (Note 13), since the plant could not be commissioned for use without the repairs.
18
Note (6) The accounting profit or loss on the disposal of a depreciable asset is not considered for tax
purposes. It is the tax profit or loss that is chargeable to tax or allowed as a deduction. The tax
profit or loss is the difference between the consideration received and the tax written down value
of the asset [s.22(8)]. In the case of immovable property (other than land) where the consideration
received on the disposal exceeds the cost of the property, the consideration received is treated as
the cost of the property [s.22(13)(d)] for calculating the tax profit or loss.
As the consideration received (Rs.9,000,000) for the building sold is more than the cost of the
building (Rs.5,000,000), Rs.9,000,000 is treated as the cost of the building (deemed cost) for
working out the tax profit/loss on the sale of the building.
The tax profit on the disposal of the building is worked out as under:
Deemed cost 9,000,000
Depreciation allowed [actual cost Rs.5,000,000 less
tax written down value Rs.3,500,000] (1,500,000)
––––––––––
7,500,000
––––––––––
Tax profit 1,500,000
––––––––––
Note (7) The cost of the furniture purchased is capital expenditure and is not deductible. The accounting
policy of the company to treat such expenditure as revenue expenditure cannot override the
provisions of the tax statute. For tax purposes Rs.250,000 is treated as a depreciable asset
(Note 13).
Note (8) Since the provision of Rs.300,000 is not against specific debts, it is not a deductible charge.
Note (9) Rs.350,000 credited to the provision for bad debts account represents a receipt against a debt
which was allowed as a deduction (bad debts) in the tax year 2003 under the head ‘Income from
business’. The receipt of Rs.350,000 in the tax year 2006 is a recoupment of the loss allowed in
the tax year 2003 and is now chargeable to tax as ‘Income from business’ [s.70].
Note (10) Rs.1,250,000 expended on the development of computer software is an intangible for tax
purposes [s.24(11)]. The normal useful life (NUL) of the software has been estimated by the
company to be 12 years. For tax purposes an intangible with a NUL of more than 10 years is to
treated as if it has a NUL of 10 years. The expenditure of Rs.1,250,000 is to be amortised over
ten years proportionate to the number of days the intangible is used in the tax year in deriving
income from business chargeable to tax [s.24(3), (4) and (6)]. As the software has been used for
92 days (31 March 2006 to 30 June 2006) in the tax year 2006, the amount deductible is
worked out as under:
Cost of the intangible Rs.1,250,000
–––––––––––––
–––––––––––––
Normal useful life 10 years
–––––––––––––
–––––––––––––
Amortisation deduction for one whole year Rs.125,000
–––––––––––––
–––––––––––––
For 92 days in a year of 365 days Rs.31,507
–––––––––––––
–––––––––––––
Note (11) Trading debts amounting to Rs.250,000 have been written off in the tax year 2006 against the
provision for bad debts account. Rs.250,000 has been claimed as a deductible charge on the
assumption that the amount written off has previously been included in the income of the
company chargeable to tax and the company has reasonable grounds to believe that the debts are
irrecoverable [s.29].
19
Buildings Computers Initial
Allowance
Cost of workers’ residential quarters 4,000,000
Less: Cost of land (Note 12.1) 1,000,000
––––––––––
3,000,000
––––––––––
Initial allowance at 50% 1,500,000
Cost of computers 250,000
––––––––––
––––––––––
1,625,000
––––––––––
Note (12.1) The cost of land is not to be included in the cost of the building for the purposes of initial
allowance and depreciation.
Plant and Buildings Computer Motor Furniture Total
machinery hardware vehicles depreciation
Written down value 1,800,000 5,000,000 600,000 500,000 400,000
Disposal – (3,500,000) – – – –
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
1,800,000 1,500,000 600,000 500,000 400,000
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Depreciation 270,000 150,000 180,000 75,000 60,000 735,000
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Additions 3,660,000* 3,000,000 250,000 250,000
Initial allowance ** – (1,500,000) (125,000) – –
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Written down value 3,660,000 1,500,000 125,000 250,000
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Depreciation for 12 months 549,000 150,000 37,500 – 37,500 774,000
––––––––––
1,509,000
––––––––––
** Cost of plant Rs.3,000,000 plus Rs.660,000 expended to bring the plant into a serviceable
condition.
** A second-hand plant which has previously been used in Pakistan and furniture, do not qualify
for initial allowance [s.23(5)].
Note (14) Dividends received by a public company (for tax purposes) are taxed at 5% of the gross amount
of the dividends irrespective of whether the dividends are received from a public or private
company.
Rupees
Net amount of dividends received after deduction of tax (Rs.90,000 +
Rs.195,000) 285,000
Gross amount of dividends 300,000
Rs.15,000 being the tax deducted at source is the final tax on the
dividend income.
Note (15) An amount received by a person, inter alia, as a loan from another person (not being a banking
company or a financial institution) which is not paid by a crossed cheque or through a banking
channel from a person holding a national tax number card, is treated as the income of the recipient
chargeable to tax in the year of receipt under the head ‘Income from other sources’ [s.39.(3)]. As
the loan was received in cash Rs.1,000,000 is the income of Jingo Ltd (recipient) chargeable to
tax under the head ‘Income from other sources’.
20
Marks
2 Mr Sultan
Tax year 2006
(a) Computation of income
Salary Rupees
From PQR Ltd
– Compensation for loss of employment (Note 1) 1,000,000 1
– Pension (note 2) 900,000 1·5
From ABC Ltd
Gratis payment (Note 3) 300,000 1·5
Basic salary – nine months (Note 4) 1,800,000 0·5
Cash allowances
– Leave fare assistance (Note 5) 180,000 0·5
– House rent (Note 5.1) 180,000 1·5
– Utilities (Note 5.2) 0 1
– Medical (Note 5.3) 90,000 1
Benefit of concessional loan (Note 7) 20,000 1
Waiver of loan (Note 8) 127,000 0·5
––––––––––
4,720,000
Income from property
Rent chargeable to tax (Note 9) 510,000 2
Deductions
Legal expenses (Note 11) 60,000 1
––––––––––
162,000
––––––––––
348,000
Sub-lease of land (Note 12) 50,000 1
––––––––––
––––––––––
––––––––––
be awarded for the explanations of the treatment of items not included in the computation of income
–––
20
(1) Rs.500,000 received as a gratuity from the PQR Gratuity Fund (Fund) is exempt from tax since the
Fund is approved by the Commissioner in accordance with the rules in Part III of the Sixth Schedule
[clause 13(ii) of Part I of the Second Schedule].
(2) The accumulated balance due and becoming payable to an employee participating in a recognised
provident fund is exempt from tax [clause 23 of Part I of the Second Schedule].
(3) Since only the rent received or receivable by the owner from a tenant is chargeable to tax, the question
of claiming a deduction for vacancy does not arise.
(4) The tax deducted from the gross amount of the prize on the prize bond is the final tax on such income.
The income is not chargeable to tax under any head of income and consequently is not included in the
computation of income.
21
Marks
(b) Computation of tax
Less: Amount of compensation for loss of employment to be taxed separately (Note 1) 1,000,000 1
––––––––––
4,118,000
––––––––––
––––––––––
Tax on Rs.700,000 102,500
––––––––––
1,127,900 0·5
Tax on Rs.1,000,000 (compensation for loss of employment) at 25% (Note 1) 250,000 1
––––––––––
Tax assessed before tax credit 1,377,900
Less: Tax credit on purchase of shares in Cleangas Ltd (Note 13) 40,383 1·5
––––––––––
1,337,517
Tax deducted at source 1,200,000 0·5
––––––––––
Balance payable 137,517
––––––––––
––––––––––
Tax Deducted/Collected as Final Tax Final tax
Prize on prize bond – gross amount Rs.100,000 10,000 0·5
–––
5
–––
25
–––
Note (1) Any amount received, whether paid voluntarily or under an agreement, inter alia, for loss of
employment, is a profit in lieu of or in addition to salary and is taxable as salary income
[12(2)(e)(iii)]. Sultan has elected to have the Rs.1,000,000 received from PQR Ltd
(compensation for loss of employment) taxed at the average rate of tax paid on his total income
for the preceding three years [s.12(6)]. Tax on Rs.1,000,000 is calculated separately at 25%
being the average rate of tax of the preceding three years.
Note (2) Any pension received by a citizen of Pakistan from a former employer is exempt from tax provided
the person does not continue to work for the same employer or an associate of the employer. The
exemption is not dependent upon the age of the person receiving the pension [clause (8) of Part
I of the Second Schedule]. As Sultan, after retiring from PQR Ltd continued to work for ABC Ltd,
which is an associate of PQR Ltd [s.85], the pension is not exempt from tax but is chargeable
to tax as salary income.
Note (3) An amount or perquisite is treated as received by an employee from any employment regardless
of whether the amount or perquisite is paid or provided, inter alia, by a past, future or present
employer [s.12(5)]. All voluntary payments not attributable to any services rendered, depending
upon the goodwill of the employer (past or present) and even if the recipient has no right of action
in the case of non-payment, are chargeable to tax as the recipient’s salary. The gratis payment
of Rs.300,000 is thus chargeable to tax in the hands of Sultan as his salary income.
Note (4) Salary is taxable on a receipt basis. As the salary and allowances of the month are paid on the
first day of the following month, the salary and the cash allowances for June 2006 were paid in
July 2006 [tax year 2007]. The salary and allowances for nine months (September 2005 to May
2006] are thus chargeable to tax in the tax year 2006.
Note (5) All cash allowances (except for certain exemptions for house rent, utilities and medical) are
chargeable to tax if the salary income including the value of perquisites and benefits in a tax year
is Rs.600,000 or more. As Sultan’s salary income including perquisites and benefits exceeds
Rs.599,999 the cash allowances for leave fare, house rent (Note 5.1), utilities (Note 5.2) and
medical (Note 5.3) are chargeable to tax as salary income.
22
Note (5.1) As Sultan’s salary including perquisites and allowances exceeds Rs.599,999, house rent
allowance (HRA) is exempt from tax up to 45% of basic salary subject to a maximum of
Rs.270,000. As 45% of basic salary (45% of Rs.1,800,000) is Rs.810,000 the amount
exempt from tax is limited to Rs.270,000.
Rupees
HRA – (Rs.50,000 x 9 months) 450,000
––––––––
––––––––
Note (5.2) Utilities allowance (Rs.20,000 x 9 months) 180,000
Exempt from tax is 10% of basic salary (10% of Rs.1,800,000) 180,000
––––––––
Chargeable to tax 0
––––––––
Note (5.3) Medical allowance (Rs.30,000 x 9 months) 270,000
Exempt from tax is 10% of basic salary (10% of Rs.1,800,000) 180,000
––––––––
––––––––
Medical allowance is exempt up to 10% of basic salary because Sultan’s terms of employment
do not provide for free medical treatment or hospitalisation or any reimbursement for such
expenses. [Clause (139)(b) of Part I of the Second Schedule]
Note (6) The fair market value (FMV) of the car, taken on lease, at the commencement of the lease period
(1 October 2005) is Rs.4,000,000. As the car is for Sultan’s private (non-business) and
business use, Rs.200,000 being 5% of the FMV of the car is the annual benefit. As the car was
available for Sultan’s private use only from 1 October 2005, the value of the benefit is calculated
for nine months. The amount chargeable to tax is Rs.123,000 made up as under:
Rupees
Annual benefit 200,000
––––––––
––––––––
For nine months (1 October 2005 to 30 June 2006) 150,000
Less: Reimbursed by Sultan (Rs.3,000 x 9 months) 27,000
––––––––
––––––––
––––––––
Note (7) The taxable benefit of a loan given by an employee is computed on the basis of the ‘bench mark’
rate of profit applicable to the tax year. The benchmark rate applicable to the tax year 2006 is
8% per annum on the loan amount [The benchmark rate is given in the preamble to the
examination paper]. As no profit is payable by Sultan on the loan of Rs.500,000, the profit on
the loan chargeable to tax for six months (1 January 2006 to 30 June 2006) is Rs.20,000 (8%
of Rs.500,000 x 6/12) [s.13(7) and (14)].
Note (8) The waiver of an obligation of an employee to repay an amount owing by the employee to the
employer, is a perquisite chargeable to tax in the year the amount is waived. Therefore the waiver
of Rs.127,000 of the loan advanced by ABC Ltd is a taxable perquisite and is chargeable to tax
[s.13(9)].
Note (9) The ‘rent chargeable to tax’ is made up as under:
Rupees
Rent received from Dee 300,000
Rent received from Cee 150,000
Non-adjustable deposit (Note 9.1) 60,000
––––––––
510,000
––––––––
Note (9.1) A non-adjustable deposit received by the owner of a building from a tenant is chargeable to tax
in 10 years in equal proportion including the year in which the deposit is received. However, if
the deposit is refunded to the tenant before the expiry of 10 years, no portion of the deposit is
chargeable to tax in the tax year the deposit is refunded. As the deposit of Rs.600,000 received
from Dee was refunded in the tax year 2006, no portion of this deposit is chargeable to tax.
However one-tenth of the deposit received from Cee is treated as rent chargeable to tax
(1/10 x Rs.600,000) [s.16].
23
Note (10) One-fifth of the rent chargeable to tax (1/5 of Rs.510,000 = Rs.102,000) is allowable as a
statutory deduction in computing income under the head ‘income from property’ irrespective of
whether or not any amount has been spent on repairs. The statutory allowance is calculated on
the ‘rent chargeable to tax’ and not on the rent received. The ‘rent chargeable to tax’ besides the
rent received from Dee and Cee also includes Rs.60,000 which is the taxable one-tenth portion
of the non-adjustable deposit received from Cee [s.17(1)(a)].
Note (11) Not all legal expenses are deductible in computing income under the head ‘income from
property’. Only expenditure for legal services acquired to defend the owner’s title to the property
or any suit connected with the property in a Court is deductible. [s.17(1)(h)]
Note (12) Any rent received from the sub-lease of land or a building is chargeable to tax under the head
‘income from other sources’ [s.39(1)(e)]. Deductions allowable in computing income under this
head include any expenditure paid in deriving income chargeable to tax under that head other
than any expenditure of a capital nature [s.40(1)]. Expenditure is considered to be of a capital
nature for the purposes of s.40, if it has a normal useful life of more than one year [s.40(6)].
Income chargeable to tax from the sub-lease of the land is Rs.50,000 (Rs.150,000 rental
received from B less Rs.100,000 rental paid for the land).
Note (13) A person (other than a company) is allowed a tax credit, inter alia, on the cost of acquiring shares
from the Privatisation Commission of Pakistan. The credit is to be calculated on the lower of (a)
the cost of acquiring the shares, (b) 10% of the person’s taxable income for the year or (c)
Rs.150,000.
The amount of the investment on which the tax credit is to be calculated is Rs.150,000 since
both the cost of acquiring the shares (Rs.600,000) and 10% of Sultan’s taxable income
(Rs.511,800) are more than Rs.150,000.
The calculation of the tax credit [s.62(1) and (2)] on the investment in the acquisition of the
shares in Cleangas Ltd is calculated as under:
Rupees
Tax assessed before allowance of tax credit (A) 1,377,900
Taxable income for the tax year (B) 5,118,000
Amount of investment on which tax credit is to be calculated (C) 150,000
Tax credit allowed
A/B x C
Rs.1,377,900/Rs.5,118,000 x Rs.150,000 40,383
24
Marks
3 (a) Cinderella Ltd Rupees
Calculation of input tax
On purchase of raw material used exclusively for making taxable
supplies (Rs.1,350,000 x 15/115) 176,087 0·5
On purchases of raw materials used for making both taxable and
exempt supplies 2,285,000 0·5
Less: Payment of a transaction in cash 65,500 0·5
––––––––––
2,219,500
––––––––––
Input tax (2,219,500 x 15/
115) 289,500 0·5
––––––––––
Apportionment of input tax (Note) 258,562 3·5
On purchase of raw material and spare parts for making zero
rated supplies (Rs.1,600,000 x 15/115) 208,696 0·5
On payment to courier service company (Rs.365,000 x 15/115) 47,609 0·5
––––––––––
Admissible amount of input tax 690,954
––––––––––
Calculation of output tax
On sale of taxable goods – (Rs.6,850,000 at 15%) 1,027,500 0·5
On sale of zero-rated goods – (Rs.2,220,000 at 0%) – 0·5
On advance payment received – (Rs.750,000 at 15%) 112,500 1
––––––––––
1,140,000
Less: Credit note issued for return of supply (Rs.694,000 at 15%) –
[s.9 read with Chapter III of the Sales Tax Rules 2005] 104,100 1
––––––––––
1,035,900
––––––––––
Sales Tax Payable – May 2006
Output tax 1,035,900
Input tax 690,954
––––––––––
344,946 0·5
––––––––––
––––––––––
Note:
Apportionment of input tax of Rs.289,500
Taxable supplies/(taxable supplies + exempt supplies) x input tax
Rs.9,820,000 (A)/[9,820,000 + 1,175,000 (B)] x 289,500 258,562
(A) Rs.9,820,000 is made up as under:
Sale of taxable goods 6,850,000
Sale of zero rated goods 2,220,000
Advance received for future supplies 750,000
––––––––––––
Rs.9,820,000
––––––––––––
(B) Rs.1,175,000 is the sale of exempt goods
(b) (i) To claim input tax for a taxable supply, the registered person should hold a tax invoice showing his
name and registration number in respect of the supply made. 1
(ii) To claim input tax for goods imported into Pakistan, the registered person should hold a bill of entry or a
goods declaration showing his name and registration number. The bill of entry or the goods declaration
should be duty cleared by the customs authorities. 1
(iii) To claim input tax for goods purchased in an auction, the registered person should hold the treasury
receipt showing his name, his registration number and the amount of sales tax paid. 1
(c) The registered person can claim the input tax for goods purchased in the month of August 2005 by filing a
revised sales tax return for August 2005 provided he specifies the reasons for such delayed input tax
adjustment in the revised sales tax return. 2
–––
15
–––
25
Marks
4 (1) The option to acquire shares in Airaids plc (AAP) under an employee share scheme.
Jamshed’s contention of offering to tax Rs.50,000 (£500) is not correct since the Income Tax Ordinance
specifically provides that the value of a right or option to acquire shares under an employee share scheme
is not chargeable to tax. [s.14(1)]. 2
(2) Sale of the option to acquire 500 shares in AAP.
Jamshed is correct in contending that Rs.100,000 (the consideration received Rs.100,000 less his cost of
acquisition Rs.0) is chargeable to tax. However the amount is chargeable to tax under the head ‘Salary’
[s.14(5)] and not as capital gains as erroneously contended by Jamshed. 2
(3) Gift of 300 shares in XYZ plc.
Jamshed’s contention is not correct since under the non-recognition rules relied upon by him, no gain or loss
is taken to have arisen on the disposal of an asset, inter alia, by reason of a gift, provided the person
acquiring the gift is not a non-resident person for Pakistan tax purposes at the time of the acquisition of the
asset [s.79(1)(c) read with s.79(2)].
When Sorab acquired the shares on 31 May 2006 (his tax year 2006), he was a non-resident individual
for Pakistan tax purposes in the tax year 2006 since he was neither present in Pakistan for at least
182 days in the tax year 2006 [1 July 2005 to 27 December 2005 = 180 days] nor was he an
employee of the Federal Government or a provincial government posted abroad during that tax year [s.82].
The non-recognition rules under s.79 are therefore not applicable to the transfer of 300 shares in XYZ plc to
Sorab. The profit on the disposal of the 300 shares is calculated as under: 2
Rupees
Consideration (Note 1) 600,000 1
Cost (Note 2) 450,000 1·5
––––––––
Profit on disposal 150,000
––––––––
As the shares were held for less than a year, the entire profit of Rs.150,000 is chargeable to tax as
Jamshed’s income for the tax year 2006 under the income head of ‘capital gain’. 0·5
Note 1
As the disposal of the shares was by way of a gift, the fair market value (FMV) of the shares at the time
of its disposal is treated as the consideration received [s.77(1)]. The price of £20 per share quoted on the
stock exchange is taken as the FMV [300 x £20 = £6,000 (Rs.600,000)].
Note 2
The cost of the 300 shares acquired by Jamshed is the amount paid for the shares plus the amount
charged to tax as the salary income of Jamshed on acquiring the shares. [s.14(4)].
Rupees
Amount paid for the shares – £10 x 300 =£3,000 (£1 = Rs.100). 300,000
Amount charged to tax as salary income in the tax year 2005.
300 shares were acquired at the exercise price of £10 per share when the
FMV of one share was £15 (i.e. the price quoted on the stock exchange).
The difference of £5 per share equal to Rs.150,000 (£5 x 300 = £1,500 i.e.
Rs.150,000) is the taxable benefit which would have been taxed under the
head ‘salary’ in the tax year 2005. 150,000
––––––––
450,000
––––––––
(4) Moveable assets held for personal use.
Moveable assets held for personal use (with certain exceptions) are excluded from the definition of a
‘capital asset’. Since capital gains can only arise on the disposal of a capital asset, moveable assets held
for personal use (which are not in the list of the exceptions) are outside the ambit of capital gains
(s.37(5)(d) read with s.38(5)]. Jewellery and antiques are included in the aforesaid exceptions and any gain
on their disposal is chargeable to tax under the head of ‘capital gains’. However any loss on the disposal
of jewellery or antiques is not recognised as a loss.
Jamshed’s contention is not correct since:
– the gain of Rs.600,000 on the disposal of the jewellery is chargeable to tax as ‘capital gains’ and 1
– the loss of Rs.100,000 on the disposal of the antique vase is not deductible as a capital loss. 1
(5) Shares in Zee Ltd.
A loss on the disposal of a capital asset is not deductible as a capital loss where a gain on the disposal of
such an asset is not chargeable to tax [s.38(2)].
Zee Ltd being a public company for tax purposes any gain made on the sale of its shares is exempt from
tax (Clause 110 of Part I of the Second Schedule). Therefore the loss of Rs.50,000 on the sale of the shares
in Zee Ltd is not deductible as a capital loss. 2
26
Marks
(6) Unadjusted loss
A capital loss cannot be carried forward for more than six years immediately succeeding the tax year in
which the loss was incurred [s.59(2)]. The capital loss sustained in the accounting year ended
30 June 1999 lapsed on 30 June 2005 (tax year 2005). The unadjusted capital loss of Rs.40,000 is
therefore neither available to be set-off against capital gains for the tax year 2006 nor to be carried forward. 2
–––
15
–––
5 (1) PlusMinus is a resident individual since in the tax year 2006 (accounting year ended 30 June 2006), he
was an employee of the Federal Government of Pakistan and was posted outside Pakistan [s.82(c)].
The payment of Rs.100,000 made to PlusMinus, a resident individual, was for the provision of services.
Every prescribed person making a payment to a resident person for the provision of services is required to
deduct tax at the time of making the payment [s.153(1)(b)].
A ‘prescribed person’ for the purpose of deduction of tax from payments for the sale of goods, for the
rendering of or the provision of services, or on the execution of a contract inter alia includes a company
other than a ‘small company’ [s.153(9)(b)].
As Q Ltd is not a small company, it is a prescribed person. As the payment was made to a resident
person for the provision of services, Q Ltd was required to deduct tax at the time of the payment of
Rs.100,000.
The tax deducted from a payment to a resident person for the sale of goods or on the execution of a
contract shall be the final tax on the income of the resident person [s.153(6)]. As the payment
made was for the provision of services the tax deducted is not the final tax of PlusMinus on the
income arising from the transaction but would be allowable to him as a tax credit. 4
(2) Retailers Pakistan Ltd (RP)
A prescribed person making a payment to a permanent establishment in Pakistan of a non-resident
person for the sale of goods is required to deduct tax at the time of making the payment [s.153(1)(a)].
RP operating in Pakistan as a branch of the non-resident Retailers Inc, would be construed to be a
permanent establishment in Pakistan of a non-resident person. As the payment of Rs.750,000 to RP
was for the sale of goods, Q Ltd as a prescribed person [for reasons given in (1) above] was required
to deduct tax at the time of payment. The tax deducted from the payment of Rs.750,000 is not the
final tax of the recipient on the income arising from the transaction since the payment was not made to
a resident person. The tax deducted would be allowable as a tax credit. 3
(3) Builders Associates (BA)
A prescribed person making a payment to a resident person on the execution of a contract is required
to deduct tax at the time of payment [s.153(1)(c)].
BA being a partnership firm is an association of person (AOP) [s.80(2)(a)]. The AOP is a resident
AOP. An AOP shall be resident if the control and management of its affairs is situated wholly or partly in
Pakistan during the relevant tax year [s.84]. The payment of Rs.1,000,000 made by Q Ltd was to a
resident person on the execution of a contract and Q Ltd as a prescribed person (for reasons given in
(1) above) was therefore required to deduct tax at the time of payment. The fact that no work had
commenced on the building is immaterial since tax is to be deducted from all payments made
including payments by way of an advance.
The tax deducted from a resident person on the execution of a contract is the final tax of the resident
person [s.153(6)]. The tax deducted from the payment of Rs.1,000,000 is the final tax of BA on the
income arising from the transaction since BA is a resident person and the payment was made on the
execution of a contract. 3
(4) Mr Property
A prescribed person making a payment on account of rent of immovable property is required to
deduct tax from the amount of rent payable provided the annual rent exceeds Rs.300,000. Rent of
immovable property for the purpose of deduction of tax includes rent payable in advance and also any
rent for furniture, fittings and services relating to the property [s.155(1) and (2)].
A prescribed person for the purpose of deduction of tax from a payment of rent of immovable
property includes a company. As the annual rent (including the rent for furniture and fixtures) exceeds
Rs.300,000, Q Ltd as a prescribed person was required to deduct tax.
The tax deducted from the payment of Rs.400,000 is not the final tax on the rental income received
by Mr Property but would be allowable to him as a tax credit. 2
27
Marks
(5) Machinery Suppliers plc (MSP)
Any person paying an amount to a non-resident is required to deduct tax from the amount paid
except, inter alia, when the non-resident is not chargeable to tax in respect of the amount paid.
The business income of a non-resident is chargeable to tax if the income is a Pakistan-source income.
MSP is a non-resident company. The business income of MSP derived from the sale of the packing
machine to Q Ltd is not a Pakistan-source income since the sale of the machine was completed outside
Pakistan when the title in the machine passed to Q Ltd in London (outside Pakistan). The payment
of £100,000 is therefore not chargeable to tax in Pakistan and Q Ltd was not required to deduct tax
from the payment. 3
–––
15
–––
6 (a) (i) Diamond Jim and his family members being non-residents for Pakistan tax purposes in the tax
year 2006 are chargeable to tax only on income which is a Pakistan-source income [s.11(6)].
One of the sources of income which is considered to be a Pakistan-source income is any gain
from the alienation of any share in a company, the assets of which consist wholly or principally,
directly or indirectly of immovable property in Pakistan or of the right to explore for or exploit
natural resources in Pakistan [s.101(10) – geographical source of income]. The chargeability to
tax is on the gain on the disposal of shares in a particular type of a company – a company whose
principal assets are those as specified above.
The income of £100,000 has arisen from the disposal of the shares in GoldFinger Ltd (GL) which
is a non-resident company operating in Pakistan as a branch. Since the principal asset of GL in
Pakistan is the right to explore and exploit mineral deposits in an area of Balochistan, the gain of
£100,000 made by Diamond Jim and his family is their Pakistan-source income and therefore
chargeable to tax. Therefore the contention of Diamond Jim that because GL is a non-resident
company, the gain of £100,000 is not chargeable to tax in Pakistan is erroneous. 6
(ii) Under the provisions of the geographical source of income any gain arising from the disposal of
shares in a resident company shall be Pakistan-source income [s.101(13)]. In other words,
normally a gain on the disposal of shares in a non-resident company would not be a
Pakistan-source income except where the assets of the company consist principally of immovable
property or of the right to explore for or exploit natural resources in Pakistan [s.101(10)].
If GL was engaged in the business of the distribution of petroleum products and its income was
principally from the distribution of petroleum products, its assets wholly or principally, directly or
indirectly would not consist of immovable property or the right to explore for or exploit natural
resources in Pakistan. GL being a non-resident company, any gain from the disposal of its
shares would be a foreign-source income for Diamond Jim and his family members and therefore
the gain would not be chargeable to tax in Pakistan. 4
(b) (i) The conditions to be fulfiled to enable the holding company to set-off the loss surrendered by
the subsidiary company are:
– the ownership to the extent of 75% or more in the subsidiary company continues for
a period of five years; and 1
– the subsidiary company continues the same business during the said five years. [s.59B(2)] 1
(ii) The loss surrendered by the subsidiary company can be claimed by the holding company for
set off against its income from ‘Income from business’ in the tax year of the surrender of the loss
and the following two years. [s.59B(2)] 1
(iii) If the loss surrendered cannot be adjusted by the holding company within the limitation period, the
loss will revert back to the subsidiary company who would then carry forward the loss in
accordance with the provisions of the law for set off of business losses. [s.59B(4)] 2
–––
15
–––
28
Marks
7 (a) The note required by the local agent
(i) The mode and manner of the tax assessment of air transport business carried on by a non-resident
is not on the net-income basis. A fixed rate of 3% is imposed on the aggregate of the freight
received or receivable by the non-resident from the carriage of goods, passengers, livestock or mail
depending upon whether the shipment is from an airport in Pakistan (embarked in Pakistan) or an
airport outside Pakistan (embarked outside Pakistan).
SA would be a non-resident for Pakistan tax purposes. A fixed tax of 3% would be imposed on the
aggregate of the following:
– For goods embarked from an airport in Pakistan, the gross amount received or receivable
by SA for the carriage of goods irrespective of whether the amount is received or receivable
in Pakistan or outside Pakistan.
– For goods embarked from an airport outside Pakistan, the gross amount received or receivable
by SA for the carriage of goods only if the said amount is received or receivable in Pakistan. [s.7]
The tax imposed at 3% would be the final tax of SA on the aforesaid aggregate amounts received
or receivable. The aggregate amounts are hereinafter referred to as the ‘Amount’. 5
(ii) The above basis of computing income would not change if the aircraft used for the carriage of goods
were chartered by SA. 1
(iii)/(iv) As the tax of 3% is the final tax on the Amount, the tax statute provides that no deduction shall
be allowable for any expenditure incurred in deriving the Amount [s.8(b)] and the tax payable on
the Amount shall not be reduced by any tax credit [s.8(d)].
In view of the above

– the question of determining the allocation of the expenditure incurred by SA which is
attributable to the Pakistan operations does not arise since such expenditure cannot be
claimed against the Amount which is chargeable to tax; and 1
– no credit would be allowed for the tax paid in Australia against the Pakistan tax payable 1
(v) SA or the local agent authorised by SA would have to furnish the Commissioner with a return
for each quarter ending on 30 September, 31 December, 31 March and 30 June showing the
Amount [specified in item (i) above]. The return has to be furnished within 45 days from the
last day of each quarter. SA or the agent has also to furnish any particulars, accounts or
documents which may be required by the Commissioner. The Commissioner, after being satisfied
that the return furnished is complete in all respects, would determine the amount of the tax payable
for the quarter and notify SA in writing of the tax due which is to be paid within the time specified
in the notice. In practice, tax would be calculated by SA and paid at the time of furnishing the
return for each quarter. [s.144] 3
(b) (i) If SA was incorporated in a country where its world income was exempt from tax, SA would still
be chargeable to tax in Pakistan despite its tax exempt status in the country of its incorporation.
As a non-resident, SA is chargeable to tax on its income derived in Pakistan. 1
(ii) Under the Income Tax Ordinance, 2001 (Ordinance) the Federal Government can enter into an
agreement with the government of any other country (foreign government) for the avoidance of
double taxation, with respect to taxes on income imposed under this Ordinance [s.107].
The provisions of a tax treaty on a particular matter would override the provisions of the local
legislation on a similar matter.
A tax treaty can, inter alia, provide for relief from the tax payable under the Ordinance.
Accordingly if SA was incorporated in a country which has a tax treaty with Pakistan and the
treaty provided that the income from the operation of aircraft would be taxable only in that country,
the income from SA arising from the operation of its aircraft in Pakistan would not be chargeable to
tax in Pakistan. 3
–––
15
–––
29
Paper 2.3(PKN)
Business Taxation
(Pakistan)
PART 2
QUESTION PAPER

answered

hall

Up to Rs. 150,000* 0%
Rs. 150,001 – Rs. 200,000 0·25%
Rs. 200,001 – Rs. 250,000 0·50%
Rs. 250,001 – Rs. 300,000 0·75%
Rs. 300,001 – Rs. 350,000 1·50%
Rs. 350,001 – Rs. 400,000 2·50%
Rs. 400,001 – Rs. 500,000 3·50%
Rs. 500,001 – Rs. 600,000 4·50%
Rs. 600,001 – Rs. 700,000 6·00%
Rs. 700,001 – Rs. 850,000 7·50%
Rs. 850,001 – Rs. 950,000 9·00%
Rs. 950,001 – Rs. 1,050,000 10·00%
Rs. 1,050,001 – Rs. 1,200,000 11·00%
Rs. 1,200,001 – Rs. 1,500,000 12·50%
Rs. 1,500,001 – Rs. 1,700,000 14·00%
Rs. 1,700,001 – Rs. 2,000,000 15·00%
Rs. 2,000,001 – Rs. 3,150,000 16·00%
Rs. 3,150,001 – Rs. 3,700,000 17·50%
Rs. 3,700,001 – Rs. 4,450,000 18·50%
Rs. 4,450,001 – Rs. 8,400,000 19·00%
Rs. 8,400,001 and over 20·00%
* For a woman taxpayer where salary income exceeds 50% of taxable income for the tax year 2007, no tax is chargeable
if taxable income does not exceed Rs. 200,000

Tax year Banking Public company other Private company other Small
company than a banking company than a banking company company
2006 38% 35% 37% 20%
2007 35% 35% 35% 20%

For the rendering of or providing of services 6% of gross amount payable

Received by a public company or an insurance company or
any other resident company 5% of the gross amount of the dividend
In any other case 10% of the gross amount of the dividend
2
Depreciation
Plant and machinery (not otherwise specified) 15% ⎬ of the tax written down value
Motor vehicles (all types) 15% ⎪
Computer hardware 30% ⎭
F. Benchmark rate
For determining the value of the perquisite on loans given to employees, the benchmark rate for the tax year 2007 is 9%
per annum of the loan amount
3 [P.T.O.
1 (a) A-Bee-Cee plc, a public company incorporated under the law of the United Kingdom relating to the incorporation
of companies, has been operating in Pakistan for over 50 years. The control and management of the Pakistan
branch for the accounting year ended 31 December 2006 was situated wholly outside Pakistan.
Required:
Briefly state, with reasons:
(i) Whether A-Bee-Cee plc will be assessed as a company for Pakistan tax purposes for the relevant tax
year. (2 marks)
(ii) Whether you consider A-Bee-Cee plc to be a resident or a non-resident for Pakistan tax purposes for the
relevant tax year. (2 marks)
(b) PQR Ltd is an industrial undertaking engaged in the manufacture of fertilisers. The following information is
furnished to you for the year ended 31 December 2006.
(1) PQR Ltd is a private company for Pakistan tax purposes, but is a public company under the Companies
Ordinance, 1984.
(2) The accounting profit for the year ended 31 December 2006, after transferring Rs. 500,000 to a provision
for taxation was Rs. 10,600,000.
(3) Deductions claimed in the accounts include: Rupees
(i) Accounting depreciation on company owned assets. 1,360,000
(ii) Expenditure on the provision of perquisites and allowances to the chief
financial officer in excess of 50% of his basic salary. 350,000
(iii) Amount collected by the Collector of Customs for an erroneous declaration
in an import document. 150,000
(iv) Tax collected by the Collector of Customs at the customs stage on the import
of fertiliser in finished form for sale. 600,000
(v) Net loss (adjusted for tax purposes) on the sale of the imported fertiliser. 300,000
(vi) Accounting depreciation on an item of plant taken on lease from an approved
leasing company (lessor). The ownership of the plant is to be transferred to
PQR Ltd (lessee) on payment of the final lease instalment due on
31 March 2007. 230,000
(vii) Legal expenses incurred in connection with an infringement of a trade mark
of a wholly owned subsidiary of PQR Ltd. 400,000
(viii) Payment to the Workers’ Participation Fund under the provisions of the
Companies Profit (Workers’ Participation) Act, 1968. 850,000
(i) Accounting profit on the sale of a motor car. 90,000
(ii) Recoveries against debts written off in prior years and allowed as a tax
deduction under the head ‘Income from business’. 310,000
(iii) Share of profit received from an association of persons (AOP) in which
PQR Ltd is a member. 1,250,000
The taxable income of the AOP was Rs. 5,000,000 and the tax assessed
on the AOP was Rs. 1,250,000.
4
(5) Fixed assets
(i) The tax written down values on 1 January 2006 were:
Buildings 8,200,000
Computer hardware 2,500,000
Furniture 1,250,000
(ii) An item of second-hand plant (not previously used in Pakistan) was
imported at a cost of Rs. 5,500,000 and commissioned for use on
15 December 2006. Customs duty thereon of Rs. 1,500,000 has been
charged as an expenditure in the profit and loss account.
(iii) New computers were purchased on 1 December 2006 for
Rs. 5,000,000 and commissioned for use on 1 January 2007.
(iv) During the year a motor car (cost Rs. 1,200,000 and tax written down value
Rs. 650,000) was sold for Rs. 900,000. The cost of the car had been
restricted to Rs. 1,000,000 for the purpose of claiming tax depreciation.
(v) On 30 November 2006, a new motor car was purchased for Rs. 2,000,000.
(i) Rs. 600,000 payable against a loan taken in the accounting year ended
31 December 2002 from an associated company.
(ii) Rs. 300,000 received in cash from a shareholder as a deposit for the issuance
of shares in the company.
(7) Advance tax paid was Rs. 1,500,000.
Required:
(i) Compute the total income and the taxable income of PQR Ltd for the relevant tax year under the
appropriate heads of income. Your answer should give clear reasons/explanations for the inclusion or
exclusion of each of the items listed above. The reasons/explanations for the items not included in the
computation of income should be shown separately. (23 marks)
(ii) Calculate the tax payable by/refundable to PQR Ltd for the relevant tax year. (3 marks)
(30 marks)
5 [P.T.O.
Pestonji has approached you to compute his taxable income and tax payable for his accounting year ended 30 June
2007 and the following information is furnished to you.
(1) Since 1 January 2004. Pestonji was working in the United Kingdom as the Chief Financial Officer of Hotel
Splendid plc (HSP). He retired from HSP on 25 September 2006 and immediately returned to Pakistan. His
taxable income from HSP for the period 1 July 2006 to 25 September 2006 was £15,000 on which tax of
£2,000 was deducted by HSP and paid to the UK revenue authority.
(2) Pestonji had participated in the HSP employee share scheme (Scheme):
– Under the Scheme, a participant has a free right to transfer the shares acquired under the Scheme only after
a minimum holding period of three years.
– On 1 July 2006, the custodian of the Scheme granted Pestonji the right to acquire 1,000 shares in HSP at
the exercise price of £10 per share.
– There was no payment to be made for the right to acquire these 1,000 shares in HSP. The value of one right
was estimated by the custodian to be £2.
– On 1 July 2006, Pestonji sold the rights for 500 shares for Rs. 100,000.
– On 1 September 2006, Pestonji exercised his remaining rights to purchase 500 shares in HSP at the
exercise price of £10 per share. The market price of one share on that date was £15. The 500 shares
purchased were in Pestonji’s possession on 30 June 2007.
(3) On returning to Pakistan, Pestonji, as a self-employed individual, commenced business on 1 October 2006 as a
management consultant to Oriental Hotels Pakistan Ltd (OHPL) on a fixed fee of Rs. 400,000 per month. At the
time of payment of the fee, tax at the relevant rate was deducted by OHPL.
On 30 November 2006, XYZ Bank required Pestonji to repay a loan of Rs. 1,000,000 taken by him for his
business. OHPL offered to pay XYZ Bank the Rs. 1,000,000 if Pestonji agreed to join OHPL as its Finance
Director on 1 January 2007. On Pestonji’s agreement to the offer of employment, OHPL, prior to the issuance
of the letter of employment to Pestonji, paid Rs. 1,000,000 to XYZ Bank in discharge of the loan taken by
Pestonji.
Pestonji closed his business on 31 December 2006. The summarised income statement, prepared by him, for
the period 1 October 2006 to 31 December 2006 was as under:
Rupees
Fees for services rendered (net of tax deducted at source) 1,128,000
Less: Expenditure and depreciation adjusted for tax purposes 1,160,000
––––––––––
Net business loss 32,000
––––––––––
––––––––––
(4) Pestonji received Rs. 600,000 as consideration for vacating the premises occupied by him on rent for his
business.
(5) Pestonji’s terms of employment with OHPL provided for the following from 1 January 2007.
(i) A basic salary of Rs. 500,000 per month.
(ii) Monthly cash allowances of:
– Rs. 50,000 for utilities
– Rs. 60,000 for medical
– 45% of basic salary for housing
(iii) Two company maintained cars. A new car was purchased for Rs. 2,000,000 on 1 January 2007 for
Pestonji’s private and business use and another car was leased by the company which was exclusively for
his business use. The fair market value of the leased vehicle at the commencement of the lease was Rs.
2,500,000.
(iv) A monthly payment of Rs. 30,000 to an approved pension fund to provide for Pestonji’s retirement.
6
(v) The terms of employment do not provide for free medical treatment or hospitalisation or any reimbursement
of such expenses.
(6) On 1 January 2007, Pestonji took a loan of Rs. 500,000 repayable in ten equal instalments, from OHPL. Profit
on the loan is payable at the rate of 9% per annum.
(7) On 30 June 2007, OHPL waived Rs. 250,000 of the loan amount due from Pestonji.
(8) Pestonji was reimbursed Rs. 175,000 for hospitalisation charges of his wife.
(9) Due to disturbances in the city the salary and cash allowances for the month of June 2007 of all employees were
disbursed by OHPL on 2 July 2007.
(10) Zakat paid was Rs. 10,000.
(11) Tax deducted at source by OHPL on Pestonji’s salary income was Rs. 700,000
Pestonji also informs you that:
(i) On 30 June 2006, he had acquired 1,000 shares in ABC Ltd for Rs. 500,000 from the Privatization Commission
of Pakistan and had claimed a tax credit thereon of Rs. 50,500.
(ii) On 1 June 2007, he sold the 1,000 shares in ABC Ltd for Rs. 500,000 and from the proceeds acquired 1,000
shares in FGH Ltd for Rs. 500,000 from the Privatization Commission of Pakistan.
(iii) The following amounts were received by him during the year ended 30 June 2007 (net of tax deducted at source
where applicable).
– Dividend from a public company Rs. 90,000
– Dividend from a private company Rs. 9,000
The rate of exchange is to be taken as £1 = Rs. 100.
Required:
(a) Compute the taxable income of Mr Pestonji under the relevant heads of income for the relevant tax year
giving clear reasons/explanations for the inclusion or exclusion of each of the items listed above. The
reasons/explanations for the items not included in the computation of income and tax payable should be
shown separately. (18 marks)
(b) Calculate the tax payable by/refundable to Mr Pestonji for the relevant tax year. (4 marks)
(c) Identify and briefly comment on the taxes deducted at source which are considered to be the final tax on the
income arising from the transactions which have suffered deduction of tax at source. (3 marks)
(25 marks)
7 [P.T.O.
Section B – THREE questions ONLY to be attempted
3 (a) Section 7A of the Sales Tax Act, 1990 empowers the Federal Government to levy and collect sales tax on specified
goods on a minimum value addition which is to be declared by certain persons or categories of person for the
supply of goods. Under the Sales Tax Special Procedures Rules, 2006, a commercial importer is required to pay
sales tax on the supply of imported goods (other than those specified in the Third Schedule) on a value addition
of not less than ten percent on the value of goods declared for customs purposes.
Hamza and Hisham is a partnership firm registered as a commercial importer with the sales tax authorities in
Pakistan. During the month of March 2007 the firm imported a large consignment of DVD players. DVD players
are not included in the Third Schedule. The landed value of the DVD players amounted to Rs. 50,000,000 on
which customs duty and other taxes amounting to Rs. 2,500,000 was payable.
Required:
(i) Calculate the amount of value addition on the goods imported by Hamza and Hisham. (2 marks)
(ii) Calculate the total sales tax payable on these imported goods. (2 marks)
(iii) State when the sales tax on these imported goods must be paid. (1 mark)
(b) ABC is registered as a retailer with the sales tax authorities.
Required:
(i) State the circumstances under which ABC can apply for de-registration. (2 marks)
(ii) State the circumstances under which the registration of ABC can be suspended by the Collector.
(3 marks)
(c) Sales tax is charged on the value of the taxable supplies made by a registered person in the course of any taxable
activity carried on by that person.
Required:
State how the value of supply would be determined:
– where the consideration for a supply is partly in kind and partly in money, and (2 marks)
– where goods are provided at a discounted price (trade discount). (3 marks)
(15 marks)
8
Question 4 begins on page 10.
9 [P.T.O.
4 (a) Secure Securities Ltd (SSL) is in the business of stocks, shares and finance brokers. SSL closes its accounts on
31 December each year. At the close of business on 31 December 2005, SSL held 50,000 shares in Chemicals
Ltd as its stock-in-trade. These 50,000 shares had been purchased on 1 July 2002 at Rs. 10 per share.
Chemicals Ltd is a public company for tax purposes.
On 31 December 2006, SSL disposed of the 50,000 shares in Chemicals Ltd resulting in a gain of
Rs. 5,000,000. SSL’s chief accountant is of the view that the gain of Rs. 5,000,000 would be income
chargeable under the head ‘Income from business’ since:
– the 50,000 shares in Chemicals Ltd ever since their acquisition on 1 July 2002 have always been shown
as SSL’s stock-in-trade in the accounts furnished to the tax authorities; and
– any income on the sale of stock-in-trade of a business is chargeable to tax under the head ‘Income from
business’.
Required:
(i) State giving reasons whether or not the view of the chief accountant is correct. (4 marks)
(ii) State how the gain of Rs. 5,000,000 on the disposal of the shares in Chemicals Ltd would be shown in
the return of income of Secure Securities Ltd for the tax year 2007. (2 marks)
(b) The following information is furnished to you by Mr Hamid on 1 June 2007.

(1) Hamid became a member of the Karachi Stock Exchange (KSE) on 1 July 2006 by purchasing one share
in Karachi Stock Exchange (Guarantee) Ltd (KSEG), from Mr Ali, for Rs. 2,000,000. He also acquired from
Ali the occupancy rights of a room in the stock exchange for Rs. 300,000.
(2) On 31 May 2007, Hamid, having reached the age of 61 years, decided to retire from his business as a
stock and shares broker. On 1 June 2007, Hamid gave up his membership rights in KSE by transferring to
ABC (Private) Ltd:
– the one share in KSEG for Rs. 4,000,000; and
– the occupancy rights of the room in the KSE for Rs. 700,000.
Required:
Explain the tax implications for Mr Hamid in the tax year 2007 in respect of the disposal of the one share
in Karachi Stock Exchange (Guarantee) Ltd and the transfer of the occupancy rights of the room in the stock
exchange. (3 marks)
10
(c) For this part of the question, you should assume that today’s date is 31 July 2007.
Mr Patel is preparing his return of income for his accounting year ended 30 June 2007 and furnishes you with
the following details:
(1) On 1 June 2007, Patel sold 5,000 shares in XYZ (Private) Ltd for Rs. 100,000. The shares had become
his property on 1 July 2006 on the distribution of assets on the liquidation of LMN Ltd in which company
he was a shareholder.
(2) On 1 June 2007, Patel transferred 10,000 shares in Q (Private) Ltd to his wife Seema under an agreement
to live apart. Seema is an employee of the Ministry of Foreign Affairs, Government of Pakistan and was
posted to South Africa during the tax year 2007. In the tax year 2007 Seema was present in Pakistan for
30 days when she was on leave from her foreign posting.
The 10,000 shares in Q (Private) Ltd were purchased by Patel in the tax year 2004 for Rs. 100,000. The
fair market value of the 10,000 shares on 1 June 2007, based on a valuation done by the auditors of Q
(Private) Ltd, was Rs. 200,000.
Patel is of the view that:
(i) The Rs. 100,000 representing the sale consideration of the 5,000 shares in XYZ (Private) Ltd is his income
chargeable to tax under the head ‘Capital gains’ since he had not paid anything to acquire the shares and
the shares were not held for more than one year since their acquisition.
(ii) The shares transferred to his wife Seema under an agreement to live apart would be treated as a disposal
of a capital asset and Rs. 100,000 representing the difference between the fair market value of the shares
(Rs. 200,000) and the cost (Rs. 100,000) would be chargeable to tax under the head ‘Capital gains’.
Required:
State, giving reasons, whether or not you are in agreement with each of the two views expressed by Mr Patel.
If you are not in agreement with any of his views, explain the correct treatment to be adopted for the
determination of the income, if any, chargeable under the correct head(s) of income for the tax year 2007.
(6 marks)
(15 marks)
11 [P.T.O.
5 For the purposes of this question you should assume that today’s date is 31 July 2007.
(a) The following information is furnished to you by Mr Kapadia, a resident individual.
(1) Kapadia is the owner of an apartment in a residential building. On 1 July 2006 he entered into a contract
with Mr Usman for the sale of the apartment for Rs. 1,000,000. Under the terms of the contract Usman
paid Kapadia Rs. 100,000 as a deposit and the balance amount of Rs. 900,000 was payable on 31 July
2006 failing which the contract for sale would be terminated and the deposit amount of Rs. 100,000 would
be forfeited. Usman failed to make payment of the Rs. 900,000 on 31 July 2006 and the deposit amount
was duly forfeited.
(2) On 1 August 2006, Kapadia rented out the apartment to his brother at a monthly rent of Rs. 20,000. Similar
apartments in the building fetch a monthly rent of Rs. 25,000.
(3) Kapadia has incurred the following expenditure on the apartment:
Rupees
Repairs 60,000
Insurance against risk 50,000
Taxes to a local authority 20,000
Profit paid to a bank for money borrowed to acquire the apartment 10,000
Legal expenses for defending the title to the apartment 5,000
––––––––
145,000
––––––––
––––––––
(4) Kapadia has no other taxable income under any other head of income.
Kapadia informs you that for the tax year 2007 (accounting year ended 30 June 2007) he is not required to pay
any tax, since his income for the said tax year [rent received Rs. 220,000 (Rs. 20,000 x 11 months) minus the
expenditure of Rs. 145,000] is less than Rs. 100,000, the basic threshold of taxable income on which no tax
is payable.
Required:
(i) Explain why Mr Kapadia’s contention is not correct; (3 marks)
(ii) Compute the tax payable by Mr Kapadia for the tax year 2007, if the applicable rate of tax is 5%.
(4 marks)
(iii) Explain whether or not your answer to (ii) above would be different and if so how, if the income from
the apartment chargeable to tax was Rs. 150,000 in the tax year 2007. (4 marks)
(b) ABC (Pakistan) Ltd discarded an item of plant, which was used for the carrying on of its business in its accounts
for the accounting year ended 31 December 2006, as the plant had become obsolete. The tax written down value
of the discarded plant on 1 January 2006 was Rs. 500,000.
Required:
Explain the tax implications for ABC (Pakistan) Ltd for the relevant tax year relating to the plant discarded.
(4 marks)
(15 marks)
12
6 Under the provisions of s.177 of the Income Tax Ordinance, 2001, the Commissioner has the power to conduct an
audit of the tax affairs (including examination of the accounts and records and any inquiry into expenditure, assets
and liabilities) of a taxpayer selected for audit.
The assessment of Usman Pakistan Ltd (UPL) for the tax year 2006 has been selected for audit under s.177.
(1) On completion of the audit, the Commissioner informed UPL that he intends to amend the assessment for the
tax year 2006 to:
(i) treat Rs. 500,000 credited to capital reserve account as the taxable income of UPL;
(ii) disallow the tax credit of Rs. 315,540 claimed against the tax payable;
(iii) disallow Rs. 700,000 paid to an expert valuer for the valuation of the company’s office building;
(iv) disallow Rs. 300,000 out of the tax depreciation claimed on the office building (as above); and
(v) disallow Rs. 875,000 paid to a legal counsel for defending UPL’s title to its factory building.
The Commissioner has required UPL to furnish explanations/reasons as to why he should not amend the
assessment on the lines indicated.
(2) The following information and details on the issues raised by the Commissioner are provided to you:
(i) Rs. 500,000 credited to capital reserve.
Rs. 500,000 is the face value of 50,000 shares in JKL Ltd issued to UPL as bonus shares on its
shareholding in JKL Ltd.
(ii) Tax credit of Rs. 315,540.
The tax credit was claimed on the cost of acquiring in the tax year new shares in STY Ltd which is a public
company listed on the Karachi stock exchange.
(iii) Rs. 700,000 paid to the expert valuer.
The valuation of the office building was required by Zee Bank as the building was pledged to the bank
against a loan taken by UPL for its business purposes.
(iv) Tax depreciation on office building.
The value of the office building as estimated by the expert valuer was Rs. 6,000,000 as against its book
value of Rs. 3,000,000. The book value of the building and its tax written down value were each enhanced
by Rs. 3,000,000. The addition of Rs. 3,000,000 to the tax written down value of the building resulted in
an increase in the tax depreciation claimed by Rs. 300,000 (10% of Rs. 3,000,000).
(v) Legal fees paid.
UPL had received a legal notice from Super Bank stating that UPL does not have a clear title to the factory
building which UPL had purchased from Mr. Sarvar. The building had been pledged to the bank against a
loan taken by Sarvar.
(3) The Finance Director of UPL wants you to explain the relevant tax provisions on the issues raised by the
Commissioner.
Required:
State, giving reasons, whether or not, in each case, the amendment proposed by the Commissioner is or is not
in accordance with the provisions of the tax statute.
The allocation of marks is as follows: issues (i), (ii) and (v), 3 marks each; issue (iii) 2 marks; and issue (iv),
4 marks.
(15 marks)
13 [P.T.O.
7 (a) Mungali Moosta (Private) Ltd (MMPL) was incorporated on 1 July 2005 and closed its first accounts on 30 June
2006. MMPL commenced business on 1 September 2005 as an industrial undertaking engaged in the
manufacture of component parts for the automobile assembly industry. Prior to the commencement of business,
MMPL had incurred the following expenditure in July and August 2005.
Rupees
Preparation of a feasibility report 8,000,000
Construction of prototypes 5,000,000
Trial production activities 2,000,000
–––––––––––
15,000,000
–––––––––––
–––––––––––
MMPL’s return of income for the tax year 2006 was furnished to the Commissioner in the proper form and within
the due date of filing. The aforesaid three items of expenditure were not claimed as deductible expenditure on
the reasoning that they were incurred prior to commencement of business and the expenditure was in the nature
of capital expenditure. The taxable income declared was Rs. 2,500,000 and tax thereon was paid along with
the return of income. The statutory auditors have pointed out to MMPL, that the tax treatment accorded to the
three items of expenditure totaling Rs. 15,000,000 was not correct.
Required:
(i) State, explaining the relevant provision of the law, why the tax treatment accorded to the three items of
expenditure in the return of income for the tax year 2006 was incorrect. (6 marks)
(ii) State what action Mungali Moosta (Private) Ltd should take to rectify the mistake and compute the tax
refundable for the tax year. (5 marks)
(b) 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.
Required:
Briefly explain how you would determine the amount of the consideration received by a person in respect of
an asset which the person has transferred to another person by reason of a gift. (4 marks)
(15 marks)
14
Answers

Marks
1 (a) (i) A company for Pakistan tax purposes, inter alia, means a body incorporated by or under the law of a
country outside Pakistan relating to the incorporation of companies [s.80(2)(b)(iv)]. As A-Bee-Cee plc is
a company incorporated under the law of the United Kingdom, A-Bee-Cee plc is a company for
Pakistan tax purposes. 2
(ii) As A-Bee-Cee plc is incorporated under the law of the United Kingdom relating to the incorporation of
companies, it would be a resident company for Pakistan tax purposes, if the control and management
of its affairs was situated wholly in Pakistan at any time in the year [s.83(b)]. A-Bee-Cee plc is a
non-resident company for Pakistan tax purposes in the tax year 2007, since the control and
management of its affairs was situated wholly outside Pakistan during that year. 2
–––
4
–––
(b) (i) PQR Ltd

Tax year 2007
Rupees Rupees
Accounting depreciation (Note 2) 1,360,000 0·5
Penalty paid to the Collector of Customs (Note 3) 150,000 1
Accounting depreciation on a leased asset (Note 5) 230,000 1
Legal expenses (Note 6) 400,000 1
Payment to the Workers’ Participation Fund (Note 7) 850,000 1
Tax profit on disposal of a motor car (Note 8) 100,000 2
Customs duty paid on the import of second-hand plant (Note 9)1,500,000 1
––––––––––
5,690,000
Less: Accounting profit on disposal of a motor car (Note 8) 90,000 0·5
––––––––––
(7,860,000)
––––––––––
8,430,000
Amount received in cash from a shareholder as a deposit for the
issuance of shares in the company (Note 12) 300,000 2
––––––––––
Less: Payment to the Workers’ Participation Fund (Note 7) 850,000 1
––––––––––
––––––––––
––––––––––
The relevant notes will be considered in allocating the marks against each item. In addition, specific
marks will be awarded for the explanations of the treatment of items not included in the computation of
income (1 mark for each item) as follows: 6
–––
23
–––
Items not included in the computation of income.
(1) Up to the tax year 2006 any expenditure incurred by an employer on the provision of perquisites
and allowances to an employee in excess of 50% of the employee’s salary was not deductible.
The Finance Act 2006 deleted this provision and therefore all such expenditure is now allowed
as a deductible expenditure.
(2) The net loss (adjusted for tax purposes) on the sale of the imported fertiliser is an allowable
deduction. The Finance Act, 2006, legislated that the tax collected by the Collector of Customs
on the import of fertiliser by a manufacturer of fertiliser is not the final tax [s.148(7)(b)].
(3) Rs. 310,000 represents a receipt against a bad debt written off in a prior year and allowed as a
deductible charge under the head ‘Income from business’. The receipt of Rs. 310,000 is a
recoupment of the loss allowed in a prior year and is now chargeable to tax as ‘Income from
business’ [s.70].
17
Marks
(4) The share of profit received from an association of persons (AOP) is the taxable income of PQR Ltd
[s.88A(I)]. However, as the AOP has already paid tax on its income, PQR Ltd is allowed a tax credit
against its tax payable [s.88A(2)].
(5) No initial allowance or depreciation is allowable on the new computers purchased on 1 December
2006 (tax year 2007) since it was not commissioned for use in the business in the tax year 2007.
Initial allowance (s.23) and depreciation (s.22) are allowable only if the depreciable asset is used
in the taxpayer’s business in the tax year .
(6) Any expenditure which has previously been allowed as a deduction remaining unpaid for three years
from the end of the year it was first allowed is treated as income chargeable to tax in the first year
following the end of the said three years [s.34(5)]. However, no adjustment is required for the amount of
Rs. 600,000 representing the amount of a loan unpaid as this amount is not an expenditure
which could have been claimed as a deductible charge.
(ii) Computation of tax payable Rupees Rupees

Tax on taxable income of Rs. 7,880,000 at 35% 2,758,000 0·5
Tax credit on tax paid by the AOP (Note 13) (312,500) 1
––––––––––
2,445,500
Advance tax paid 1,500,000 0·5
––––––––––
(2,100,000)
–––––––––– –––
Balance of tax payable 345,500 3
––––––––––
–––––––––– –––
30
–––
Notes as referred to in the computation of income and tax payable.

Note (1) Any tax paid or payable that is leviable on the profits of the business is not a deductible charge
[s.21(a)]. Any provision made in the accounts for taxation is therefore not deductible.
Note (2) Accounting depreciation is not a deductible charge. Initial allowance and depreciation is allowable
at the rates prescribed in the Third Schedule.
Note (3) The amount paid to the Collector of Customs for the erroneous declaration in an import document
is in the nature of a penalty for violation of the customs law and is not deductible [s.21(g)].
Note (4) Tax collected by the Collector of Customs on the import of fertilisers by a manufacturer of fertilisers
is not the final tax on the income arising out of the import [s.148(7)(b)]. The tax collected is
available to PQR Ltd as a tax credit.
Note (5) Depreciation is allowable only on depreciable assets owned by a taxpayer [s.22(I) and (15)]. As
the ownership of the plant has not been transferred to PQR Ltd by the approved leasing company
(lessor), the charge for depreciation is not deductible.
Note (6) Expenditure that is incurred by a taxpayer wholly and exclusively for the purpose of its business
is a deductible expenditure [s.20(I)]. The legal expenses incurred by PQR Ltd in connection with
the infringement of a trade mark of its wholly owned subsidiary is not deductible since it is not
incurred wholly and exclusively for the business of PQR Ltd. For Pakistan tax purposes, PQR Ltd is
a separate legal entity from its wholly owned subsidiary.
Note (7) A payment to the Workers’ Participation Fund (WPF) is not a deductible expenditure in determining
the total income of a taxpayer. However a payment to WPF in accordance with the provisions of
the Companies Profit (Workers’ Participation) Act, 1968 is a deductible allowance from the total
income to arrive at the taxable income (s.9 read with s.60B)
Note (8) Accounting profit or loss on the disposal of a depreciable asset is ignored for tax purposes. The tax
profit or loss on the disposal of a depreciable asset is the difference between the consideration
received and the tax written down value of the asset.
18
Marks
In the case of the disposal of a motor car whose cost has been restricted for claming tax
depreciation, the consideration received is to be adjusted as under:
Rupees
Sale consideration received (A) 900,000
Restricted cost for depreciation purposes (B) 1,000,000
Actual cost (C) 1,200,000
A x B/C
900,000 x 1,000,000/1,200,000 750,000
Rs. 750,000 is to be treated as the sale consideration for
calculating the tax profit or loss on the disposal of the motor car
Tax written down value 650,000
––––––––
Tax profit on the disposal of the motor car 100,000
––––––––
––––––––
Note (9) Customs duty on the import of the second-hand plant is capital expenditure to be added to the
initial cost of the plant.
Rupees
Cost of second-hand plant 5,500,000
Add: Customs duty (Note 9) 1,500,000
––––––––––
7,000,000
––––––––––
––––––––––
––––––––––
––––––––––
A second-hand plant which has not previously been used in Pakistan is entitled to initial allowance
[s.23(1) and (5)(c)]
Plant and Building Computer Motor Furniture Total
Written down value 9,500,000 8,200,000 2,500,000 2,400,000 1,250,000
Disposal – – – (650,000) –
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
9,500,000 8,200,000 2,500,000 1,750,000 1,250,000
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Depreciation 1,425,000 820,000 750,000 262,500 187,500 3,445,000
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Additions 7,000,000 – – 2,000,000 –
Initial allowance (3,500,000) – – * – –
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Written down value 3,500,000 – – 2,000,000 –
–––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Depreciation 525,000 – – 300,000 – 825,000
––––––––––
4,270,000
––––––––––
––––––––––
* Any road transport vehicle not plying for hire is not eligible for initial allowance
Note (12) An amount received by a person, inter alia, as a deposit for the issuance of shares from another person
(not being a banking company or a financial institution) which is not paid by a crossed cheque
or through a banking channel from a person holding a national tax number card, is treated as the
income of the recipient chargeable to tax in the year of receipt under the head ‘Income from
other sources’ [s.39(3)]. The Rs. 300,000 received in cash is the income of PQR Ltd (recipient)
chargeable to tax under the head ‘Income from other sources’.
Note (13) Tax credit on the tax paid by the AOP

Rupees
Share of profit received from the AOP (A) 1,250,000
Tax assessed on the AOP (C) 1,250,000
A/B x C
1,250,000/5,000,000 x 1,250,000 312,500
19
Marks
2 Mr Pestonji
Tax year 2007
Rupees
(a) Computation of taxable income
Salary
From Hotel Splendid plc
Foreign-source salary exempt from tax (Note 1) 0 1·5
From Oriental Hotels Pakistan Limited (OHPL)
Payment by OHPL to XYZ bank against loan liability (Note 3) 1,000,000 1
Basic salary – Rs. 500,000 x 5 months (Note 4) 2,500,000 1
Cash allowances (Note 4)
Utilities – Rs. 50,000 x 5 months (Note 5) 250,000 1
Housing – 45% of basic salary (Note 5) 1,125,000 1
Medical (Note 6) 50,000 1
Waiver of loan taken from the company (Note 8) 250,000 1
Reimbursement of wife’s hospitalisation charges (Note 9) 175,000 1
––––––––––
5,500,000
Consideration for vacating premises (Note 10) 60,000 2
––––––––––
Zakat paid 10,000 0·5
––––––––––
––––––––––
––––––––––
be awarded for the explanations of the treatment of items not included in the computation of income or tax
payable (1 mark for each item) as follows: 5
–––
18
–––
Items not included in the computation of income or tax payable.
(1) In an employee share scheme, where there is any restriction on the transfer of the shares acquired under
an employee share scheme, the benefit accruing to the employee on the purchase of such shares is not
chargeable to tax until the employee has the free right to transfer the shares or when the employee
disposes of the shares (if so allowed by the custodian of the scheme), whichever is earlier [s.14(3)(a)].
Pestonji acquired 500 shares in the HSP employee share scheme (Scheme) at the exercise price of
£10 per share when the market value of one share was £15. The difference of £5 per share equivalent
to Rs. 250,000 [£5 x 500 = £2,500 (Rs. 250,000)] though a benefit of employment is not chargeable
to tax until the expiry of the three year holding period or the time Pestonji sells the shares (if so allowed
by the custodian of Scheme).
(2) The value of a right or option granted to an employee to acquire shares under an employee share
scheme is not chargeable to tax [s.14(1)]. Therefore £2 being the value of one right as estimated by
the custodian of the Scheme is irrelevant for the computation of income or tax payable.
(3) As the company maintained car taken on lease is used by Pestonji for business use only, there is no
taxable benefit for him.
(4) Until such time as Pestonji retires, he has no right to any part of the contribution made by OHPL to the
pension fund. Therefore the monthly contribution made by OHPL to the pension fund is not Pestonji’s
income.
(5) A taxable benefit on a loan given by the employer would arise, if no profit on the loan is payable by the
employee or the rate of profit on the loan is less than the benchmark rate for the relevant tax year. As
the profit payable on the loan is 9% per annum which is equal to the benchmark rate for the tax year
2007, there is no impact on the computation of income or tax payable.
20
Marks
(b) Computation of tax Rupees
Tax at 19% on taxable income of Rs. 5,550,000 1,054,500 0·5
Less: Tax credit on purchase of shares in FGH Ltd (Note 11) 38,000 1·5
––––––––––
1,016,500
Add: Tax credit recouped which was allowed in the tax year 2006 on the purchase
Add: of shares, disposed of during the year (Note 12) 50,500 1·5
––––––––––
1,067,000
Less: Tax deducted at source on salary 700,000 0·5
–––––––––– –––
Tax payable 367,000 4
––––––––––
–––––––––– –––
(c) Income derived which is subject to final tax.

(i) Dividend income received by an individual is taxed at 10% of the gross amount of the dividend
irrespective of whether the dividend is received from a public or a private company. Rs. 11,000 being
the tax deducted at source (on the gross dividend of Rs. 110,000) is the final tax and the dividend
income is not chargeable to tax under any head of income. 1
(ii) Fees for rendering services to Oriental Hotels (Pakistan) Ltd.
The tax deducted at source on a payment to a resident person, inter alia, for the rendering of or
providing of services, by a ‘prescribed person’, is the final tax on the income of the resident person
arising from the rendering of or providing of services. A company is one of the categories included in the
definition of a ‘prescribed person’.
Rs. 72,000 being the tax deducted at source (6% of gross fees of Rs. 1,200,000 for three months) is
the final tax on the income arising from the rendering of services to OHPL [s.153(6)]. The income is
not chargeable to tax under any head of income and no deduction is allowable for any expenditure
incurred in deriving the income [s.169]. 2
–––
3
–––
25
–––
Notes referred to in the computation of income and tax payable.
Note (1) Foreign source salary received by a resident individual is exempt from Pakistan tax, if the individual
has paid foreign income tax on the salary or if tax has been withheld by the foreign employer
and paid to the revenue authority of the foreign country in which the employment was exercised
[s.102(1) and (2)]. £15,000 salary received by Pestonji is his foreign-source salary since the
employment was exercised outside Pakistan. It is exempt from Pakistan tax since Pestonji is a
resident individual and foreign income tax was deducted by the foreign employer in the United
Kingdom and paid to the UK revenue authority.
Note (2) Any gain made on the disposal of a right or an option entitling the holder to acquire shares under
an employee share scheme is chargeable to tax under the head ‘salary’ [s.14(5)]. As no payment
was made for the right to acquire 1,000 shares under the HSP employee share scheme,
Rs. 100,000 received for the sale of the rights for 500 shares is the gain chargeable to tax as
salary income.
Note (3) An amount or perquisite is treated as received by an employee from employment regardless of
whether the amount or perquisite is paid or provided, inter alia, by a past or a prospective employer
[s.12(5)(b)]. Furthermore where an obligation of an employee to repay an amount owing by the
employee to another person is paid by the employer, the amount so paid is chargeable to tax under
the head ‘salary’ [s.13(10)]. The payment of Rs. 1,000,000 by Oriental Hotels (Pakistan) Ltd
(prospective employer) to the XYZ Bank against the loan owing by Pestonji is a perquisite provided
by the employer and is chargeable to tax as salary income.
Note (4) All income chargeable under the head ‘salary’ is taxable on a receipt basis. As the salary and cash
allowances for June 2007 were paid on 2 July 2007 (tax year 2008), the salary and cash
allowances for only five months (January 2007 to May 2007) are chargeable to tax.
Note (5) The cash allowances for utilities and housing are fully taxable. Prior to the Finance Act, 2006
certain exemptions were available for such cash allowances.
21
Marks
Note (6) Rupees
Medical allowance (Rs. 60,000 x 5 months) 300,000
10% of basic salary is exempt from tax (10% of Rs. 2,500,000) 250,000
––––––––
––––––––
––––––––
Medical allowance is exempt from tax up to 10% of basic salary only if the employee’s terms of
employment do not provide for free medical treatment or hospitalisation or reimbursement for
such expenses [clause 139(b) of Part I of the Second Schedule].
Note (7) As the car purchased for Rs. 2,000,000 is for Pestonji’s private (non-business) and business use,
Rs. 100,000 being 5% of Rs. 2,000,000 is the annual benefit. Since the car was used for six
months (January 2007 to June 2007), the amount chargeable to tax is Rs. 50,000.
employer, is a perquisite chargeable to tax, under the head ‘salary’ in the tax year the amount is
waived [s.13(9)]. Rs. 250,000 of the loan amount waived by OHPL is thus chargeable to tax as
salary income.
Note (9) The reimbursement of Rs. 175,000 is chargeable to tax as Pestonji’s salary income, since under
the terms of employment Pestonji is not entitled to free medical treatment or hospitalisation or any
reimbursement of such expenses.
Note (10) Any amount received by a person as consideration for vacating the possession of a building or
part thereof as reduced by the amount paid to acquire such building is chargeable to tax under the
head ‘Income from other sources’ over 10 years in equal proportion including the year in which the
consideration is received. Therefore Rs. 60,000, being one-tenth of Rs. 600,000 consideration
received, is chargeable to tax [s.39(I)(k) and (2)].
Note (11) A person (other than a company) is allowed a tax credit, inter alia, on the cost of acquiring
shares from the Privatisation Commission of Pakistan. The credit is to be calculated on the lower
of (a) the cost of acquiring the shares, (b) 10% of the person’s taxable income for the year or (c)
Rs. 200,000. Since both the cost of acquiring the shares (Rs. 500,000) and 10% of Pestonji’s
taxable income (Rs. 555,000) are more than Rs. 200,000, the tax credit is to be calculated on
Rs. 200,000 only as against Rs. 500,000 invested in the purchase of shares in FGH Ltd.
The calculation of the tax credit [s.62(1) and (2)] on the investment in the acquisition of the shares
in FGH Ltd is calculated as under:
Rupees
Tax credit allowed
A/B x C
Rs. 1,054,500/Rs. 5,550,000 x Rs. 200,000 38,000
Note (12) On 30 June 2006 (tax year 2006) Pestonji had purchased 1,000 shares in ABC Ltd from the
Privatization Commission of Pakistan and was allowed a tax credit of Rs. 50,500 against the tax
payable for the tax year 2006. The 1,000 shares were sold on 1 June 2007 (tax year 2007). As
the shares were disposed of within twelve months of the date of acquisition, the tax credit
allowed in the tax year 2006 is recouped and the amount of tax payable for the tax year 2007
(tax year in which the shares were disposed of) is increased by Rs. 50,500 being the amount of
tax credit allowed in the tax year 2006 [s.62(3)].
3 (a) (i) Amount of value addition on the goods imported.

Rupees
Value of DVD players as determined for customs purposes. 50,000,000
Customs duty and other taxes payable at the customs stage. 2,500,000
–––––––––––
Assessed import value. 52,500,000
–––––––––––
–––––––––––
The amount of value addition is 10% of the assessed
import value of the goods (10% of Rs. 52,500,000). 5,250,000 2
–––––––––––
––––––––––– –––
(ii) Total sales tax payable.
– On the assessed import value (15% of Rs. 52,500,000). 7,875,000 1
– On the value addition (15% of Rs. 5,250,000). 787,500 1
––––––––––– –––
8,662,500 2
–––––––––––
––––––––––– –––
22
Marks
(iii) Hamza and Hisham, as a commercial importer is required to pay the sales tax of Rs. 8,662,500 at
the same time as making payment of the customs duty and other taxes. 1
–––
(b) (i) ABC can apply for de-registration when:

– it ceases to carry on its business; or 1
– its supplies become exempt from sales tax 1
–––
2
–––
(ii) ABC’s registration can be suspended when the Collector has reason to believe that ABC has:
– committed tax fraud; 1
– evaded tax; or 1
– failed to deposit the sales tax due after having recovered the tax from the buyers. 1
–––
3
–––
(c) (i) Where the consideration for a supply is partly in kind and partly in money, the value of the supply
would be the open market price of the supply excluding the amount of tax. 2
–––
(ii) Where goods are supplied at a discounted price (trade discount), the value of the supply would be the
discounted price excluding the amount of tax, provided:
– the discounted price and the related tax is shown on the tax invoice; and
– the trade discount allowed is in conformity with normal business practices. 3
–––
15
–––
4 (a) (i) The chief accountant’s view that the gain of Rs. 5,000,000 on the disposal of the shares in Chemicals
Ltd is income chargeable to tax under the head ‘Income from business’, is erroneous. 1
A ‘capital asset’ has been very broadly defined to mean property of any kind held by a person, whether
or not connected with a business. However there are certain exclusions to this definition. One of the
exclusions is ‘any stock-in-trade (not being stocks and shares), consumable stores or raw materials held
for the purpose of business’ [s.37(5)(a)]. Stock-in-trade is excluded from the definition of a capital
asset unless the stock-in-trade represents stocks and shares. In other words stocks and shares held by
a taxpayer as his stock-in-trade would fall within the definition of a ‘capital asset’ and any gain or loss
on the disposal of such stock-in-trade would be chargeable to tax under the head ‘Capital gains’ unless
the capital gain is exempt from tax. 2
For Secure Securities Ltd, being in business as stock and shares brokers, the 50,000 shares in
Chemical Ltd held as its stock-in-trade is a capital asset and therefore the gain of Rs. 5,000,000 on
the disposal of the shares is a capital gain. 1
–––
4
–––
(ii) The gain of Rs. 5,000,000 should be shown in the return of income for the tax year 2007 as capital
gains exempt from tax being a gain from the sale of shares of Chemicals Ltd which is a public company
for tax purposes. Any income chargeable under the head ‘Capital gains’ being income from the sale,
inter alia, of shares in a public company is exempt from tax up to the tax year ending on 30 June 2007
[clause (110) of Part I of the Second Schedule]. 2
–––
(b) Any income derived by an individual from the transfer of his membership rights or shares in a stock
exchange in Pakistan along with a room in the stock exchange to a company at any time between 1 July
2005 and 30 June 2007 is exempt from tax [clause 133A of Part I of the Second Schedule].
As Mr Hamid, an individual, transferred his one share in the Karachi Stock Exchange (Guarantee) Ltd along
with the room occupied by him in the stock exchange to a company [ABC (Private) Ltd] prior to 30 June 2007,
the entire income derived by Mr Hamid from the transaction is exempt from tax. 3
–––
(c) (i) Sale of 5,000 shares in XYZ (Private) Ltd.

Where a capital asset becomes the property of a person, inter alia, on the distribution of assets on the
liquidation of a company, the fair market value of the asset on the date of its acquisition is treated as
the cost of the asset [s.37(4A)(d)]. 1
23
Marks
In the circumstances, Patel’s view that the sale consideration is his income chargeable to tax as
capital gains is not correct. The capital gain or loss on the sale of the shares would be the difference
between the consideration received and the cost of the asset which in this case would be the fair
market value of the shares on the date of acquisition. 2
(ii) Mr Patel’s view is not correct. Under the non-recognition rules, no gain or loss is taken to have arisen
on the disposal of an asset, inter alia, under an agreement between spouses to live apart provided the
person acquiring the asset is not a non-resident for Pakistan tax purposes at the time of the acquisition
[s.79(1)(a) and (2)]. 2
When Seema acquired the 10,000 shares in Q (Private) Ltd on 1 June 2007 (tax year 2007) she
was a resident for Pakistan tax purposes in the tax year 2007 since during that year she was an
employee of the Federal Government of Pakistan posted abroad [s.82(c)]. 1
Accordingly under the non-recognition rules no gain is taken to have arisen on the transfer of the
10,000 shares in Q (Private) Ltd by Patel to his wife Seema, since the transfer was under an
agreement between spouses to live apart and Seema was resident for Pakistan tax purposes at –––
the time she acquired the shares. 6
–––
15
–––
5 (a) (i) Mr Kapadia’s contention of not being required to pay any tax for the tax year 2007 is not correct because
the Finance Act, 2006 changed the basis of taxation for income chargeable to tax under the head ‘Income
from property’. No deductions are now permissible against the rent chargeable to tax (previous s.17
deleted). Tax at the rate of 5% is payable on the gross amount of rent chargeable to tax [s.15(6) and –––
Division VI of Part I of the First Schedule]. 3
–––
(ii) Tax payable by Mr Kapaida
Rupees
Rental income (Note 1) 275,000 2
Forfeited deposit (Note 2) 100,000 1·5
––––––––
375,000
––––––––
Tax on Rs. 375,000 at 5% 18,750 0·5
––––––––
––––––––
Note (1) Where the rent received or receivable is less than the fair market rent for the property, the
owner of the property is treated as having derived the fair market rent for the period the property
is let on rent [s.15(4)]. As similar apartments to the one rented by Kapadia to his brother
ordinarily fetch a rent of Rs. 25,000 per month, Rs. 275,000 (Rs. 25,000 x 11 months) is
taken as the rental income for the apartment.
Note (2) The forfeited deposit amount of Rs. 100,000 paid under the contract for the sale of the
apartment is treated as rent chargeable to tax [s.15(2)].
–––
4
–––
(iii) The Finance Act, 2006 also legislated that income classified under the head ‘Income from property’
would not be chargeable to tax if the taxpayer:
(i) is an individual or association of persons;
(ii) derives income chargeable to tax under the head ‘Income from property’ not exceeding Rs. 150,000
in a tax year; and
(iii) has no taxable income under any other head of income [s.15(7)]. 3
In view of the above, if Mr Kapadia’s income chargeable to tax from the apartment under the head
‘Income from property’ was Rs. 150,000 in the tax year 2007, no tax would have been payable by him
for the tax year 2007 as he is assessed as an individual and has no taxable income under any other
head of income. 1
–––
4
–––
24
Marks
(b) The tax implications for ABC (Pakistan) Ltd for the tax year 2007 relating to the item of plant discarded are
as under:
(i) The event of discarding the item of plant is treated as a disposal of the asset in the tax year 2007
[s.75(3A)]. 1
(ii) The fair market value (FMV) of the asset determined at the time the asset was discarded is treated as
the consideration received on its disposal [s.77(3)]. 1
(iii) As the item of plant discarded is treated as a disposal of the asset and the plant was used by ABC
(Pakistan) Ltd in the carrying on of the business, the tax profit or loss on its disposal would be its
business income or business loss. If the consideration received (the FMV) exceeded Rs. 500,000 being
the tax written down value of the plant, the excess is chargeable to tax under the head ‘Income from
business’. If the consideration received (the FMV) was less than Rs. 500,000 the difference is allowable
as a deduction under the head ‘Income from business’. 2
–––
4
–––
15
–––
Marks
6 (1) The following issues raised by the Commissioner are in accordance with the provisions of the tax statute.
(i) Disallowance of the tax credit of Rs. 315,540 claimed against the tax payable.
A tax credit, based on a specified formula, is allowable to all taxpayers except a company, on the
investment, inter alia, in new shares offered to the public by a public company listed on a stock
exchange in Pakistan provided the taxpayer is an original allottee of the shares [s.62(1) and (2)].
Usman Pakistan Ltd (UPL) being a company is not entitled to the tax credit. 3
(ii) Disallowance of Rs. 300,000 out of tax depreciation claimed on office building.
A person is allowed a deduction for depreciation on its depreciable assets used in the business in the
tax year. The depreciation deduction is computed by applying specified rates of depreciation against the
tax written down value (WDV) of the asset at the beginning of the year [s.22(1) and (2)]. The WDV of
an asset in the year of its acquisition is the actual cost of the asset as reduced by initial allowance and
in subsequent years it is the cost as reduced by total depreciation (including initial allowance) allowed
as a deduction [s.22(5)]. In other words, for tax purposes, the WDV of an asset can only be increased
by the cost of any addition to the asset.
Rs. 300,000 queried by the Commissioner represents 10% of Rs. 3,000,000 which was added to the
tax WDV of the building. This addition to the WDV is erroneous since the Rs. 3,000,000 is not the cost
of any addition to the building but is the difference between the book value of the building and the
value as estimated by the expert valuer. In the circumstances the claim of Rs. 300,000 for depreciation
is not allowable under the law. 4
(2) The following issues raised by the Commissioner are not in accordance with the provisions of the tax statute.
(i) Rs. 500,000 credited to capital reserve.
The definition of ‘income’ [s.2(29)] specifically excludes from its ambit, in the case of a shareholder of
a company, the amount representing the face value of any bonus shares issued by a company to the
shareholders. UPL is a shareholder of JKL Ltd and therefore Rs. 500,000 representing the face value
of 50,000 bonus shares issued by JKL Ltd is not UPL’s income chargeable to tax. 3
(ii) Rs. 700,000 paid to the expert valuer.
The valuation of the office building was at the requirement of Zee Bank. The valuation was required by
the bank against a loan taken by UPL for business purposes. It is therefore an expenditure incurred
wholly and exclusively for the purposes of the business and is a deductible expenditure [s.20(1)]. 2
(iii) Rs. 875,000 paid to a legal counsel
The expenditure incurred in defending the title to the factory building is a revenue disbursement. The
expenditure has not created any new asset nor has it added value to the factory building. It was incurred
in the ordinary course of maintaining the assets of the company. The expenditure has been incurred
wholly and exclusively for the purposes of the business and is therefore a deductible expenditure
[s.20(1)]. 3
–––
15
–––
25
Marks
7 (a) (i) As the three items of expenditure were incurred after Mungali Moosta (Private) Ltd [MMPL] was
incorporated but prior to the commencement of business, such expenditure is classified in the tax
statute as ‘pre-commencement expenditure’ [s.25]. ‘Pre-commencement expenditure’ has been defined
to mean any expenditure incurred before the commencement of a business wholly and exclusively to
derive income chargeable to tax and specifically includes the cost of feasibility studies, construction of
prototypes and trial production activities [s.25(5)]. 3
Pre-commencement expenditure is not allowed as a direct deduction but is allowed to be amortised for
tax purposes on a straight line basis over five years in equal proportion [20% per year]. The total
deductions allowed for amortisation are not to exceed the amount of the pre-commencement
expenditure. In the circumstances the treatment accorded to the three items of expenditure is not correct. 3
–––
6
–––
(ii) Each of the three items of expenditure falls within the definition of ‘pre-commencement expenditure’
and therefore MMPL is entitled to a deduction for amortization at the rate of 20% of Rs. 15,000,000
in the tax year 2006 and the succeeding four tax years on a straight line basis. To claim this
amortisation deduction, MMPL would have to file a revised return of income. 2
Tax year 2006
Revised computation of income
Rupees
Taxable income as per original return of income 2,500,000
Less: Amortisation of pre-commencement expenditure (20% of Rs. 15,000,000) 3,000,000 1
––––––––––
Tax loss 500,000
––––––––––
––––––––––
Tax paid with original return of income (37% of Rs. 2,500,000) 925,000 1
––––––––––
––––––––––
Tax refundable 925,000 1
––––––––––
––––––––––
–––
5
–––
(b) The consideration received by a person on the disposal of an asset shall be the amount received or the fair
market value (FMV) of the asset whichever is higher at the time of the disposal. If any part of the consideration
is received in kind, the FMV thereof is to be included in determining the amount of consideration received. 3
In the case of an asset disposed of by a person by reason of a gift, the person does not receive any thing.
Therefore the FMV of the asset at the time the person parts with the asset, will be treated as the consideration
received by that person. 1
–––
4
–––
15
–––
26
Paper F6 (PKN)
Fundamentals Level – Skills Module
Taxation
(Pakistan)
Monday 3 December 2007
Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
ALL FIVE questions are compulsory and MUST be attempted.

Tax rates and allowances are on page 3.
Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The question paper begins on page 3.
2
SUPPLEMENTARY INSTRUCTIONS
1. Calculations and workings need only be made to the nearest rupee.
2. All apportionments should be made to the nearest month.
3. All workings should be shown.
TAX RATES AND ALLOWANCES

The following tax rates and allowances are to be used in answering the questions.
A. Tax rates for individuals where salary income exceeds 50% of taxable income for the tax year 2007.
Up to Rs. 150,000 0%
Rs. 150,001 – Rs. 200,000 0.25%
Rs. 200,001 – Rs. 250,000 0.50%
Rs. 250,001 – Rs. 300,000 0.75%
Rs. 300,001 – Rs. 350,000 1.50%
Rs. 350,001 – Rs. 400,000 2.50%
Rs. 400,001 – Rs. 500,000 3.50%
Rs. 500,001 – Rs. 600,000 4.50%
Rs. 600,001 – Rs. 700,000 6.00%
Rs. 700,001 – Rs. 850,000 7.50%
Rs. 850,001 – Rs. 950,000 9.00%
Rs. 950,001 – Rs. 1,050,000 10.00%
Rs. 1,050,001 – Rs. 1,200,000 11.00%
Rs. 1,200,001 – Rs. 1,500,000 12.50%
Rs. 1,500,001 – Rs. 1,700,000 14.00%
Rs. 1,700,001 – Rs. 2,000,000 15.00%
Rs. 2,000,001 – Rs. 3,150,000 16.00%
Rs. 3,150,001 – Rs. 3,700,000 17.50%
Rs. 3,700,001 – Rs. 4,450,000 18.50%
Rs. 4,450,001 – Rs. 8,400,000 19.00%
Rs. 8,400,001 and over 20.00%
* For a woman taxpayer where salary income exceeds 50% of taxable income for the tax year 2007, no tax is
chargeable if taxable income does not exceed Rs. 200,000

Tax year Public company Private company Small company
2007 35% 35% 20%

For rent of immovable property (including rent of furniture and fixtures
and amounts for services relating to such property) 5% of gross rent paid

Received by a public company or any other resident company 5% of the gross amount of the dividend
In any other case 10% of the gross amount of the dividend
Depreciation
Buildings (all types) 10%
Furniture and fittings 15%
Plant and machinery (not otherwise specified) 15% of the tax written down value
Motor vehicles (all types) 15%
Computer hardware 30%
3 [P.T.O.
ALL FIVE questions are compulsory and MUST be attempted
1 Wheels Pakistan Limited (WPL), an industrial undertaking, is engaged in the manufacture of motor cars. The following
information is available for the accounting year ended 30 June 2007.
(1) WPL is a public company under the Companies Ordinance, 1984. 40% of its shares are held by the Federal
Government, 50% by the Government of Kuwait and 10% by individuals. WPL is not listed on any stock
exchange in Pakistan
(2) WPL’s accounting profit for the year ended 30 June 2007 before the transfer of Rs. 2,000,000 to the general
reserve account is Rs. 20,000,000
Rupees
(i) Accounting depreciation 6,000,000
(ii) Tax collected by the Collector of Customs on the import of motor cars in CBU
(completely built unit) condition 11,000,000
(iii) Donation to a relief fund established in Pakistan by the Federal Government 700,000
(iv) Major renovations to upgrade the assembly line to meet the increasing demand
for deluxe cars 3,000,000
(i) Accounting profit on the sale of a building 6,000,000
(ii) The face value of bonus shares received from Gears Limited, a public
company not listed on any stock exchange in Pakistan. WPL holds
shares in Gears Limited as an investment 500,000
(iii) Dividends (net of tax) received from Poshcars (Private) Ltd, a company
incorporated under the Companies Ordinance, 1984 95,000
(iv) Received against a debt written off in the tax year 2006, which write off
was then not allowed as a deduction against taxable income 175,000
(v) Net income (adjusted for tax purposes) on the sale of the imported cars
in CBU condition (as in 3(ii) above) 5,000,000
(5) Fixed assets
(i) The tax written down values of WPL’s fixed assets on 1 July 2006 were:
Buildings 13,800,000
Furniture and fitting 1,570,000
(ii) A deluxe motor car was purchased on 1 January 2007 for Rs. 6,000,000, for the Chief Executive
(iii) One of the buildings (cost Rs. 10,000,000 and tax written down value Rs. 7,000,000) was sold on
30 June 2007 for Rs. 15,000,000
(iv) An item of second-hand plant, not previously used in Pakistan, was imported from Japan at a cost of
Rs. 3,500,000. Rs. 500,000 was incurred on the installation of the plant, which was commissioned for
use on 1 January 2007. The Rs. 500,000 installation cost has been shown as revenue expenditure in the
accounts.
4
(i) Rs. 3,000,000 payable in respect of a loan taken out for business purposes in the accounting year ended
30 June 2003. The Rs. 3,000,000 includes an amount of Rs. 400,000 profit payable on the loan, which
amount was allowed as a deduction in the accounting year ended 30 June 2003.
(ii) Rs. 1,000,000 received in cash from a director as a temporary advance to meet working capital
requirements.
(iii) Rs. 4,000,000 received in cash from Carsales Associates, a customer, as an advance payment for the sale
of cars.
Radiators Pakistan Limited (RPL), an industrial undertaking, which is the 100 per cent subsidiary of WPL, furnished
its complete return of income for the tax year 2007 to the tax department on 1 October 2007, declaring a tax loss
for its accounting year ended 30 June 2007 (other than brought forward losses) of Rs. 1,750,000. The said loss was
surrendered by RPL in favour of its holding company WPL. The Chief Financial Officer of WPL wants you to set-off
the surrendered loss of Rs. 1,750,000 against the taxable income of WPL.
Required:
(a) Briefly state, with reasons, whether or not Wheels Pakistan Limited (WPL) is a public company for tax
purposes. (2 marks)
(b) Compute the taxable income of WPL for the relevant tax year under the appropriate heads of income. Your
answer should give clear reasons/explanations for the inclusion or exclusion in the computation of taxable
income of each of the items listed above. The reasons/explanations for the items not listed in the computation
of taxable income should be shown separately. Specific marks are allocated for this part of the requirement.
(24 marks)
(c) Calculate the tax payable by/refundable to WPL for the relevant tax year. (4 marks)
(30 marks)
5 [P.T.O.
2 The following information is furnished to you by Mr Cyrus Banaji for his accounting year ended 30 June 2007.
(1) On 31 December 2006, Cyrus, a citizen of Pakistan, retired from the employment of the Karachi branch of ABC
Limited (ABC), a company incorporated under the law of a country outside Pakistan. Cyrus has been in the
employment of ABC since 1 January 1990 and on retirement he received:
– Rs. 1,000,000 from ABC as a gratuity. The amount received was not from any gratuity fund approved by
the Commissioner or a gratuity scheme approved by the Central Board of Revenue.
– Rs. 9,000,000 from the ABC Employees Provident Fund being the accumulated balance in his account of
the fund. The fund has been recognised by the Commissioner.
(2) Cyrus was also eligible to receive a monthly pension of Rs. 50,000 from 1 January 2007. At the end of each
month ABC transfers Rs. 50,000 to his bank account.
(3) On 1 June 2007 (on which date Cyrus was no longer in the employment of ABC), DEF Ltd Singapore transferred
the equivalent of Rs. 4,000,000 in US Dollars to Cyrus’s bank account in Singapore. The payment was in
consideration of Cyrus consenting to a restrictive covenant restraining him from entering into employment with
any competitor company of ABC for a period of five years. DEF Ltd Singapore is an associate company of ABC.
(4) The terms of employment of Cyrus with ABC provided for the following:
– Rs. 25,000 for utilities
– Rs. 25,000 for medical treatment
– Rs. 45,000 for house rent assistance
(iii) A company maintained car (purchased for Rs. 2,000,000 on 1 January 2003) for Cyrus’s personal and
business use.
(iv) No entitlement to free medical treatment or hospitalisation or reimbursement of such expenses.
(5) Under the ABC car policy, a retiring employee, with at least three years service, has the option to purchase the
company maintained car used by that employee at the accounting written down value (WDV) of the car. Cyrus
exercised this option and purchased the car at its WDV of Rs. 100,000 on 30 December 2006. He sold the car
on 1 January 2007 for Rs. 250,000.
(6) Tax deducted at source by ABC from Cyrus’ salary income for the relevant tax year was Rs. 1,200,000
(7) Cyrus and his friend Sorab entered into a partnership agreement on 1 January 2006, to carry on business as
manufacturers of washing machines under the name of Sorab Associates. The partnership agreement provides
that profits or losses in the business are to be shared equally. The taxable income of the partnership for the year
ended 31 December 2006 [Special tax year 2007] was Rs. 2,500,000 and the tax paid by the partnership on
this Rs. 2,500,000 was Rs. 625,000.
(8) On 15 December 2006, Cyrus purchased a building which had previously been used as a factory in the Korangi
Industrial Estate for Rs. 4,000,000 and installed in the building an item of second-hand plant previously used
in Pakistan, for the preparation of bakery products, costing Rs. 2,000,000. Cyrus leased the Korangi property
consisting of the building together with the plant on 1 January 2007 to Mr Double Roti, for a composite rent of
Rs. 200,000 per month payable in advance.
Cyrus is also the owner of a residential building in Gulshan which was let to Gulab (Private) Limited on 1 July
2006, for a monthly rental of Rs. 150,000. Rent for the year ended 30 June 2007 was received in advance on
1 July 2006 after deduction of tax at the prescribed rate.
6
The following expenditure was incurred by Cyrus on the two properties for the tax year 2007:
Korangi Gulshan
property building
Rs. Rs.
Repairs to building 80,000 50,000
Repairs to plant 50,000 –
Ground rent 2,000 2,000
Insurance 38,000 10,000
———— ————
170,000 62,000
————
———— ————
————
(9) Cyrus has also furnished you with the following information in respect of amounts received by him in the
accounting year ended 30 June 2007:
(i) Rs. 54,000 as a dividend on his shareholding in XYZ Ltd, a company listed on the Karachi Stock Exchange.
He wants to claim, as a deductible charge against this dividend income, Rs. 10,000 paid as profit on a loan
obtained to acquire the shares in XYZ Ltd.
(ii) Rs. 65,000 as arrears of salary for the year ended 30 June 2006 received from ABC on 21 March 2007.
He does not want to include this Rs. 65,000 in the computation of income for the year ended 30 June
2007 since:
– he was not an employee of ABC on 21 March 2007 and therefore the Rs. 65,000 can not be treated
as received from any employment; and
– the receipt of the Rs. 65,000 pertains to the year ended 30 June 2006 and is not his taxable income
for the year ended 30 June 2007.
Required:
(a) Compute the taxable income of Mr Cyrus Banaji for the relevant tax year under the appropriate heads of
income. Your answer should give clear reasons/explanations for the inclusion or exclusion in the computation
of taxable income of each of the items listed above. The reasons/explanations for the items not listed in the
computation of taxable income should be shown separately. Specific marks have been allocated for this part
of the requirement. (21 marks)
(b) Calculate the tax payable by/refundable to Mr Cyrus Banaji for the relevant tax year. (4 marks)
(25 marks)
7 [P.T.O.
3 (a) Mr Murad, a resident for Pakistan tax purposes, is preparing his return of income for the accounting year ended
30 June 2007 and the following information is furnished to you:
(1) On 1 July 2006, Murad became a member of the Karachi Stock Exchange (KSE) by purchasing from
Mr Govind one share in Karachi Stock Exchange (Guarantee) Ltd (KSEG) for Rs. 30,000,000. He also
acquired from Govind the occupancy rights of a room in the stock exchange building for Rs. 800,000.
(2) On 31 May 2007 Murad and Govind formed a partnership firm under the name of Murind Associates.
On 1 June 2007 Murad gave up his membership rights in KSE and transferred to Murind Associates the
one share in KSEG for Rs. 40,000,000 and the occupancy rights of the room in the stock exchange for Rs.
800,000.
Murad is of the view that there are no tax implications of the transaction relating to the transfer of the one share
in KSEG and the occupancy rights in the room in the stock exchange, due to a specific exemption from tax for
such transactions available under a clause in Part I of the Second Schedule.
Required:
State, giving reasons, whether or not Mr Murad’s contention is correct. (3 marks)
(b) The following information is furnished to you by Mr Noman relating to his accounting year ended 30 June 2007.
(1) As an employee of the Karachi branch of Winners Bank plc (WBP), Noman, prior to his retirement from
WBP, had participated in the Winners Employee Share Scheme (Scheme), the details of which are as
follows:
– Under the Scheme, a participant has the free right to transfer the shares acquired only after a minimum
holding period of six months, unless permission is granted by the custodian of the Scheme for the
transfer of the shares before the expiry of the holding period.
– On 1 July 2006, Noman was granted the right to purchase 2,000 shares in WBP at the exercise price
of £10 per share. The £10 was inclusive of a consideration of £1 for the right to acquire the shares.
Noman accepted the right offered and made a payment of £2,000.
– On 31 July 2006 Noman disposed of the right relating to 1,000 shares for Rs. 150,000.
– On 1 August 2006 Noman exercised the right to acquire the balance of 1,000 shares in WBP and
made a payment of £9 per share, having already paid £1 per share at the time of accepting the right.
On 1 August 2006 the price quoted for one share in WBP on a stock exchange in the United Kingdom
(UK) was £12.
– On 1 February 2007 (i.e. the end of the minimum holding period of six months for the shares acquired
under the Scheme) the price of one share in WBP quoted on a stock exchange in the UK was £14.
– On 15 June 2007, Noman sold 500 shares in WBP for Rs. 1,200,000.
– The rate of exchange is to be taken as £1 = Rs. 100 on all relevant dates.
(2) On 31 May 2007 Noman sold some shares all of which had been acquired by him on 30 April 2006. The
details of the gain or loss on the sale of these shares is as under:
– Gain of Rs. 100,000 on the sale of shares in Lowlands (Private) Limited.
– Gain of Rs. 40,000 on the sale of shares in Highlands Ltd a company incorporated under the
Companies Ordinance, 1984, in which 50% of the shares are held by a company incorporated in Saudi
Arabia which is wholly owned by the Kingdom of Saudi Arabia. Highlands Ltd is not listed on any stock
exchange in Pakistan.
– Loss of Rs. 60,000 on the sale of shares in Fibres Ltd a company whose shares were traded on the
Lahore Stock Exchange in the tax year 2007 and which remained listed on that exchange on 30 June
2007.
(3) On 31 May 2007 Noman sold agricultural land for Rs. 700,000, which he had purchased in April 2007
for Rs. 500,000.
8
(4) On 15 June 2007, Noman sold personal jewellery for Rs. 1,200,000. The jewellery had been gifted to him
at the time of his marriage on 1 January 2006, on which date it had been valued by a reputed firm of
jewellers at Rs. 900,000.
(5) In the accounting year ended 30 June 2007, Noman paid Rs. 50,000 as zakat under the Zakat and Ushr
Ordinance, 1980.
Required:
Compute the total income and the taxable income of Noman under the appropriate heads of income for the
relevant tax year, giving clear reasons/explanations for the inclusion or exclusion of each of the items listed
above. The reasons/explanations for the items not included in the computation of total/taxable income should
be shown separately. Specific marks are allocated for this part of the requirement. (17 marks)
(20 marks)
9 [P.T.O.
4 Jasmine Pharmaceuticals Company (JPC), a partnership firm, registered under the Partnership Act 1938, is in the
business of manufacturing pharmaceuticals. The assessment of JPC for the tax year 2007 (accounting year ended 30
June 2007) was selected for audit under s.177 of the Income Tax Ordinance, 2001.
(1) On completion of the audit, the Commissioner informs JPC that he intends to amend the assessment for the tax
year 2007 to:
(i) Levy minimum tax of 0·5% on the firm’s turnover of Rs. 9,000,000.
(ii) Disallow Rs. 1,530,000 out of travelling expenses, being the travel and hotel expenses for JPC’s technical
manager’s visit to Japan.
(iii) Disallow Rs. 400,000 being the contribution paid by JPC to the unrecognised Jasmine Employees Provident
Fund.
(iv) Disallow Rs. 75,600 expended on the annual Eid-Milan party for JPC’s employees and their families.
(v) Disallow Rs. 500,000 being damages paid to JPC’s sole distributor.
(vi) Disallow the donation of Rs. 1,000,000 paid to a hospital.
(vii) Disallow the Rs. 1,200,000 salary paid to Mr A.
The Commissioner has required JPC to furnish explanations/reasons as to why he should not amend the
assessment on the lines indicated.
(2) The following information on the issues raised by the Commissioner is provided to you:
(i) Minimum tax
JPC was not aware of the concept of minimum tax payable.
(ii) Travelling expenses
The travel to Japan was entirely for business purposes. It was necessary for the firm’s technical manager to
travel to Japan for the purpose of selecting a second-hand mixing machine, so as to ensure that the machine
was compatible with the company’s existing plant.
(iii) Contribution to the unrecognised provident fund.
JPC, in its accounting system, has ensured that when any payment is made from the fund to an employee,
tax would be deducted at source from the amount of the payment, if the amount is chargeable to tax as the
salary income of the employee.
(iv) Eid-Milan party
The expenditure on the party was motivated by the purpose of maintaining cordial relations between the
employees and the management.
(v) Damages paid to the sole distributor
Due to the failure to deliver supplies within the time stipulated in the contract, JPC had to pay damages to
their sole distributor. The failure to deliver the supplies in time was due to the negligence of the despatch
department of the firm and not due to the violation of any law.
(vi) Donation
The donation was not paid to any private hospital but to a hospital which was established in Pakistan by
the Federal Government.
(vii) Salary paid to Mr A
Mr A is a partner in the firm of JPC. He is also the Chief Executive Officer (CEO) of the firm devoting his full
time to managing the affairs of the firm. His salary was approved by the partners.
Mr A, as CEO of JPC, wants you to explain the relevant statutory tax provisions on the issues raised by the
Commissioner.
10
Required:
State giving reasons whether or not in each case, the amendment proposed by the Commissioner is or is not in
accordance with the provisions of the tax statute.
Note: the allocation of marks is as follows:
Item (iii), 3 marks; all of the other six items, 2 marks each.
(15 marks)
5 Mr Miskeen, a registered person for sales tax purposes, is engaged in the manufacture of electrical appliances in
Gujranwala.
Miskeen’s business transactions for the month of June 2007 are summarised as follows:
Rupees
Purchases of raw materials from registered persons 2,500,000
Purchases of packing materials from unregistered persons 950,000
Sale of electrical appliances to:
– registered persons 1,890,000
– unregistered persons 2,150,000
Sale of old model electric toasters to registered persons (Note 1) 422,800
Notes:
(1) Prior to the introduction of a new model of electric toasters, Miskeen sold his entire stock of the old model
toasters, allowing a trade discount of 35% (shown on the face of the invoice). This trade discount given to the
dealers is not in accordance with Miskeen’s normal business practice. Had the old model toasters been sold at
the normal discounted price, the sale proceeds would have been Rs. 650,000 as against the Rs. 422,800
actually received.
(2) All payments for purchases made are stated inclusive of sales tax at the rate of 15%, where applicable. All
amounts for the sale of electric appliances are stated exclusive of sales tax.
Required:
(a) Calculate the sales tax payable by/refundable to Mr Miskeen for the month of June 2007. (5 marks)
(b) Give clear explanations of the treatment accorded to the following items in calculating the sales tax payable
by/refundable to Mr Miskeen in part (a):
(i) The purchases of packing material from unregistered persons. (1 mark)
(ii) The supply of goods to unregistered persons. (1 mark)
(iii) The supply of goods to registered persons at a trade discount of 35%. (3 marks)
(10 marks)
11
Answers

Fundamentals Level – Skills Module, Paper F6 (PKN) December 2007 Answers
Taxation (Pakistan) and Marking Scheme
Marks
1 (a) A public company for Pakistan tax purposes, inter-alia, means a company in which not less than 50% of the
shares are held by a foreign government [s.2(47)(ab)]. Since 50% of the shares in Wheels Pakistan Limited
(WPL) are held by the Government of Kuwait, WPL is a public company for tax purposes. 2
—–
(b) Wheels Pakistan Limited

Tax year 2007
Computation of taxable income Rupees Rupees
Add: Accounting depreciation (Note 1) 6,000,000 0·5
Tax collected by the Collector of Customs (Note 2) 11,000,000 1
Donation to a relief fund (Note 3) 700,000 1
Major renovations to plant (Note 4) 3,000,000 1
Plant installation expenses (Note 5) 500,000 1
Unpaid liability (Note 6) 400,000 1
Tax profit on the sale of the building (Note 7) 3,000,000 2
—————– 24,600,000
Less: Accounting profit on the sale of the building (Note 8) 6,000,000 0·5
Bonus shares received (Note 9) 500,000 2
Dividend income (Note 10) 95,000 1
Recovery of a debt previously written off (Note 11) 175,000 1
Depreciation (Note 13) 3,345,500 4
—————–
(12,115,500)
——————
32,484,500
Temporary advance received in cash for working capital (Note 14) 1,000,000 2
——————
——————
——————
be awarded for the explanations of the treatment of items not included in the computation of income [1 mark
each for items (i), (ii) and (iii) and 2 marks for item (iv)] as follows. 5
—–
24
—–
Items not included in the computation of taxable income
(1) No adjustment is required in the computation of income for Rs. 2,000,000 transferred to the general reserve
account, since the transfer is after determination of the profit of Rs. 20,000,000.
(2) The net income of Rs. 5,000,000 (adjusted for tax purposes), on the sale of the imported cars in CBU
condition, is income chargeable to tax, since the tax of Rs. 11,000,000 collected at the customs stage is not
the final tax [s.148(7)(c)]. No adjustment is, therefore, required for the Rs. 5,000,000 in the computation of
income.
(3) An advance received by a person from another person (not being a banking company or a financial institution)
which is not paid by a crossed cheque or through a banking channel from a person holding a national tax
number, is treated as the income of the recipient chargeable to tax in the year of receipt under the head
‘Income from other sources’ [s.39(3)]. However, the provisions of s.39(3) does not apply to an advance
payment for the sale of goods or supply of services [s.39(4)]. No adjustment is, therefore, required in the
computation of income for the Rs. 4,000,000 received in cash from Carsales Associates as an advance
payment for the sale of cars.
(4) Under the provisions of group relief (s·59B), a subsidiary of a public company can surrender its assessed loss
for the year in favour of its holding company provided certain conditions are fulfilled, one of which is that the
holding company should be a public company listed on a registered stock exchange in Pakistan. As Wheels
Pakistan Limited is not listed on any stock exchange in Pakistan, Radiators Pakistan Limited cannot surrender
its tax loss of Rs. 1,750,000 to Wheels Pakistan Limited and therefore, the Rs. 1,750,000 cannot be set off
by Wheels Pakistan Limited against its taxable income.
15
Marks
(c) Computation of tax payable Rupees
Tax credit on donation (Note A) (245,000) 2·5
———–——
11,474,575
Tax collected by the Collector of Customs (11,000,000) 1
—————–
Balance of tax payable 474,575
—————–
—————– —–
4
—–
30
—–
Note (A)
As the donation is to a relief fund established in Pakistan by the Federal Government, a tax credit is allowed
at the average rate of tax (before allowance of any tax credit) on the lower of the amount of the donation paid
or 15% of the taxable income [s.61(1)(b) and (2)].
Rupees
Tax credit is calculated as under:
Tax on taxable income before tax credit (A) 11,719,575
Taxable income for the year (B) 33,484,500
The lesser of the amount of the donation (Rs. 700,000) or 15%
of taxable income (15% of Rs. 33,484,500 = Rs. 5,022,675) (C) 700,000
A/B × C
Rs. 11,719,575/Rs. 33,484,500 × Rs. 700,000 245,000
Notes referred to in the computation of taxable income and tax payable
Note (1) Accounting depreciation is not a deductible charge. Depreciation calculated at the rates prescribed
in the Third Schedule is a deductible charge.
Note (2) The tax of Rs. 11,000,000 collected by the Collector of Customs is not a deductible charge. It is
also not the final tax on the income derived from the sale of the imported cars in CBU condition
[s.148(7)(c)]. The Rs. 11,000,000 collected as tax is available to Wheels Pakistan Limited as a
tax credit.
Note (3) Rs. 700,000 paid as a donation is not deductible but Wheels Pakistan Limited is entitled to a tax
credit calculated under a prescribed formula [s.61(1)(b)].
Note (4) Rs. 3,000,000 expended on upgrading the assembly line is capital expenditure, since the
expenditure incurred has increased the capacity of the assembly plant – it has added value to a
depreciable asset. For tax purposes the written down value of plant and machinery has been
increased by Rs. 3,000,000 (Note 13).
Note (5) Rs. 500,000 spent on the installation of the item of plant imported from Japan is not an
expenditure for the carrying on of the business, but is capital expenditure. The cost of the plant has
been increased by Rs. 500,000 (Note 12).
Note (6) The unpaid amount of Rs. 400,000 for profit on debt (included in sundry creditors) was allowed
as a deduction in the tax year 2003 (accounting year ended 30 June 2003). As the amount has
remained unpaid for three years from the end of the tax year in which the deduction was allowed,
the Rs. 400,000 is chargeable to tax in the tax year 2007 (i.e. the first tax year following the end
of the said three years).
Note (7) The tax profit or loss on the disposal of a depreciable asset is the difference between the
consideration received and the tax written down value of the asset [s.22(8)]. However, in the case
of immovable property (other than land) where the consideration received on the disposal exceeds
the cost of the immovable property, the consideration received is to be treated as the cost of the
property for calculating the tax profit or loss on the disposal of the immovable property
[s.22(13)(d)].
As the consideration received (Rs. 15,000,000) for the sale of the building is more than the cost
of the building (Rs. 10,000,000), Rs. 15,000,000 is treated as the cost of the building (deemed
cost) for working out the tax profit/loss on the sale of the building.
16
Marks
The tax profit on the disposal of the building is worked out as under:
Rupees
Deemed cost 15,000,000
Depreciation allowed (actual cost Rs. 10,000,000
less tax written down value Rs. 7,000,000) (3,000,000)
—————– 12,000,000
—————–
Tax profit 3,000,000
—————–
—————–
Note (8) The accounting profit or loss on the disposal of a depreciable asset is not to be considered in the
determination of taxable income. It is the tax profit or loss that is chargeable to tax or allowed as a
deduction. The accounting profit of Rs. 6,000,000 is, therefore, not chargeable to tax.
Note (9) Rs. 500,000 representing the face value of bonus shares issued to Wheels Pakistan Limited is not
income chargeable to tax. For tax purposes ‘income’ does not include, in the case of a shareholder
of a company, the face value of any bonus shares issued by the said company to its shareholders
[s.2(29)].
Note (10) Dividends received by a public company (for tax purposes) are taxed at 5% of the gross amount of
the dividends irrespective of whether the dividends are received from a public or private company.
Rupees
Net amount of dividend received from Poshcars (Private) Ltd after deduction of tax 95,000
Gross amount of dividend 100,000
Rs. 5,000 being the tax deducted at source is the final tax on the dividend income
Note (11) A recovery of a debt previously written off and allowed as a deductible charge is income chargeable
to tax. However, as the debt of Rs. 175,000 written off in the tax year 2006, was not allowed as
a deductible charge, the receipt of the Rs. 175,000 is not income chargeable to tax.
Rupees
Cost of second-hand item of plant 3,500,000
Add: Installation cost 500,000
—————
4,000,000
—————
—————
—————
A second hand plant which has not previously been used in Pakistan is entitled to the initial
allowance [s.23(1) and (5)(c)]
Plant and Buildings Motor Furniture Total
machinery vehicles depreciation
Rate of depreciation 15% 10% 15% 15%
Rs. Rs. Rs. Rs. Rs.
Written down value 2,700,000 13,800,000 2,500,000 1,570,000
Disposal (7,000,000)
Renovation cost 3,000,000
————— —————– ————— —————
5,700,000 6,800,000 2,500,000 1,570,000
————— —————– ————— —————
Depreciation 855,000 680,000 375,000 235,500 2,145,500
————— —————– ————— —————
Additions 4,000,000 6,000,000
Initial allowance 2,000,000 *
————— —————
Written down value 2,000,000 6,000,000
————— —————
Depreciation 300,000 900,000 1,200,000
—————
3,345,500
—————
—————
* Road transport vehicles not plying for hire are not eligible for initial allowance
17
Marks
Note (14) Any advance received in cash otherwise than as an advance payment for the goods or supply of
services is treated as the income of the recipient chargeable to tax as ‘Income from other sources’
[s.39(3) and (4)]. As the temporary advance of Rs. 1,000,000 from a director of the company was
received in cash, the said Rs. 1,000,000 is chargeable to tax under the head ‘Income from other
sources’.
2 (a) Mr Cyrus Banaji

Tax year 2007
Salary
From ABC
Consideration for agreeing to a restrictive covenant (Note 1) 4,000,000 1·5
Gratuity (Note 2) 925,000 2
Basic salary – Rs. 250,000 × 6 months
(1 July 2006 to 31 December 2006) 1,500,000 0·5
Cash allowances
– Utilities - Rs. 25,000 × 6 months (Note 3) 150,000 0·5
– House rent – Rs. 45,000 × 6 months (Note 3) 270,000 0·5
– Medical – Rs. 150,000 – exempt from tax (Note 4) – 1
Benefit on purchase of car (Note 6) 150,000 1
Pension exempt from tax (Note 7) – 1
Arrears of salary (Note 8) 65,000 1
————— 7,110,000
Share of profit from the partnership firm – Rs. 1,250,000 exempt from tax (Note 9) – 2
Income from the Korangi property (Note 10) 330,000 4
—————
—————
—————
be awarded for the explanation of the treatment of items not included in the computation of income or tax
payable (1 mark for item (1) and 2 marks each for items (2) and (3)). 5
—–
21
—–

(1) The accumulated balance due and becoming payable to an employee participating in a recognised
provident fund is exempt from tax (clause 23 of Part 1 of the Second Schedule).
(2) A tax is imposed at prescribed rates on every person who receives a dividend from a company. The tax
imposed is computed by applying the relevant rate of tax on the gross amount of the dividend (s·5).
Dividend income received by an individual is taxed at the rate of 10% of the gross amount of the
dividend, irrespective of the status of the company from which the dividend is received. Rs. 6,000, being
the tax deducted at source [10% of the gross dividend of Rs. 60,000 (s.150)], is the final tax on the
dividend income and it is, therefore, not included in the computation of taxable income or tax payable.
As tax at 10% is imposed on the gross amount (Rs. 60,000) of the dividend received, the question of
any deductible charges does not arise. The Rs. 10,000 profit paid by Cyrus on the loan obtained to
acquire the shares in XYZ Ltd is, therefore, not deductible.
(3) Every ‘prescribed person’ making a payment on account of the rent of immovable property (including the
rent of furniture and fixtures and amounts for services relating to the property) is required to deduct tax
at the rate of 5% of the gross rent paid [s.155(1)]. The tax so deducted is the final tax on the income
from property. A company is one of the categories included in the definition of a ‘prescribed person’
[s.155(3)(iv)]. Gulab (Private) Ltd being a company is a prescribed person and is, therefore, required to
deduct tax on the rent paid to Cyrus.
Rs. 90,000 being the tax deducted at source (5% of the gross rent of Rs. 1,800,000) is the final tax
[s.155(2)] on the income from the Gulshan building. The Rs. 1,800,000 is not chargeable to tax under
any head of income in computing the taxable income of Cyrus and no deduction is allowable for the
expenditure of Rs. 62,000 incurred by Cyrus in deriving the income from property [s.169(2)(a) and (b)].
18
Marks
(b) Computation of tax payable
The share of profit from the AOP received by Cyrus is exempt from tax and does not form part of his taxable
income. However, for the purpose of determining the rate of tax that would be applicable to the taxable income
(i.e. income other than the share of profit from the AOP), the share of profit from the AOP is included in Cyrus’s
taxable income as if the said profit was chargeable to tax.
Rupees
Tax at 20% on taxable income if the share of profit from
the AOP were chargeable to tax [20% of Rs. 8,690,000
(Rs. 7,440,000 + Rs. 1,250,000)] (A) 1,738,000
Taxable income if the share of profit from the AOP were chargeable to
tax [Rs. 7,440,000 + Rs. 1,250,000] (B) 8,690,000
Actual taxable income (C) 7,440,000
(A/B × C)
Rs. 1,738,000/Rs. 8,690,000 × Rs. 7,440,000 1,488,000 3·5
Less: Tax deducted at source by ABC (1,200,000) 0·5
————— —–
Tax payable 288,000 4
—————
————— —–
25
—–
Note (1) An amount paid, inter alia, by a past employer or an associate of the employer to a past employee,
is treated as received by the employee from an employment [s.12(5)]. Furthermore any
consideration paid for an employee’s agreement to a restrictive covenant in respect of any past,
present or future employment is a profit in lieu, or in addition to salary [s.12(2)(e)(v)].
The equivalent of Rs. 4,000,000 in US Dollars transferred to the bank account of Cyrus in
Singapore by DEF Ltd Singapore, an associate company of ABC is considered to be a payment by
ABC to Cyrus. This payment, being in consideration of Cyrus consenting to a restrictive covenant
restraining him from entering into employment with any competitor company of ABC for a period
of five years, is a profit in lieu of or in addition to salary and is chargeable to tax as the salary
income of Cyrus.
Note (2) Under the provisions of clause (13) of Part I of the Second Schedule, any amount receivable as a
gratuity by an employee on his retirement:
(i) from any gratuity fund approved by the Commissioner under the applicable rules is exempt
from tax;
(ii) from an employer under a gratuity scheme of the employer applicable to all employees and
approved by the Central Board of Revenue for the purposes of the said clause (13), a
maximum of Rs. 200,000 is exempt from tax; and
(iii) in any other case, 50% of the amount receivable from the employer or Rs. 75,000 whichever
is the less, is exempt from tax.
As the gratuity received by Cyrus was neither from an approved gratuity fund nor from an approved
gratuity scheme of ABC, item (iii) would be applicable:
Rupees
Gratuity received 1,000,000
—————
Taxable as salary 925,000
—————
—————
Note (3) The cash allowances for utilities and housing are fully taxable.
Note (4) A medical allowance received by an employee not exceeding 10% of the basic salary of the
employee is exempt from tax, provided free medical treatment or hospitalisation charges is not
provided for in the terms of employment [Clause 139(b) of Part I of the Second Schedule].
As the terms of employment of Cyrus state that he is not entitled to free medical treatment or
hospitalisation, the entire amount of Rs. 150,000 (Rs. 25,000 x 6 months), being not more than
10% of his basic salary, is exempt from tax.
Note (5) As the company maintained car is used by Cyrus partly for his personal use, Rs. 50,000, being
5% of the cost of the car proportionate to the number of months the car was used by Cyrus, (5%
of Rs. 2,000,000 × 6/12 = Rs. 50,000) is chargeable to tax as salary income [s.13(3) and Rule
5 of the Income Tax Rules].
19
Marks
Note (6) Where any asset is transferred by an employer to an employee, the amount chargeable to tax in
the hands of the employee is the fair market value (FMV) of the asset on the date of its transfer as
reduced by any payment made by the employee [s.13(11)]. The car purchased by Cyrus for
Rs. 100,000 was sold by him within two days of its acquisition for Rs. 250,000. It is, therefore,
reasonable to take the said Rs. 250,000 as the FMV of the car on the date of its transfer.
Rs. 150,000 being the difference between the FMV (Rs. 250,000) and the payment made by
Cyrus for the car (Rs. 100,000), is chargeable to tax as salary income.
Note (7) Under clause (8) of Part I of the Second Schedule, any pension received by a citizen of Pakistan
from a former employer is exempt from tax, unless the person continues to work for the employer
or an associate of the employer. The pension received by Cyrus is exempt from tax since he fulfills
the conditions of the said clause (8)
Note (8) An amount is treated as received from an employment regardless of whether the amount is paid
inter-alia by a past employer [s.12(5)(b)]. The Rs. 65,000 received from ABC (a past employer)
is, therefore, income from employment (salary income). Furthermore, any income chargeable to tax
under the head ‘salary’ is taxable on a receipt basis. Since the arrears of salary for the year ended
30 June 2006 were received in the accounting year ended 30 June 2007, the Rs. 65,000 is
chargeable to tax as salary in the tax year 2007.
Note (9) Sorab Associates (a partnership) is assessed to tax in the status of an association of persons (AOP)
[s.80(2)(a)]. An AOP which is not a professional firm prohibited from incorporating by any law or
the rules of the body regulating the profession, is taxed separately from its members and where the
AOP has paid any tax, any amount received by a member out of the income of the AOP, is exempt
from tax [s.92(I)]. As Sorab Associates has paid tax on its assessed income, the Rs. 1,250,000
received by Cyrus from the firm in his capacity as a member of the AOP, is exempt from tax.
Note (10) A composite rent of Rs. 1,200,000 (Rs. 200,000 × 6 months) was received as consideration for
the lease of the Korangi property consisting of the building together with the plant installed in the
building. Such income after permissible deductions is chargeable to tax as ‘Income from other
sources’ [s.39(1)(f)]. Permissible deductions allowable in computing such income are (a) any
expenditure paid by the person in deriving income chargeable to tax other than expenditure of a
capital nature [s.40(1)] (b), depreciation of any plant, machinery or building used to derive that
income [s.40(3)(a)] and initial depreciation for any plant or machinery used to derive that income
[s.40(3)(b)].
The taxable income of the Korangi property is computed as under:

Rupees
Lease rent received (Rs. 200,000 × 6 months) 1,200,000
Less: Repairs to building 80,000
Repairs to plant 50,000
Ground rent 2,000
Insurance 38,000
Depreciation (see note) 700,000
————– 870,000
—————
—————
—————
Note: Depreciation
Building Plant Total
depreciation
Rate of depreciation 10% 15%
Rs. Rs. Rs.
Cost 4,000,000 2,000,000
Depreciation 400,000 300,000 700,000
————
————
The initial allowance is not allowed on second-hand plant or machinery that has been used
previously in Pakistan [s.23(5)(c)].
20
Marks
3 (a) The exemption clause referred to by Mr Murad is in respect of any income derived by an individual from the
transfer of his membership rights or share in a stock exchange in Pakistan, along with a room in the stock
exchange, to a company at any time between 1 July 2005 and 30 June 2007 [clause (133A) of Part I of the
Second Schedule].
The exemption under the said clause (133A) is not available to Murad, since the transfer of his share in
Karachi Stock Exchange (Guarantee) Ltd [KSEG] along with the occupancy rights of the room in the stock
exchange was not to a company but to Murind Associates, a partnership firm which is treated as an
‘association of persons’ for tax purposes [s.80(2)(a)]. 3
—–
(b) Mr Noman
Tax year 2007
Rupees Rupees
Computation of total/taxable income
Salary
– gain on the disposal of the right to acquire 1,000 shares (Note 1) 50,000 1·5
– benefit on the acquisition of 1,000 shares (Note 2) 400,000 3
———— 450,000
Capital gains
Gain on the sale of shares acquired under the employee share scheme (Note 3) 500,000 3
Gain on the sale of shares in Lowlands (Private) Limited (Note 4) 75,000 1·5
Gain on the sale of shares in Highlands Limited – exempt from tax (Note 5) – 1·5
Gain on the sale of personal jewellery (Note 6) 225,000 2
———— 800,000
—————
Zakat paid (Note 7) (50,000) 0·5
—————
—————
—————
be awarded for the explanation of the treatment of items not included in the computation of income [2 marks
for item (1) and 1 mark each for items (2) and (3)] as follows:
4
—–
17
—–
20
—–
Items not included in the computation of total/taxable income
(1) In an employee share scheme, where shares issued to an employee are subject to a restriction on the
transfer of the shares, no amount is chargeable to tax on the employee until the earlier of, the time the
employee has the free right to transfer the shares or the time the employee disposes of the shares
[s.14(3a)].
Noman acquired 1,000 shares in Winners plc on 1 August 2006 at the exercise price of £10 per share,
when the price quoted on a stock exchange in the UK was £12. The benefit of £2 per share is not
chargeable to tax since under the Winners Employee Share Scheme, there is a restriction on the transfer
of the shares. There is a holding period of six months before Noman has the free right to transfer the
shares.
(2) A loss on the disposal of a capital asset is not deductible where a gain on the disposal of such an asset
is not chargeable to tax [s.38(2)]. Fibres Ltd is a public company for tax purposes and any gain on the
sale of its shares is exempt from tax up to the tax year ending on 30 June 2007 (clause 110 of Part 1
of the Second Schedule). Therefore, the loss of Rs. 60,000 incurred on the disposal of the shares in
Fibres Ltd is not deductible.
(3) A gain or loss under the head ‘Capital gains’ can only arise on the disposal of a ‘capital asset’. Any
immovable property is excluded from the definition of a capital asset and, therefore, any gain or loss on
the disposal of an immovable property is outside the ambit of capital gains. The gain of Rs. 200,000 on
the sale of the agricultural land is, therefore, not included in the computation of income.
21
Marks
Notes referred to in the computation of total/taxable income
Note (1) The gain on the disposal of a right or option to acquire shares under an employee share scheme
is chargeable to tax under the head ‘Salary’ [s.14(5)]. The gain of Rs. 50,000 is made up as under:
Rupees
Consideration received on the disposal of the right to acquire 1,000 shares in
Winners Bank plc (WBP) under the Winners Employee Share Scheme (Scheme) 150,000
Consideration paid for the right to acquire the 1,000 shares [£1 × 1,000 = £1,000
(£1 = Rs. 100)] 100,000
————
————
————
Note (2) Where shares issued under an employee share scheme are subject to a restriction on the transfer
of the shares the amount chargeable to tax on the employee under the head ‘Salary’ is the fair
market value (FMV) of the shares at the earlier of the time the employee has the free right to transfer
the shares or disposes of the shares, as reduced by the amount paid to acquire the shares including
any amount paid for the grant of a right to acquire the shares [s.14(3) (a) and (b)].
On 1 August 2006, Noman exercised the right to purchase 1,000 shares in WBP under the
Scheme for £10 per share. The 1,000 shares issued were subject to a restriction on their transfer
as the shares could only be transferred after a minimum holding period of six months. On
1 February 2007 (i.e. six months after 1 August 2006) Noman had the free right to transfer the
shares. The FMV of one share in WBP on 1 February 2007 was £14 being the price quoted on a
stock exchange in the UK on that date. The benefit of Rs. 400,000 on the acquisition of the 1,000
shares in WBP under the Scheme is made up as under:
Rupees
FMV of 1,000 shares in WBP [£14 × 1,000 = £14,000 (£1 = Rs. 100)] 1,400,000
Consideration paid at the time of:
– accepting the right to acquire the 1,000 shares
[£1 × 1,000 = £1,000 [£1 = Rs. 100] 100,000
– exercising the right to acquire the 1,000 shares
[£9 × 1,000 = £9,000 [£1 = Rs. 100] 900,000
———— 1,000,000
—––———
Benefit on acquisition of the 1,000 shares 400,000
—————
—————
Note (3) Gain on the disposal of 500 shares in WBP acquired under the Scheme.
Rupees
Consideration received on the disposal of 500 shares 1,200,000
Cost of 500 shares to Noman (Note 3A) 700,000
—————
—————
—————
As the shares were held for less than one year, the entire gain of Rs. 500,000 is chargeable to tax
under the head ‘Capital gains’.
Note (3A) The cost of the shares to an employee acquired under an employee share scheme is the sum of (i)
the consideration, if any, paid by the employee for the right or option to acquire the shares, (ii) the
consideration, if any, paid by the employee for the shares, and (iii) the amount chargeable to tax
as the salary income of the employee on acquisition of the shares [s.14(4)].
Rupees
(i) £1 paid on accepting the right to acquire 1,000 shares [£1 × 1,000 = £1,000
(£1 = Rs. 100)] 100,000
(ii) £9 paid on the acquisition of 1,000 shares £9 × 1,000 = £9,000
(£1 = Rs. 100) 900,000
(iii) Amount charged to tax as salary income on the acquisition of the
shares (Note 2) 400,000
—————
Cost of 1,000 shares 1,400,000
—————
—————
Cost of 500 shares (1/2 × 1,400,000) 700,000
—————
—————
22
Marks
Note (4) As the shares in Lowland (Private) Ltd were held by Noman for more than one year, only
Rs. 75,000, being 75% of the gain of Rs. 100,000 is chargeable to tax.
Note (5) A gain on the disposal of shares in a company which is a ‘public company’ for tax purposes is
exempt from tax up to the tax year ending on 30 June 2007 (clause 110 of Part 1 of the Second
Schedule). Highlands Ltd is a ‘public company’ for tax purposes, since 50% of its shares are held
by a company incorporated in Saudi Arabia (foreign company) which is wholly owned by the
Kingdom of Saudi Arabia (foreign government) [s.2(47)(ab)]. Therefore, the gain of Rs. 40,000 on
the disposal of the shares is exempt from tax.
Note (6) Gain on the sale of jewellery
A gain or loss under the head ‘Capital gains’ can only arise on the disposal of a ‘capital asset’.
Movable assets held for personal use (with certain exceptions) are excluded from the definition of
a ‘capital asset’ and therefore, any gain or loss on the disposal of such movable assets (which are
not in the list of the exceptions) is outside the ambit of capital gains. One of the exceptions to the
above is jewellery. Any jewellery even if held for personal use is treated as a ‘capital asset’ and any
gain on its disposal is chargeable to tax as income from capital gains [s.37(5)(d)].
For assets acquired by gift (there is no cost of acquisition for the person acquiring the asset), the
FMV of that asset, on the date of its acquisition by the donee is treated as the cost of the asset
[s.37(4A)]. The jewellery gifted to Noman on 1 January 2006 was valued by a reputed firm of
jewellers to be worth Rs. 900,000, which can be taken to be the FMV of the jewellery at the time
of its acquisition by Noman. Rs. 900,000 is accordingly treated as the cost of the jewellery.
Rupees
Sale consideration of the jewellery 1,200,000
Cost being the FMV of the jewellery on 1 January 2006 900,000
—————
Gain on sale 300,000
—————
—————
75% of the gain of Rs. 300,000 is chargeable to tax since the jewellery was
held by Noman for more than a year [s.37(3)] 225,000
—————
—————
Note (7) A payment of zakat under the Zakat and Ushr Ordinance, 1980 is a deductible allowance from
total income [s.9 and s.60].
4 (1) The following issues raised by the Commissioner are not in accordance with the provisions of the tax statute:
(i) Minimum tax
The concept of minimum tax shall apply only to a resident company [s.113(1)]. As Jasmine
Pharmaceuticals Company (JPC) is a partnership firm, its tax status is that of an association of persons
and therefore, the provisions relating to minimum tax payable are not applicable to JPC. 2
(ii) Contribution to the unrecognised provident fund
A contribution to a recognised provident fund is an allowable deduction. A contribution made to an
unrecognised provident fund is also deductible provided the employer has made effective arrangements
to ensure that tax would be deducted from any payments made by the fund in respect of which the
recipient is chargeable to tax under the head ‘Salary’ [s.21(f)].
As JPC has made the aforesaid effective arrangements for deduction of tax from any payments made by
the fund to an employee which is chargeable to tax as the employee’s salary income, the contribution of
Rs. 400,000 made to the fund is a deductible expenditure. 3
(iii) Eid-Milan party
The expenditure of Rs. 75,600 is in the nature of an amenity provided to the employees motivated on
the grounds of commercial expediency, since maintaining cordial and friendly relations with employees
is an integral part of the profit earning process of any business. Expenditure incurred on the grounds of
commercial expediency and in order to indirectly facilitate the carrying on of the business, is expenditure
incurred wholly and exclusively for the purposes of the business and is a deductible expenditure. 2
(iv) Damages paid
The Rs. 500,000 paid to the sole distributor as damages due to the failure to deliver supplies within the
time stipulated in the contract, is an expense connected and incidental to the carrying on of the business
of JPC. That the delay in the delivery of the goods was due to the negligence of JPC’s despatch
department is not relevant. The expenditure incurred is wholly and exclusively for the purpose of the
business and is a deductible expenditure. 2
23
Marks
(2) The following issues raised by the Commissioner are in accordance with the provisions of the tax statute:
(i) Travelling expenses
The expenditure of Rs. 1,530,000 incurred solely to secure the purchase of a mixing machine, is capital
expenditure and is not deductible. Rs. 1,530,000 should be added to the cost of the mixing machine for
tax purposes. 2
(ii) Donation
The donation of Rs. 1,000,000 paid to a hospital run by the Federal Government is not a deductible
expenditure. JPC is however entitled to a tax credit [s.61(I)(b) and (2)]. 2
(iii) Salary paid to Mr A.
Any salary paid by an association of persons (AOP) to a member of the AOP is not a deductible
expenditure [s.21(j)]. A partnership firm has the tax status of an AOP and is assessed to tax as an AOP.
Mr A, being a partner in JPC, is thus a member of the AOP and therefore, the salary paid to him is not
a deductible expenditure. 2
—–
15
—–
5 Mr Miskeen
Rupees
(a) Calculation of input tax
Sales tax on:
– purchases of raw materials from registered persons [Rs. 2,500,000 × 15/115] 326,087 1·0
– purchases of packing materials from unregistered persons ((b)(i)) – 1·0
—————
Admissible amount of input tax for June 2007 326,087
—————
—————
Calculation of output tax
Sales tax on:
– supply of goods to registered persons [Rs. 1,890,000 × 15%] 283,500 0·5
– supply of goods to unregistered persons [Rs. 2,150,000 × 15%] ((b)(ii)) 322,500 1·0
– supply of goods at a trade discount of 35% [Rs. 650,000 × 15%] ((b)(iii)) 97,500 1·0
—————
Admissible amount of output tax for June 2007 703,500
—————
—————
Sales tax payable for June 2007
Output tax 703,500
Input tax 326,087
—————
377,413 0·5
—————
————— ––––
5
—––
(b) (i) As unregistered persons do not charge sales tax and issue tax invoices the question of claiming input tax
does not arise. 1
—–
(ii) As Miskeen is a registered person for sales tax purposes he is required to charge sales tax on making
taxable supplies, irrespective of the fact that the supply has been made to an unregistered person. 1
—–
(iii) In the case of trade discounts the ‘value of supplies’ for the purpose of the levy of sales tax shall be the
discounted price excluding the amount of tax, provided that the tax invoice shows the discounted price
and the related tax and the discount allowed is in conformity with normal business practice.
In respect of the sale of the old model toasters, the discounted price and related tax has been shown on
the tax invoices. However, since the trade discount of 35% is not in conformity with normal business
practice, the consideration of Rs. 422,800 received by Miskeen for the sale of the old model toasters, is
not the ‘value of supplies’. Rs. 650,000, which would have been received had the toasters been sold at
their normal price, is considered as the ‘value of supplies’ on which sales tax must be charged, levied
and paid. 3
—–
—–
10
—–
24
Paper F6 (PKN)
Taxation
(Pakistan)
Monday 2 June 2008
Time allowed
Writing: 3 hours

Tax rates and allowances are on pages 3–4.


The question paper begins on page 3.
2

A. Tax rates for individuals

where salary income exceeds 50% of taxable income for the tax year 2008.
Up to Rs. 150,000* 0%
Rs. 150,001 – Rs. 200,000 0.25%
Rs. 200,001 – Rs. 250,000 0.50%
Rs. 250,001 – Rs. 300,000 0.75%
Rs. 300,001 – Rs. 350,000 1.50%
Rs. 350,001 – Rs. 400,000 2.50%
Rs. 400,001 – Rs. 500,000 3.50%
Rs. 500,001 – Rs. 600,000 4.50%
Rs. 600,001 – Rs. 700,000 6.00%
Rs. 700,001 – Rs. 850,000 7.50%
Rs. 850,001 – Rs. 950,000 9.00%
Rs. 950,001 – Rs. 1,050,000 10.00%
Rs. 1,050,001 – Rs. 1,200,000 11.00%
Rs. 1,200,001 – Rs. 1,500,000 12.50%
Rs. 1,500,001 – Rs. 1,700,000 14.00%
Rs. 1,700,001 – Rs. 2,000,000 15.00%
Rs. 2,000,001 – Rs. 3,150,000 16.00%
Rs. 3,150,001 – Rs. 3,700,000 17.50%
Rs. 3,700,001 – Rs. 4,450,000 18.50%
Rs. 4,450,001 – Rs. 8,400,000 19.00%
Rs. 8,400,001 and over 20.00%
B. Tax rates for individuals

to whom the rates given in A are not applicable.
Up to Rs. 100,000 0%
Rs. 100,000 – Rs. 110,000 0.50%
Rs. 110,001 – Rs. 125,000 1.00%
Rs. 125,001 – Rs. 150,000 2.00%
Rs. 150,001 – Rs. 175,000 3.00%
Rs. 175,001 – Rs. 200,000 4.00%
Rs. 200,001 – Rs. 300,000 5.00%
Rs. 300,001 – Rs. 400,000 7.50%
Rs. 400,001 – Rs. 500,000 10.00%
Rs. 500,001 – Rs. 600,000 12.50%
Rs. 600,001 – Rs. 800,000 15.00%
Rs. 800,001 – Rs. 1,000,000 17.50%
Rs. 1,000,001 – Rs. 1,300,000 21.00%
Rs. 1,300,001 and over 25.00%
3 [P.T.O.
2008 35% 35% 20%

For the rendering of or providing of services 6% of the gross amount payable
E. Other tax rates

On dividends received from a company 10% of the gross amount of the dividend
On income from property 5% of the rent chargeable to tax
Depreciation
Furniture and fittings 15%
Plant and machinery (not otherwise specified) 15% of the tax written down value
Motor vehicles (all types) 15%
Computer hardware 30%
G. Pre-commencement expenditure
Rate of amortisation of pre-commencement expenditure 20% (straight-line basis)
4
1 PQR (Pakistan) Ltd (PQR), incorporated on 1 January 2007, commenced its business operations on 1 March 2007.
PQR is a public company under the Companies Ordinance, 1984. The company was granted permission by the
commissioner to use a twelve-month period ending 31 December as its tax year. The company applied for listing on
the Lahore Stock Exchange and its shares were traded on that exchange for the first time on 31 December 2007. The
company remained listed on that exchange until 1 July 2008 on which date the company was delisted on the
exchange.
PQR is an industrial undertaking engaged in the business of manufacturing pharmaceuticals and its summarised
accounts for the period from 1 January 2007 to 31 December 2007 are as follows:
Notes Rupees Rupees
Sales 98,000,000
Cost of sales 1 (69,500,000)
Gross profit ––––––––––– 28,500,000
Less: Administration expenses 2 6,900,000
Less: Selling and distribution expenses 3 4,750,000
Less: Financial charges 4 2,250,000
Less: Provision for bad debts 5 300,000
Less: Income tax 6 1,100,000 15,300,000
–––––––––– –––––––––––
13,200,000
Other income 7 1,650,000
–––––––––––
Net profit 14,850,000
–––––––––––
The following additional information is provided:
(1) Cost of sales includes: Rupees
(i) Accounting depreciation. 5,948,000
(ii) The first instalment of lease rent paid to an approved leasing company for the
lease of a liquid filling plant which is being used by PQR for its business. The
ownership of the plant is to be transferred to PQR on payment of the sixth and
final instalment. 300,000
(iii) Depreciation on the leased liquid filling plant used by PQR in its business. 165,000
(iv) Payment to the Workers’ Welfare Fund under the Workers’ Welfare Fund
Ordinance, 1971. 195,000
(v) Donation to a charitable hospital established by a private trust. 300,000
(2) Administration expenses include: Rupees
(i) Accounting depreciation. 1,650,000
(ii) Tax collected by the Collector of Customs:
– On the import of raw materials for the company’s own use. 965,000
– On imported injections in finished form, for sale. 837,000
(iii) Legal expenses:
– For an amendment in the memorandum and articles of association to
incorporate changes required by the corporate law authority. 100,000
– For increasing the share capital of the company. 625,000
5 [P.T.O.
(3) Selling and distribution expenses include a penalty of Rs. 650,000 paid to a
customer in settlement of a claim for damages under a clause of a contract for the
supply of a batch of influenza vaccines. Laboratory tests and in-house investigations
revealed that the vaccines exceeded the accepted level of impurities specified in
the contract and that this was due to the negligence of employees of PQR’s
production department.
(4) Financial charges include reimbursement to the promoters of the company for
expenditure incurred in taking legal advice on certain matters raised by the company
law authorities at the time of the incorporation of PQR of Rs. 600,000.
(5) The movement in the provision for bad debts comprises: Rupees Rupees
30 June 2007 Provision made (5% of debtors) 300,000
30 July 2007 Loan given to an employee written off 10,000
Trading debts written off 90,000
Excess provision written back 100,000 (200,000)
–––––––– –––––––––
31 December 2007 Balance carried forward 100,000
–––––––––
(6) Income tax represents a payment in discharge of a demand raised by the commissioner
on completion of the tax audit for the tax year 2006.
(7) Other income includes: Rupees
(i) Share of profit received from an association of persons (AOP) in which PQR is a
member. 550,000
The AOP was in the business of manufacturing spare parts. No tax was deducted
from the payments received for the sale of goods as the payers were not prescribed
persons who are required to deduct tax.
The taxable income of the AOP was Rs. 1,500,000 and the tax assessed and
paid by the AOP was Rs. 375,000.
(ii) Excess provision for bad debts written back (as per (5) above) 100,000
(iii) Net income on the sale of imported injections 67,000
The net income has been adjusted for tax purposes including the apportionment
of common expenses and allowances allocated to the sale of the imported
injections.
(8) During the period from 1 January 2007 to 28 February 2007 PQR incurred
expenses on the construction of prototypes and trial production activities aggregating
Rs. 3,000,000, which has been debited to the preliminary expenses account and is
shown as an asset in the balance sheet as on 31 December 2007.
(9) Advance tax paid for the tax year 2008 on 15 December 2007 was Rs. 900,000.
(10) Assets purchased during the tax year and shown as fixed assets in the balance sheet
as on 31 December 2007 were:
Fixed assets Rupees
Buildings 15,700,000
Motor cars 12,900,000
Furniture 18,750,000
Computers 20,900,000
(i) All the above assets are new assets except for the following which have been
used previously in Pakistan:
– second-hand plant costing Rs. 10,000,000
– a factory building costing Rs. 11,700,000
6
(ii) The amount for computers of Rs. 20,900,000 is made up as follows:
Rupees
Computer hardware 10,900,000
Computer software 10,000,000
––––––––––
20,900,000
––––––––––
The computer software was acquired on 1 November 2007, but was not used by PQR in its business
chargeable to tax before 1 February 2008. The normal useful life of the software is estimated to be five
years.
Required:
(a) Briefly state with reasons:
(i) whether or not PQR (Pakistan) Ltd is a public company for tax purposes; and (2 marks)
(ii) whether you consider PQR (Pakistan) Ltd to be a resident company or a non-resident company.
(1 mark)
(b) Compute the taxable income of PQR (Pakistan) Ltd for the relevant tax year under the appropriate heads of
income, giving clear reasons/explanations for the inclusion in or exclusion from the computation of taxable
income of each of the items listed above.
Note: the reasons/explanations for the items not listed in the computation of taxable income should be shown
separately. Specific marks are allocated for this part of the requirement.
(23 marks)
(c) Calculate the tax payable by/refundable to PQR (Pakistan) Ltd for the relevant tax year. (4 marks)
(30 marks)
7 [P.T.O.
2 For the purpose of this question you should assume that today’s date is 15 August 2008.
The following information is provided by Mr Qureshi.
(1) Qureshi, a citizen of Pakistan, retired from the services of XYZ Private Ltd (XYZ) on 29 June 2007. On retirement,
Qureshi was eligible to receive the following from XYZ:
(i) A monthly pension of Rs. 20,000 payable from 1 July 2007.
(ii) Rs. 100,000 in lieu of unavailed privileged leave.
(iii) Rs. 350,000 as a gratuity. The gratuity payable was under a gratuity scheme of XYZ, which is applicable
to all the company’s employees. The gratuity scheme has been approved by the then Central Board of
Revenue.
The pension is deposited at the end of each month into Qureshi’s bank account. The amounts for the leave pay
(leave encashment) and gratuity were paid by XYZ to Qureshi on 5 July 2007. No taxes were deducted by XYZ
from the above payments.
(2) Qureshi commenced employment with Superior Steel Ltd (SSL) on 1 July 2007 as the factory accountant. In
accordance with the terms of his employment the following remuneration and benefits were received by Qureshi
for the year ended 30 June 2008:
(i) A basic monthly salary of Rs. 200,000.
(ii) Monthly allowances of Rs. 20,000 for housing and Rs. 30,000 each for utilities and medical treatment.
(iii) A company maintained motor car for his business and private use.
(iv) Reimbursement of all medical treatment or hospitalisation charges for Qureshi and his wife.
(v) Two months notice in writing on either side in case of cessation of employment.
(3) As a policy matter of SSL, which is applicable to all employees, the basic salary for the month is deposited into
each employee’s bank account on the first working day of the following month. The monthly allowances are to
be collected by the employees from the cashier on the last working day of each month.
(4) (i) In order to provide the benefit of a car to Qureshi, a new Toyota Saloon was taken on lease by SSL on
1 August 2007 from an approved leasing company, for an annual lease rental of Rs. 400,000 payable for
four years. If the car had been purchased outright by SSL, the cash price would have been Rs. 1,200,000.
(ii) For the year ended 30 June 2008, SSL paid Rs. 210,000 as hospitalisation charges for the treatment of
Qureshi’s wife.
(iii) SSL made a one time payment of Rs. 500,000 to Qureshi on his agreement to give six months notice of
cessation of employment instead of the two months notice agreed to in the original terms of employment.
(iv) During the month of June 2008, Qureshi was on vacation. On resuming his duties on 7 July 2008, he
collected his monthly allowances from the cashier for the month of June 2008.
(v) Tax deducted at source by SSL from Qureshi’s salary income for the relevant tax year was Rs. 767,000.
(5) (i) On 1 July 2007, Qureshi rented an apartment owned by SSL, located in a building adjoining the SSL’s
factory premises. The apartment had recently been vacated by a tenant. The tenant, who had no connection
with SSL, had paid a monthly rent of Rs. 15,000. A deduction of Rs. 10,000 per month is being made by
SSL from the basic salary of Qureshi as rent for the use of the apartment.
(ii) Due to the constantly fluctuating power supply, SSL agreed to supply electricity to the apartment rented by
Qureshi from the factory generator. The electricity units consumed during the year ended 30 June 2008 as
per the meter installed in the apartment, if purchased from an independent power company, would have
cost Rs. 123,800.
8
(6) Qureshi is the owner of a piece of land in Sadar.
On 1 September 2007, Qureshi entered into a contract with Mr Govind for the sale of the land for
Rs. 20,000,000. Under the terms of the sale contract, Govind paid Rs. 300,000 as a deposit and the balance
of Rs. 19,700,000 was payable at the latest by 1 October 2007, failing which the deposit would stand forfeited.
Govind failed to pay the balance amount of Rs. 19,700,000 and the deposit of Rs. 300,000 was forfeited.
On 1 October 2007, Qureshi rented the land to Govind on a monthly rental of Rs. 250,000. Govind paid the
rent in advance up to 30 June 2008. On 1 October 2007 Govind also paid Qureshi a refundable deposit of
Rs. 3,000,000 which was not adjustable against the rent payable.
(7) After seeking permission from SSL, Qureshi commenced his own part-time business, under the name of Taxhelp,
of preparing returns of income of salaried individuals for the year ended 30 June 2007 which were to be
furnished to the tax authorities by 30 September 2007. The permission granted by SSL was on the understanding
that on working days Qureshi could devote his time to the business only after 7 pm and that his business should
not interfere with his official duties as the factory accountant.
Qureshi closed the first accounts of Taxhelp for the period ended 30 June 2008. The summarised income and
expenditure account for that period is as follows:
Rupees Rupees
Receipts
Fees received (net of tax) from Rose Pakistan Ltd (RPL) for
preparing the tax returns of all the employees of RPL – category 1 282,000
Fees received from other individuals – category 2 100,000 382,000
––––––––
Expenditure
Salaries to part-time employees working exclusively on the RPL assignment (155,600)
Expenditure common to both categories 1 and 2
Salaries to part-time employees 64,000
Stationery, computer hire and conveyance of staff 24,432 (88,432)
–––––––– ––––––––
Surplus of receipts over expenditure 137,968
––––––––
The above expenditure is only for the business of Taxhelp and is not allocable to any other head of income.
(8) Other information submitted by Qureshi.
(i) On 13 June 2008, Qureshi donated Rs. 150,000 to an educational institution established in Karachi by the
Federal Government.
(ii) Qureshi received a dividend of Rs. 45,000 (net of tax) from a private company on 10 January 2008.
(iii) Qureshi paid Rs. 15,000 as zakat under the Zakat and Ushr Ordinance, 1980 in the year ended 30 June
2008.
Required:
(a) Compute the taxable income of Mr Qureshi for the relevant tax year under the appropriate heads of income,
giving clear reasons/explanations for the inclusion in or exclusion from the computation of taxable income of
each of the items listed above.
separately. Specific marks are allocated for this part of the requirement.
(20 marks)
(b) Calculate the tax payable by/refundable to Mr Qureshi for the relevant tax year. (5 marks)
(25 marks)
9 [P.T.O.
3 For the purpose of this question, you should assume that today’s date is 15 August 2008.
Mr Tausif is preparing his return of income for the tax year 2008 and furnishes you with the following information for
his accounting year ended 30 June 2008.
(1) He has been a member of the Karachi Stock Exchange since 2 January 2006. He is self-employed and is the
sole proprietor of Tausif Associates, which is engaged in the business of stocks and shares and finance brokers.
Due to his indifferent health, he has been in the process of winding up the business of Tausif Associates since
1 January 2007 and since that date he has not transacted any business for his clients. The transactions in the
books of Tausif Associates for the year ended 30 June 2008 are as follows:
(i) Disposal of shares on 7 January 2008 held as stock-in-trade in the books of Tausif Associates.
– Gain of Rs. 143,000 on the sale of shares in Ebu Ltd, a listed company on the Karachi Stock Exchange.
– Gain of Rs. 360,000 on the sale of shares in Aromatic Coffee (Pakistan) Ltd (ACL) a company
incorporated under the Companies Ordinance, 1984. ACL is not listed on any stock exchange in
Pakistan. 50% of the shares in ACL are held by Aromatic Coffee Kenya which is owned by the
Government of Kenya.
– Loss of Rs. 180,400 on the sale of shares in Alibaba Ltd, a company whose shares are listed on the
Lahore Stock Exchange.
– The shares in Ebu Ltd, ACL and Alibaba Ltd were all purchased on 16 January 2006.
(ii) Membership rights in the Karachi Stock Exchange (KSE)
On 14 February 2008, Tausif gave up his membership rights in the KSE and transferred his one share in
Karachi Stock Exchange (Guarantee) Ltd (KSEGL) to Billimoria Pakistan Ltd along with a room occupied by
him in the KSE building, for a total consideration of Rs. 50,000,000. Tausif had acquired the one share in
KSEGL on 31 December 2005 for Rs. 35,000,000 but had not paid anything at the time of occupying the
room in the KSE.
(2) As a past employee of Safe Bank Inc (SBI), Tausif had participated in the SBI Employee Share Scheme (Scheme).
The details of his participation in the Scheme are as follows:
(i) Tausif was given the right to acquire 1,500 shares in SBI at the exercise price of US$10 per share.
(ii) On 16 July 2003, Tausif acquired 1,000 shares in SBI on making payment of the exercise price of US$10
per share.
(iii) The price quoted on the New York Stock Exchange on 16 July 2003 was US$15 per share.
(iv) Under the terms of the Scheme, 50% of the shares acquired were subject to a restriction on the transfer of
the shares. An employee only had the free right to dispose of the said 50% of the shares after a holding
period of three years.
(v) On 15 July 2006 (the date when Tausif had the free right to transfer the shares), the price of one share in
SBI on the New York Stock Exchange was US$20.
On 7 January 2008, Tausif sold the unutilised right to purchase 500 shares for Rs. 200,000. On the same day,
Tausif also disposed of the 1,000 shares in SBI as under:
(i) 200 shares were sold to Mr Khalid Maqbool, an ex-employee of the Pakistan branch of SBI, for
Rs. 300,000.
(ii) 500 shares were gifted to his wife Nilufer who is a citizen of Pakistan. Nilufer left Pakistan to reside in New
York on 29 December 2007 and has been living in New York since then.
(iii) 300 shares were gifted to his daughter Nasreen who is a citizen of Pakistan and living with her mother in
New York. Nasreen left Pakistan on 1 August 2007 and has been living in New York since then. Nasreen
is the manager of the visa section of the Government of Pakistan in New York and is an employee of the
Federal Government.
10
(3) Disposal of other assets
(i) As a founder member of Cuppa Tea (Private) Ltd (CTP), Tausif purchased 70,000 shares in CTP at Rs. 10
per share in the year 2004. He sold these shares in CTP on 7 January 2008 for Rs. 400,000.
(ii) On the death of Tausif’s father in the year 2004, Tausif had inherited two oil paintings. The two paintings,
‘A’ and ‘B’, were valued by an expert art dealer at the time of his father’s death at Rs. 1,700,000 and
Rs. 100,000 respectively. On 11 June 2008 Tausif sold painting ‘A’ for Rs. 1,448,000 and painting ‘B’ for
Rs. 1,000,000. The paintings had been retained by Tausif for his own use in the intervening period.
(4) Tausif has also furnished you with the following information:
(i) In the accounting year ended 30 June 2008, Tausif paid Rs. 9,000 as zakat under the Zakat and Ushr
Ordinance, 1980.
(ii) On 16 June 2008 Tausif invested Rs. 100,000 in the purchase of new shares offered to the public by
NewCo Ltd, a public company listed on the Islamabad Stock Exchange. Tausif is an original allottee of the
shares.
The rate of exchange is to be taken as US$1 = Rs. 60 at all relevant dates.
Required:
(a) Compute the taxable income of Mr Tausif under the appropriate heads of income for the relevant tax year,
giving clear reasons/explanations for the inclusion in or exclusion from the computation of taxable income of
each of the items listed above.
Note: the reasons/explanations for the items not included in the computation of taxable income should be
shown separately. Specific marks are allocated for this part of the requirement.
(17 marks)
(b) Calculate the tax payable by or refundable to Mr Tausif for the relevant tax year. (3 marks)
(20 marks)
11 [P.T.O.
4 Sunflowers Oil Pakistan Ltd (SOPL) is in the business of manufacturing edible oils. The company was incorporated
on 1 January 2007 and was allowed by the commissioner to use a twelve-month period ending on 31 December
each year as its tax year. The company’s first accounts were made up to 31 December 2007.
(1) You were invited to a meeting on 3 September 2007 when the following issues relating to the income tax return
of income for the tax year 2008 were discussed with the Finance Director of SOPL.
(i) Advance tax
The company has not paid any instalments towards advance tax for the tax year 2008.
(ii) Machinery Supplies plc (MS)
SOPL had entered into a contract with MS on 1 February 2007 (MS contract) for the purchase of a new
seed crushing plant to be shipped from the London docks at the latest by 31 May 2007. The MS contract
provided that, if for any reason, SOPL failed to open a letter of credit for the sale value of the plant in favour
of MS by 1 March 2007 the contract would stand terminated and SOPL would have to pay a penalty of
Rs. 1,500,000 for breach of the terms of the contract. Within a week of entering into the contract with MS,
SOPL were able to acquire a locally manufactured seed crushing plant. The MS contract was terminated and
SOPL paid Rs. 1,500,000 to MS as the penalty for breach of the contract.
The decision to terminate the contract was in the interest of the business, since with the locally
manufactured seed crushing plant the production target for the year 2007 could be achieved thereby
maximising the profitability of the company. This was possible because the locally manufactured seed
crushing plant could be commissioned for use immediately as against a waiting period of three to four
months before the imported plant could be commissioned for use.
(iii) Forward contract for the purchase of raw materials
SOPL entered into a forward contract for the purchase of raw materials used in its business of manufacturing
edible oils to guard against loss through price fluctuations. On the date of maturity of the forward contract,
SOPL did not take delivery of the raw materials but the contract was settled by a payment of Rs. 950,000.
(iv) Repairs
SOPL purchased a labelling machine with the full knowledge that the machine was in an imperfect condition
and was in need of repairs to render it serviceable. Rs. 790,000 was expended on repairs to bring the
machine into a serviceable condition.
(v) Trade mark
On 1 January 2007 SOPL made a one time payment of Rs. 1,000,000 to EFG Ltd to acquire a valuable
trade mark. The use of the trade mark in the business has substantially improved the image of SOPL’s
products and this advantage is expected to accrue for a fairly long time.
(2) The Finance Director’s contentions in respect of each of the above transactions are as under:
(i) Advance tax
There is no obligation on the company to pay advance tax for the tax year 2008 since under the relevant
provisions of the Income Tax Ordinance, 2001 (Ordinance) only a taxpayer whose income was charged to
tax for the latest tax year is liable to pay advance tax. SOPL’s first return of income is for the tax year 2008
which is due to be furnished to the commissioner on or before 30 September 2008 therefore, the issue of
SOPL’s income being charged to tax for any year prior to the tax year 2008 does not arise.
(ii) Machinery Supplies plc (MS)
Under the Ordinance any fine or penalty is not an allowable deduction. As the payment of Rs. 1,500,000
to MS was due to a breach of the terms of the contract between SOPL and MS, the payment is in the nature
of a penalty and therefore, is not a deductible expenditure.
(iii) Forward contract
The forward contract for the purchase of raw materials was settled otherwise than by taking actual delivery
of the raw materials. This transaction would be construed to be a speculative business and treated as distinct
and separate from any other business of SOPL. Therefore, the Rs. 950,000 paid to settle the forward
contract is a loss incurred in a speculative business and is not a deductible expenditure in computing income
from SOPL’s business.
12
(iv) Repairs
The Rs. 790,000 was expended solely for repairing the labelling machine. The expenditure was incurred
wholly and exclusively for the purposes of business and therefore, is a deductible expenditure.
(v) Trade mark
As the acquisition of the trade mark for Rs. 1,000,000 has resulted in an advantage of an enduring nature,
the expenditure is capital in nature and therefore, is not claimable as a deductible expenditure.
Required:
State, giving reasons, whether or not you agree with each of the five contentions of the Finance Director. If you
are not in agreement with any of the contentions of the Finance Director, explain the correct treatment to be
adopted under the provisions of the Income Tax Ordinance, 2001.
Note: the allocation of marks is 3 marks for each item. (15 marks)
5 (a) Mr Danny is registered under the Sales Tax Act, 1990 as a manufacturer of flavoured tea. He informs you that
the Association of Tea Manufacturers has approached the then Central Board of Revenue about reducing the rate
of sales tax from 15% to 12% on the sale of locally produced tea. He furnishes you with the following information
for the month of October 2007:
Rupees
Sale of flavoured tea from 1 October 2007 to 15 October 2007 4,580,000
Sale of flavoured tea from 16 October 2007 to 31 October 2007 8,779,000
Purchase of raw material on 3 October 2007 – paid by crossed cheque 2,635,000
Purchase of spares and supplies on 15 October 2007 – paid in cash 168,500
Payment of courier service charges on 9 October 2007 – paid by crossed cheque 1,703,333
Purchase of raw materials on 21 October 2007 – paid by crossed cheque 9,470,000
Notes:
(1) All payments for purchases are stated inclusive of sales tax at the rate applicable at the relevant date.
(2) The figures for the sales and courier services are stated exclusive of sales tax.
(3) All purchases made during the period 1 October 2007 to 15 October 2007 were consumed/utilised in
producing the goods sold during the said period.
Required:
Assuming the rate of sales tax was reduced from 15% to 12% effective from 16 October 2007:
(i) State the manner in which the sales tax return for the month of October 2007 would need to be
furnished. (3 marks)
(ii) Calculate the sales tax payable by Mr Danny for the month of October 2007. (5 marks)
(b) Under the Sales Tax Act, 1990, a person who is required to maintain any records or documents, shall retain such
records and documents for a prescribed period of time.
Required:
State the period for which a person is required to retain records and documents under the Sales Tax Act,
1990. (2 marks)
(10 marks)
13
Answers

Fundamentals Level – Skills Module, Paper F6 (PKN) June 2008 Answers and
Taxation (Pakistan) Marking Scheme
Marks
1 (a) (i) A public company for Pakistan tax purposes, inter alia, means a company whose shares were traded on
a registered stock exchange in Pakistan at any time in the tax year and which remained listed on that
exchange at the end of that year.
The tax year of PQR (Pakistan) Ltd (PQR) is the twelve month period ended on 31 December 2007
(tax year 2008). PQR is a public company for Pakistan tax purposes since its shares were traded on the
Lahore Stock Exchange for the first time on 31 December 2007 and PQR remained listed on that
exchange at the end of its tax year [s.2(47)(b)]. 2
(ii) PQR is a resident company since the company is incorporated under the Companies Ordinance, 1984
[s.83(a)]. 1
–––
3
–––
(b) PQR (Pakistan) Ltd

Tax year 2008
Add: Accounting depreciation (Note 1) 7,598,000 0·5
Add: Depreciation on the leased asset (Note 2) 165,000 0·5
Add: Payment to Workers’ Welfare Fund (Note 3) 195,000 0·5
Add: Donation (Note 4) 300,000 1·0
Add: Tax collected by the Collector of Customs on:
Add: – import of raw materials for own use (Note 5) 965,000 1·0
Add: – imported injections in finished form (Note 6) 837,000 1·0
Add: Legal expenses (Note 7) 625,000 1·0
Add: Payment to the promoters of the company (Note 8) 600,000 1·0
Add: Provision for bad debts (Note 9) 300,000 0·5
Add: Income tax paid (Note 10) 1,100,000 0·5
–––––––––– 12,685,000
–––––––––––
27,535,000
Less: Net income on the sale of imported injections (Note 11) 67,000 1·0
Less: Trading debts written off (Note 12) 90,000 0·5
Less: Provision for bad debs written back (Note 13) 100,000 1·0
Less: Amortisation of pre-commencement expenditure (Note 14) 600,000 2·0
Less: Initial allowance (Note 15) 11,200,000 2·0
Less: Depreciation (Note 16) 8,315,000 2·5
–––––––––– 20,372,000
–––––––––––
Less: Allowance for Workers’ Welfare Fund (Note 3) 195,000 0·5
–––––––––––
–––––––––––
The relevant notes for the explanations of the treatment of items included in the computation of taxable
income and tax payable will be considered in allocating marks against each item.
In addition to the above, specific marks will be awarded for the explanations of the treatment of items
not included in the computation of taxable income (1 mark for each item) as follows: 6·0
–––
23
–––
17
Marks
(1) Lease rent paid to an approved leasing company for the lease of a liquid filling plant used by PQR
(Pakistan) Ltd (PQR) for its business is a deductible charge [s.28(b)] and therefore no adjustment is
required in the computation of taxable income.
(2) Legal expenses incurred for an amendment in the memorandum and articles of association of PQR
to bring it in accord with the company law requirements is revenue expenditure and is deductible.
(3) Rs. 650,000 paid to a customer in settlement of a claim of damages arising out of a contract for the
supply of influenza vaccines which were not in accordance with the standard agreed to in the contract
for sale is an expenditure in the ordinary course of carrying on the business and is therefore a
deductible expenditure. The payment of Rs. 650,000 is not a fine or a penalty for the violation of
any law, rule or regulation.
(4) Rs. 10,000 representing a loan to an employee written off against the provision for bad debts is
not a deductible charge since it is not the business of the company to advance loans.
(5) The share of profit of Rs. 550,000 received from the association of persons (AOP) has correctly been
included in the profit and loss account under the account head of other income [s.88A(1)] and
therefore no adjustment is required in the computation of taxable income. However as the AOP has
already paid tax on its income, PQR is allowed a tax credit against its tax payable.
(6) The Rs. 10,000,000 cost of the computer software is an intangible for tax purposes and has a normal
useful life of more than one year. An amortisation deduction is allowed in respect of such an intangible
but only if it is used in the tax year in deriving income from business chargeable to tax. As the computer
software was not used by PQR in its business in the year ended 31 December 2007, there can be no
deduction in that year.
(c) Computation of tax payable Rupees Rupees

Tax credit on tax paid by the AOP (Note A) (137,500) 2·0
––––––––––
2,301,300
Tax collected by the Collector of Customs 965,000 1·0
Advance tax paid 900,000 0·5
––––––––– (1,865,000)
––––––––––
Tax payable 436,300
––––––––––
–––
4
–––
30
–––
Note (A) Tax credit on the tax paid by the AOP: Rupees
Share of profit received from the AOP (A) 550,000
A/B x C
550,000/1,500,000 x 375,000 137,500
–––––––––
Notes referred to in the computation of taxable income.
Note (1) Accounting depreciation of Rs. 7,598,000 (Rs. 5,948,000 included in cost of sales and
Rs. 1,650,000 in administration expenses) is not a deductible charge for tax purposes.
Depreciation calculated at the rates prescribed in the Third Schedule is a deductible charge.
Note (2) Depreciation is allowed only to the owner of an asset. The charge for depreciation of
Rs. 165,000 of the leased liquid filling plant is not deductible since the plant had not been
transferred by the approved lessor to PQR (lessee).
Note (3) The payment of Rs. 195,000 to the Workers’ Welfare Fund is not deductible in computing the
total income but is an allowable deduction from the total income to arrive at the taxable income.
Note (4) The donation of Rs. 300,000 to the charitable hospital established under a private trust is not a
deductible charge. Tax credit under the provisions of s.61(1)(b) is also not admissible on the
amount paid since the hospital is not one that is established or run by the Federal Government
or a Provincial Government or a local authority.
18
Marks
Note (5) The tax of Rs. 965,000 collected by the Collector of Customs on the import of raw materials for
the company’s own use is not a deductible expenditure. Rs. 965,000 is allowable as a tax credit
in computing the tax due on the taxable income of PQR.
Note (6) The tax of Rs. 837,000 collected by the Collector of Customs on the import of injections in
finished form is not deductible. Rs. 837,000 is the final tax on the income from the sale of
the injections [s.148(7)].
Note (7) Legal expenses for increasing the share capital of a company are not deductible. The expenditure
is capital in nature and is not an expenditure incurred wholly and exclusively for the purposes of
the business.
Note (8) The payment of Rs. 600,000 to the promoters of PQR relates to the period prior to
incorporation of the company – in fact it is an expense relating to the formation of the company
and is therefore capital expenditure and is not deductible.
Note (9) The provision for bad debts of Rs. 300,000 made on 30 June 2007 is not for specific debts
(being 5% of outstanding debtors) and is therefore not a deductible charge.
Note (10) Any tax paid that is levied on profits or gains is not deductible [s.21(I)].
Note (11) The net income (adjusted for tax purposes) on the sale of the imported injections in finished
form is not to be included in the total income since the tax collected by the Collector of Customs
at the import stage is the final tax on the income from the sale of the imported injections.
Note (12) Trading debts amounting to Rs. 90,000 written off against the provision for bad debts are taken
as a deductible charge on the assumption that the debts were previously included in PQR’s
business income and PQR has reasonable grounds for believing that the debts are now irrecoverable.
Note (13) The excess provision of Rs. 100,000 written back to the provision for bad debts and credited
to other income in the profit and loss account is not chargeable to tax since the provision of
Rs. 300,000 for bad debts has not been allowed as a deductible charge.
Note (14) The expenditure of Rs. 3,000,000 incurred by PQR during the period 1 January 2007 (date of
incorporation of the company) to 28 February 2007 (the last day prior to commencement of
business) on the construction of prototypes and trial production activities is treated as
pre-commencement expenditure for tax purposes. Such expenditure is allowed to be amortised
for tax purposes over five years in equal proportions (20% per year).
Rupees
Total expenditure on pre-commencement expenditure 3,000,000
––––––––––
Amortisation at 20% which amount is allowed as a tax deduction 600,000
––––––––––
Note (15) Initial allowance.
Plant and Building Computers Total initial
machinery allowance
Rs. Rs. Rs. Rs.
Total cost shown under fixed assets 17,500,000 15,700,000 20,900,000 –
Cost of plant previously used in
Pakistan (10,000,000) – – –
Cost of building previously used
in Pakistan – (11,700,000) – –
Cost of software wrongly capitalised
as a fixed asset (see note below) – – (10,000,000) –
–––––––––– –––––––––– –––––––––––
Eligible for initial allowance 7,500,000 4,000,000 10,900,000 –
–––––––––– –––––––––– –––––––––––
Initial allowance at 50% 3,750,000 2,000,000 5,450,000 11,200,000
–––––––––– –––––––––– ––––––––––– –––––––––––
Note: Rs. 10,000,000, being the cost of the computer software, has been included as a fixed asset
in the balance sheet erroneously as computer software is considered to be an intangible for tax
purposes.
19
Marks
Plant and Buildings Computer Motor Furnitue Total
Cost 17,500,000 15,700,000 10,900,000 12,900,000 8,750,000
Initial allowance 13,750,000 12,000,000 15,450,000 – –
––––––––––– ––––––––––– –––––––––– ––––––––––– ––––––––––
Written down value 13,750,000 13,700,000 15,450,000 12,900,000 8,750,000
––––––––––– ––––––––––– –––––––––– ––––––––––– ––––––––––
Depreciation 12,062,500 11,370,000 1,635,000 11,935,000 1,312,500 8,315,000
––––––––––– ––––––––––– –––––––––– ––––––––––– –––––––––– ––––––––––
2 Mr Qureshi
Tax year 2008
(a) Computation of taxable income Rupees Rupees

Salary
From XYZ Private Ltd
Pension Rs. 240,000 (Rs. 20,000 x 12 months) – exempt from tax
(Note 1A) – 1·0
Payment in lieu of unavailed leave (Note 1B) 100,000 1·0
Gratuity (Note 1C) 150,000 1·5
From Superior Steel Ltd.
Basic salary – Rs. 200,000 x 11 months (Note 2) 2,200,000 1·0
Allowances (Note 3)
– Housing – Rs. 20,000 x 12 months (Note 3A) 240,000 0·5
– Utilities – Rs. 30,000 x 12 months (Note 3A) 360,000 0·5
– Medical – Rs. 30,000 x 12 months (Note 3B) 360,000 1·0
Benefit of company maintained car (Note 4) 55,000 1·5
Benefit of free hospitalisation – Rs. 210,000 – exempt from tax (Note 5) – 0·5
Consideration for agreement to a change in the terms of employment (Note 6) 500,000 1·0
Concessional rent for use of company’s apartment (Note 7) 60,000 1·0
Free electricity (Note 8) 123,800 1·0
–––––––––
4,148,800
Income from property (Note 9) 2,550,000 2·0
Income from business (Note 10) 77,892 3·0
––––––––––
Zakat paid (15,000) 0·5
––––––––––
––––––––––
The relevant notes for the explanation of the treatment of items included in the computation of taxable
In addition to the above, specific marks will be awarded for the explanations of the treatment of items not
included in the computation of taxable income (1 mark for each item) as follows. 3·0
–––
20
–––
Items not included in the computation of income and tax payable
(1) Sadar land
An amount received by an owner of a building which is not adjustable against the rent payable by the
tenant is treated as rent chargeable to tax in the tax year in which it is received and the following nine
years in equal proportions. However, there is no provision for treating such non-adjustable amounts
received by an owner of land as rent chargeable to tax. Consequently the Rs. 3,000,000 received by
Qureshi as a refundable deposit from Govind, which is not adjustable against the rent payable, is not
income chargeable to tax and has therefore not been included in the computation of taxable income.
20
Marks
(2) Dividend
Dividend income received by an individual is taxed at the rate of 10% on the gross amount of the
dividend irrespective of the status of the company paying the dividend. The Rs. 45,000 received by
Qureshi as dividend is after deduction of tax at 10% [s.150]. Rs. 5,000, being the tax deducted at
source (10% of Rs. 50,000), is the final tax and the amount of dividend income is not chargeable
to tax under any head of income in computing the taxable income of Qureshi (s.5).
(3) Income from the rendering of services
Rose Pakistan Ltd (RPL) being a company is a prescribed person for the purpose of deduction of tax
under s.153(9) from payments made, inter alia, for the rendering of or providing of services.
Rs. 18,000, being the tax deducted at the rate of 6% of the gross fees of Rs. 300,000, is the final tax
of Qureshi on the income arising from the services rendered to RPL [s.153(1) and (6)]. Such
income is not chargeable to tax under any head of income and no deduction is allowable for any
expenditure incurred in deriving the income [s.169(1) and (2)]. The income derived from the services
rendered to RPL is therefore not included in the computation of taxable income.
(b) Computation of tax payable

Rupees
Less: Income from property considered separately 2,550,000 1·0
––––––––––
4,211,692
––––––––––
Tax on Rs. 4,211,692 at 18.5% 779,163 0·5
Tax on property income of 2,550,000 at 5% (Note 9) 127,500 1·0
––––––––––
906,663
Tax credit on donation (Note 11) 20,113 2·0
––––––––––
886,550
Tax deducted at source on salary income 767,000 0·5
––––––––––
Tax payable 119,550
–––––––––– ––––
5
––––
25
––––
Notes referred to in the computation of income and tax payable
Note (1A) All income included under the head ‘salary’ is chargeable to tax when the income is received
by an employee [s.12(1)]. A person is treated as having received an amount, inter alia,
when the amount, benefit or perquisite is actually received by the person [s.69(a)].
Furthermore any amount or perquisite paid, inter alia, by a past employer is treated as
received by an employee from an employment and is treated as salary [s.12(5)(b)].
The Rs. 240,000 (Rs. 20,000 x 12) received by Qureshi from XYZ Private Ltd (XYZ) as his
pension for the twelve months from July 2007 to June 2008 is his salary income for the
tax year 2008. However, the Rs. 240,000 is exempt from tax since Qureshi is a citizen of
Pakistan, the pension received is from his former employer (XYZ) and he does not continue
to work for XYZ or any associate of XYZ (clause 8 of Part I of the Second Schedule).
Note (1B) Payment in lieu of unavailed leave amounting to Rs. 100,000, though relating to Qureshi’s
past employment with XYZ and paid by XYZ, is his salary income [s.12(2)(a)] and is
chargeable to tax in the tax year 2008 since it was paid to Qureshi on 5 July 2007
(accounting year ended 30 June 2008 – tax year 2008).
Note (1C) The Rs. 350,000 received as a gratuity from XYZ was paid to Qureshi on 5 July 2007. The
amount is his salary income [s.12(2)(a)] and is chargeable to tax in the tax year 2008.
However, an amount not exceeding Rs. 200,000 is exempt under the provisions of clause
(13)(iii) of Part I of the Second Schedule since the amount received as a gratuity is received
under the XYZ gratuity scheme which is applicable to all the employees of XYZ and the scheme
has been approved by the then Central Board of Revenue for the purpose of the said
clause (13)(iii).
Rupees
Gratuity received from XYZ 350,000
––––––––
Chargeable to tax as salary 150,000
––––––––
21
Marks
Note (2) As the basic salary, in accordance with the employment policy of Superior Steel Ltd (SSL),
is payable on the first working day of the following month, the salary for June 2008 was
credited in Qureshi’s bank account in July 2008. As salary is taxed on the receipts basis,
the salary for 11 months (July 2007 to May 2008) is taxable in the tax year 2008. The
salary for June 2008 will be taxable in the tax year 2009.
Note (3) A person is treated as having received an amount, benefit or perquisite if it is made
available to the person [s.69(c)]. As per SSL’s policy, Qureshi should have collected
the allowances for housing, utilities and medical on the last working day of June 2008.
The allowances were thus made available to Qureshi in June 2008 and are therefore
treated as having been received by him in June 2008 despite the fact that the allowances
were actually collected by him on 7 July 2008.
Note (3A) The allowances for housing and utilities are taxable.
Note (3B) A medical allowance up to 10% of the basic salary of an employee is exempt from tax if free
medical treatment or hospitalisation or reimbursement of such expenses is not provided
for in the terms of employment (clause 139(b) of Part I of the Second Schedule).
Qureshi is allowed a reimbursement of all medical or hospitalisation charges under the terms
of his employment, therefore, the medical allowance of Rs. 360,000 is taxable.
Note (4) As the motor car taken on lease by SSL on 1 August 2007 is used by Qureshi partly for
personal and partly for official use, the taxable benefit is calculated at 5% of the fair market
value of the vehicle at the commencement of the lease. The aggregate amount of
Rs. 1,600,000 payable by SSL over the lease period is not the FMV of the vehicle on
1 August 2007. Rs. 1,200,000 being the cash price of the vehicle on 1 August 2007 is the
FMV of the vehicle on that date.
Rupees
Annual benefit – 5% of Rs. 1,200,000 60,000
–––––––
For 11 months (from1 August 2007 to 30 June 2008) 55,000
–––––––
Note (5) The Rs. 210,000 paid by SSL for the hospitalisation charges for the treatment of Mrs Qureshi
is exempt from tax as this benefit is in accordance with the terms of employment of Qureshi.
It is assumed that the national tax number of the hospital is available and SSL has certified
and attested the hospital bill [clause 139(a) of Part I of the Second Schedule].
Note (6) An amount received as consideration by an employee for his agreement to a change to his
terms of employment is considered as salary chargeable to tax [s.12(2)(e)(ii)]. Therefore, the
Rs. 500,000 received by Qureshi on his agreement to give six months notice of his intention
to cease employment as against the period of two months in the original terms of employment,
is income chargeable to tax as salary.
Note (7) Qureshi pays a monthly rent of Rs. 10,000 for an apartment which is owned by SSL. The
previous tenant who had recently vacated the apartment was paying a monthly rent of
Rs. 15,000. As the previous tenant was not connected in any way to SSL, the monthly rent
of Rs. 15,000 is considered as the fair market rent of the apartment. The difference of
Rs. 5,000 a month is a benefit of employment. Rs. 60,000 (Rs. 5,000 x 12 months) is thus
chargeable to tax as salary.
Note (8) Rs. 123,800 would have been the cost of the electricity if the electricity units consumed were
purchased from an independent power company. Since the electricity was supplied free of cost
to Qureshi the Rs. 123,800 is a benefit of employment chargeable to tax as salary.
Note (9) Income from property.
Rupees
Consideration received for the use of land at Rs. 250,000
per month (Rs. 250,000 x 9) 2,250,000
Forfeited deposit paid under a contract for the sale of land 1,300,000
––––––––––
Rent chargeable to tax 2,550,000
––––––––––
Rent received or receivable by the owner of land or buildings for a tax year is chargeable to tax
in that year. Rent includes any amount received or receivable as consideration for the use of
land and includes any forfeited deposit paid under a contract for the sale of the land [s.15(1)
and (2)]. Income from property is taxed at the rate of 5 per cent of the gross amount of rent
chargeable to tax [s.15(6) read with Division VI of Part I of the First Schedule]. The tax
payable on the income from property is Rs. 127,500 (5% of Rs. 2,550,000).
22
Marks
Note (10) Income from business
The tax of Rs. 18,000 deducted by Rose Pakistan Ltd (RPL) is the final tax on the gross fees
of Rs. 300,000 for the services rendered to RPL by Taxhelp. The Rs. 300,000 is therefore not
included in the computation of income from business [item (3) in the list of items not
included in the computation of income and tax payable]. No tax has been deducted from
Rs. 100,000 being the fees received from individuals, since individuals are not prescribed
persons required to deduct tax from payments for services rendered.
The income chargeable to tax under the head income from business is computed as under:
Rupees
Fees received 100,000
Deductible expenditure – Note (10A) 122,108
–––––––
177,892
–––––––
Note (10A) The common expenditure amounting to Rs. 88,432 incurred in deriving income from the
assignment relating to RPL and from the work done for individuals is allocable
to the fees received from individuals in the proportion that the said fees bear to the total
gross fees received.
Rupees
Common expenditure incurred in deriving income from the RPL
assignment and from individuals (A) 188,432
Fees received from individuals (B) 100,000
Total gross fees received (Rs. 300,000 from RPL and
Rs. 100,000 from individuals) (C) 400,000
A x B/C
88,432 x 100,000/400,000 122,108
––––––––
1 Note (11) The donation of Rs. 150,000 to an educational institution established in Karachi by the
Federal Government is entitled to a tax credit [s.61(b)]. Tax credit is allowed at the average
rate of tax (before allowance of any tax credit) on the lower of the amount of the donation
or 30% of the taxable income of the individual [s.61(2)]
Rupees
The lesser of Rs. 150,000 (donation) or Rs. 2,028,507
(30% of taxable income) (C) 1,150,000
A/B x C
906,663/6,761,692 x 150,000 1,120,113
––––––––
23
Marks
3 Mr Tausif
Tax year 2008
Salary
Sale of rights under an employee share scheme (Note 1) 200,000 1·0
Capital gains
Shares held as stock-in-trade in the books of Tausif Associates.
– Gain of Rs. 143,000 on the disposal of shares in Ebu Ltd –
exempt from tax (Note 2) – 0·5
– Gain of Rs. 360,000 on the disposal of shares in Aromatic
Coffee (Pakistan) Ltd – exempt from tax (Note 2) – 1·0
One share in Karachi Stock Exchange (Guarantee) Ltd.
– Gain of Rs. 15,000,000 on the disposal of the one share –
exempt from tax (Note 3) – 1·5
Shares acquired in Safe Bank Inc under an employee share scheme
– Gain on the sale of 200 shares (Note 4) 67,500 3·5
– Gain on the transfer of 500 shares to Nilufer (Note 5) 168,750 3·0
Loss on the sale of shares in Cuppa Tea (Private) Ltd (Note 6) (300,000) 1·0
Movable assets held for own use
– Gain on the sale of painting ‘B’ – (Note 7) 675,000 1·5
–––––––––
611,250
–––––––––
Total income 811,250
–––––––––
–––––––––
The relevant notes will be considered in allocating marks against each item included in the computation of
taxable income.
In addition specific marks will be awarded for the explanation of the treatment of items not included in the
computation of taxable income [1 mark each for items (1) and (2) and 11/2 marks for item (3)] as follows:
3·5
–––
17
–––
(1) No loss is deductible in computing income under the head capital gains on the disposal of a capital
asset where a gain on the disposal of such asset is not chargeable to tax [s.38(2)]. As Alibaba Ltd is
a company whose shares are listed on the Lahore Stock Exchange, any gain on the disposal of its
shares is exempt from tax [clause (110) of Part I of the Second Schedule] and consequently the loss
of Rs. 180,400 on the disposal of the shares in Alibaba Ltd is not deductible.
(2) Under the non-recognition rules, no gain or loss is taken to arise on the disposal of an asset, inter alia,
by reason of a gift of the asset provided the person acquiring the asset is not a non-resident at the time
of the acquisition of the asset [s.79(1)(c) and (2)].
As Nasreen is an employee of the Federal Government of Pakistan posted abroad since 1 August
2007, she was a resident individual (for Pakistan tax purposes) in the tax year 2008 when 300
shares in Safe Bank Inc were transferred to her on 7 January 2008. Since the shares were gifted to
Nasreen by Tausif and Nasreen was not a non-resident when she acquired the shares, no gain or loss
on the disposal of the 300 shares is taken to have arisen. Therefore, this transaction is not included in
the computation of taxable income.
(3) Income under the head capital gains can only arise on the disposal of a capital asset. Moveable assets
held for personal use are excluded from the definition of capital assets with certain exceptions. There
are certain moveable assets which despite being held for personal use, are treated as capital assets and
the gain on the disposal of such assets is chargeable to tax under the head capital gains but no loss is
recognised on the disposal of such assets.
24
Marks
One of the exceptions when a moveable asset held for personal use is treated as a capital asset is a
painting. Though a gain on disposal of a painting is chargeable to tax as capital gains, any loss on
the disposal of a painting is not recognised and is not deductible [s.38(5)(a)]. The loss of Rs. 252,000
[cost as valued by the expert art dealer Rs. 1,700,000 less sale proceeds Rs. 1,448,000] suffered
on the disposal of painting ‘A’ is not recognised as a loss and is not deductible and has therefore not
been included in the computation of taxable income.
(b) Computation of tax payable Rupees

Tax on taxable income of Rs. 802,250 at 17·5% 140,394 0·5
Less: Tax credit on the purchase of shares (Note 8) 114,039 2·5
––––––––
Tax payable 126,355
–––––––– ––––
3
––––
20
––––
Note (1) Gain on the sale of rights under an employee share scheme.
Any gain made on the disposal of a right or option to acquire shares under an employee share
scheme is chargeable to tax as salary income [s.14(5)]. As Tausif has not paid any consideration
for the grant of the rights, Rs. 200,000 is chargeable to tax as salary income.
Note (2) Gain on the sale of shares held as stock-in-trade.
Stock-in-trade representing stocks and shares is considered to be a capital asset [s.37(5)(a)]
and therefore the shares in Ebu Ltd and Aromatic Coffee (Pakistan) Ltd (ACL) are the capital
assets of Tausif. Any income, inter alia, from the sale of shares listed on a stock exchange in
Pakistan or from the sale of shares of a public company (for Pakistan tax purposes), is exempt
from tax up to the tax year ending on 30 June 2008 [clause (110) of Part 1 of the Second
Schedule)].
As the shares in Ebu Ltd are listed on the Karachi Stock Exchange, the gain of Rs. 143,000 on
the disposal of the shares in Ebu Ltd is exempt from tax. ACL is a public company since 50% of
its shares are held by a foreign company (Aromatic Coffee Kenya) which company is owned
by a foreign government (Government of Kenya) [s.2(47)(ab)]. Accordingly the gain of
Rs. 360,000 on the disposal of the shares in ACL is exempt from tax.
Note (3) Gain on the sale of one share in Karachi Stock Exchange (Guarantee) Ltd.
The income derived from the transfer of the membership rights in a stock exchange in Pakistan
along with a room in the stock exchange building is exempt from tax provided the transferor is
an individual, the transferee is a company and the transfer is effected between 1 July 2005
and 30 June 2008 [clause (133A) of Part I of the Second Schedule]. The gain of
Rs. 15,000,000 [Rs. 50,000,000 sale proceeds of the one share in Karachi Stock Exchange
(Guarantee) Ltd less Rs. 35,000,000 cost of the share] is exempt from tax since the transferor
of the share (Tausif) is an individual, the transferee (Billimoria Pakistan Ltd) is a company and
the transfer was effected prior to 30 June 2008.
Note (4) Gain on the sale of 200 shares in Safe Bank Inc (SBI) acquired under an employee share scheme.
Rupees Rupees
Consideration received 300,000
Cost of the shares
Amount paid for 200 shares at US$10 per share 120,000
Amount chargeable to tax under the head salary
– Rs. 450 per share – Note (4A) – (Rs. 450 x 200)
[Cost of one share is Rs. 1,050 (210,000 / 200)] 90,000 210,000
–––––––– ––––––––
90,000
––––––––
75% of the gain of Rs. 90,000 is chargeable to tax as
capital gains since the shares were held for more than one year 67,500
––––––––
25
Marks
Note (4A) Amount chargeable to tax under the head salary
Rupees
– 500 shares in SBI which were not subject to a restriction on the transfer of
the shares. The shares were acquired by Tausif on 16 July 2003 at the exercise
price of US$10 per share when the fair market value (FMV) of one share (price
quoted on the stock exchange) was US$15. The difference of US$5 per
share [US$2,500 i.e. Rs. 150,000 (US$1 = Rs. 60)] is chargeable to tax
under the head salary and would have been taxed in the tax year 2004. 150,000
– 500 shares in SBI which were subject to a restriction on the transfer
of the shares. These 500 shares were also acquired by Tausif on 16 July
2003 at S$10 per share. As the shares were subject to a restriction on
their transfer, the amount chargeable to tax is the FMV of the share
(US$20 per share) on 15 July 2006 (the end of the holding period
of 3 years) as reduced by the amount paid for the shares (US$10
per share). The difference of US$10 per share [US$5,000 i.e.
Rs. 300,000 (US$1 = Rs. 60)] is chargeable to tax under the head
salary and would have been charged to tax in the tax year 2007. 300,000
––––––––
Total amount chargeable to tax as the salary income of Tausif in the
tax years 2004 and 2007. 450,000
________
The amount chargeable to tax in respect of one share is
(Rs. 450,000/1,000). 450
––––––––
Note (5) Gain on the transfer of 500 shares in SBI to Nilufer
No gain or loss is taken to arise on the disposal of an asset, inter alia, by reason of a gift if the
person receiving the asset is not a non-resident [non-recognition rule s.79]. This provision is
not applicable to the gift of 500 shares in SBI made to his wife Nilufer on 7 January 2008.
She was a non-resident at the time of receiving the shares. Nilufer was a non-resident in the
tax year 2008 since she was neither present in Pakistan for 183 days in the tax year 2008 (having
left Pakistan on 29 December 2007) nor was she an employee of the Federal or Provincial
government posted abroad in the tax year 2008.
When a capital asset is disposed of, inter alia, by reason of a gift, the fair market value (FMV)
of the asset on the date of the gift is treated as the consideration received [s.77(1)]. On
7 January 2008 (the date of the gift of 500 shares in SBI to Nilufer), Tausif had sold 200
shares in SBI for Rs. 300,000 (Note 4) i.e. at the rate of Rs. 1,500 per share. The said
Rs. 1,500 is treated as the FMV of one share in SBI on the date of the gift to Nilufer.
Rupees
Consideration received for 500 shares (Rs. 1500 x 500) 750,000
Cost of 500 shares in SBI [(Rs. 1050 per share as determined in Note (4)] 525,000
––––––––
Gain 225,000
––––––––
75% of the gain of Rs. 225,000 is chargeable to tax as capital gains since the
shares were held for more than one year 168,750
––––––––
Note (6) Loss on the sale of shares in Cuppa Tea (Private) Ltd.
Rupees
Cost of 70,000 shares 700,000
Consideration received on the sale of 70,000 shares 400,000
––––––––
Capital loss 300,000
––––––––
26
Marks
Note (7) Gain on the sale of painting ‘B’
Though the painting was held by Tausif for his own use, a painting is considered
to be a capital asset and any gain on the disposal of a painting is chargeable to
tax as capital gains, but no loss is recognised on the disposal of a painting
s.38(5)(a)].
Where a capital asset becomes the property of a person, inter alia, by inheritance,
the fair market value of the asset on the date of its acquisition is treated as the cost
of the asset. Since the painting was valued at Rs. 100,000 by an art expert at
the time of the death of Tausif’s father, Rs. 100,000 is treated as the cost of the
painting.
Rupees
Sale proceeds 1,000,000
Cost 100,000
–––––––––
900,000
–––––––––
75% of Rs. 900,000 is chargeable to tax as capital gains since the painting
was held for more than one year 675,000
––––––––––
Note (8) A person (other than a company) is entitled to a tax credit for a tax year on
the cost of acquiring in that year, new shares offered to the public by a public
company listed on a stock exchange in Pakistan, provided the person is the
original allottee of the shares [s.62(1)].
Tausif is eligible for a tax credit on the investment in shares since he is an
individual and is the original allottee of new shares issued by NewCo Ltd a
public company listed on the Islamabad Stock Exchange.
The amount on which the tax credit is to be calculated is the lowest of (a) the
cost of acquiring the shares, (b) 10% of the person’s taxable income or (c)
Rs. 300,000. Since both the cost of acquiring the shares (Rs. 100,000) and
Rs. 300,000 are more than 10% of taxable income (Rs. 80,225), the tax
credit is calculated on Rs. 80,225 [s.62(2)].
Rupees
The tax credit allowable is calculated as under:
Tax assessed before allowance of tax credit (A) 140,394
Taxable income for the year (B) 802,250
A/B x C
140,394/802,250 x 80,225 14,039
––––––––––
27
Marks
4 The Finance Director of Sunflower Oil Pakistan Ltd (SOPL) should be advised on the following lines:
(1) Advance tax
Up to the tax year 2007, only a taxpayer whose income was charged to tax for the latest tax year
was required to pay advance tax in four quarterly instalments computed on the basis of the last
assessed income. The Finance Act, 2007 enacted on 1 July 2007, inserted a new provision
whereby advance tax is now payable by every company even if it has not been charged to tax
previously or there has been no previous assessment. Such companies are required to estimate the
amount of advance tax payable on the basis of the estimated quarterly accounting profit and pay
the amount so determined after taking into account the minimum tax payable and any adjustment
for tax already paid [s.147(6A)].
As the accounting year of SOPL is from 1 January 2007 to 31 December 2007 and the above change in
the law was enacted on 1 July 2007, SOPL was not required to pay advance tax for the first two quarters
ended 31 March 2007 and 30 June 2007 respectively. However, advance tax computed on the estimated
quarterly accounting profit is payable for the two quarters ended 30 September 2007 and 31 December
2007 on or before 15 September 2007 and 15 December 2007 respectively. 3
(2) Machinery Supplies plc (MS)
Fees and penalties which are not deductible under the Income Tax Ordinance, 2001 are those which are
paid or payable by a taxpayer for the violation of any law, rule or regulation [s.21(g)]. The Rs. 1,500,000
paid by SOPL was in the nature of compensation for a breach of the contract with MS and the payment,
though termed a penalty in the contract document, is in fact not a fine or penalty for the violation of
any law, rule or regulation . The payment was the price paid for the termination of the contract which
was regarded as detrimental to the profitable conduct of the company’s business. Any expenditure
incurred to terminate a disadvantageous contract is revenue expenditure and is deductible. 3
(3) Forward contract
The forward contract entered into by SOPL for the purchase of raw materials used in its business of
manufacturing edible oils is in the nature of a hedging contract which was entered into to guard against
loss from future price fluctuations. Such contracts have specifically been excluded from the definition of
speculative business [s.19(2)]. Therefore, the Rs. 950,000 paid to settle the forward contract is an
expenditure incurred in the normal course of business and is a deductible expenditure. 3
(4) Repairs
An expenditure in the nature of repairs to an asset used for the purpose of the business would normally
be a deductible expenditure provided the repairs do not change the identity of the asset. Any expenditure
which substantially changes the identity of an asset or which adds value to an asset is capital expenditure.
At the time of the purchase of the labelling machine, SOPL was fully aware that the machine was in an
imperfect condition and that further expenditure in the nature of repairs had to be incurred to bring the
machine up to a proper standard before it could be used for the business. The expenditure of Rs. 790,000
has thus added value to the machine – it is in fact a part of the cost of acquiring the machine and is
capital expenditure and is not deductible. 3
(5) Trade mark
A trade mark is considered to be an intangible for tax purposes. The cost incurred by a taxpayer in acquiring
or developing a trade mark is not allowed as a deductible charge but an amortisation deduction is
allowable provided the intangible is used by the taxpayer in deriving income from business chargeable to tax.
The expenditure is allowed to be amortised over the normal useful life (NUL) of the intangible, proportionate
to the number of days the intangible is used in a tax year for the purpose of the business. An intangible with
a NUL of more than 10 years is to be treated as if it has a NUL of 10 years.
The Rs. 1,000,000 expended by SOPL in acquiring the trade mark is the cost of an intangible acquired
by SOPL. As the advantage from the use of the trade mark is expected to accrue for a number of years,
the NUL for the purpose of working the allowable amortisation deduction should be taken at 10 years.
SOPL should claim the amortisation deduction in the return of income for the tax year 2008 and in the
subsequent tax years the trade mark is used in the business. The total amortisation deduction allowable
should not exceed Rs. 1,000,000 which is the cost of acquiring the trade mark. 3
––––
15
––––
28
Marks
5 (a) Mr Danny
(i) When there is a change in the rate of sales tax during a tax period, a separate return for each portion
of the tax period is required to be furnished. Thus, two returns will have to be furnished for the month
of October 2007 – a return for the period 1 October 2007 to 15 October 2007 and a separate return
for the period from 16 October 2007 to 31 October 2007 3
––––
(ii) Sales tax at the rate of 15% Rupees Rupees
Output tax
Sale of taxable goods (Rs. 4,580,000 x 15%) 687,000 0·5
Input tax
Purchase of raw materials (Rs. 2,635,000 x 15/115) 343,696 1·0
Purchase of spare parts and supplies – Rs. 168,500 paid in cash
so not admissable – 1·0
Payment to courier company (Rs. 1,703,333 x 15%) 255,500 0·5
––––––––
599,196
––––––––
––––––––
Sales tax at the rate of 12%

Output tax
Sale of taxable goods (Rs. 8,779,000x 12%) 1,053,480 0·5
Input tax
Purchase of raw materials (Rs. 9,470,000 x 12/112) 1,014,643 1·0
––––––––––
––––––––––
Sales tax payable for the month of October 2007
(87,804 + 38,837) 126,641 0·5
–––––––––– ––––
5
––––
(b) A person is required to retain the records and documents for a period of five years after the end of the tax
period to which such records or documents relate. 2
––––
10
––––
29
Paper F6 (PKN)
Taxation
(Pakistan)
Monday 1 December 2008
Time allowed
Writing: 3 hours

Tax rates and allowances are on pages 2–3.



A. Tax rates for individuals

where salary income exceeds 50% of taxable income for the tax year 2008.
Up to Rs. 150,000* 0%
Rs. 150,001 – Rs. 200,000 0·25%
Rs. 200,001 – Rs. 250,000 0·50%
Rs. 250,001 – Rs. 300,000 0·75%
Rs. 300,001 – Rs. 350,000 1·50%
Rs. 350,001 – Rs. 400,000 2·50%
Rs. 400,001 – Rs. 500,000 3·50%
Rs. 500,001 – Rs. 600,000 4·50%
Rs. 600,001 – Rs. 700,000 6·00%
Rs. 700,001 – Rs. 850,000 7·50%
Rs. 850,001 – Rs. 950,000 9·00%
Rs. 950,001 – Rs. 1,050,000 10·00%
Rs. 1,050,001 – Rs. 1,200,000 11·00%
Rs. 1,200,001 – Rs. 1,500,000 12·50%
Rs. 1,500,001 – Rs. 1,700,000 14·00%
Rs. 1,700,001 – Rs. 2,000,000 15·00%
Rs. 2,000,001 – Rs. 3,150,000 16·00%
Rs. 3,150,001 – Rs. 3,700,000 17·50%
Rs. 3,700,001 – Rs. 4,450,000 18·50%
Rs. 4,450,001 – Rs. 8,400,000 19·00%
Rs. 8,400,001 and over 20·00%
B. Tax rates for individuals

to whom the rates given in A are not applicable.
Up to Rs. 100,000 0%
Rs. 100,001 – Rs. 110,000 0·50%
Rs. 110,001 – Rs. 125,000 1·00%
Rs. 125,001 – Rs. 150,000 2·00%
Rs. 150,001 – Rs. 175,000 3·00%
Rs. 175,001 – Rs. 200,000 4·00%
Rs. 200,001 – Rs. 300,000 5·00%
Rs. 300,001 – Rs. 400,000 7·50%
Rs. 400,001 – Rs. 500,000 10·00%
Rs. 500,001 – Rs. 600,000 12·50%
Rs. 600,001 – Rs. 800,000 15·00%
Rs. 800,001 – Rs. 1,000,000 17·50%
Rs. 1,000,001 – Rs. 1,300,000 21·00%
Rs. 1,300,001 and over 25·00%
2
2008 35% 35% 20%

Collection of advance tax by the Collector of Customs on the import
of goods 5% of the value of the goods
E. Other tax rates

On dividends received from a company 10% of the gross amount of the dividend
On income from property 5% of the rent chargeable to tax
Depreciation
Furniture and fittings
Plant and machinery (not otherwise specified)
Motor vehicles (all types)
Computer hardware
Initial allowance
15%
15%
15%
30%
} of the tax written down value
50% of cost
G. Benchmark rate
For determining the value of the perquisite on loans given to employees, the benchmark rate for the tax year 2008 is
10% per annum of the loan amount.
3 [P.T.O.
1 Woodcrafts Pakistan Limited (WPL) is an industrial undertaking engaged in the business of manufacturing furniture
using Swedish technology and designs. The following information is available for the accounting year ended 30 June
2008:
(1) WPL is a public company under the Companies Ordinance, 1984. 50% of its shares are held by Swedecrafts
Company Inc (SCI), a company incorporated in Sweden. The Government of Sweden owns 51% of the shares
in SCI. WPL is not listed on any stock exchange in Pakistan.
(2) WPL held 100% of the share capital in Stylecrafts (Private) Limited (Stylecrafts) on 1 July 2007. Stylecrafts is
an industrial undertaking and is not engaged in the business of trading.
(3) WPL’s accounting profit for the year ended 30 June 2008, after the transfer of Rs. 3,000,000 to dividend
equalisation reserve account, was Rs. 9,000,000.
(4) Deductions charged in the accounts include: Rupees
(i) Accounting depreciation. 750,000
(ii) Donation to Poor Patients Hospital established in
Karachi by the Provincial Government of Sindh. 600,000
(iii) Air fare for the production manager’s business visit to Sweden,
paid in cash. 250,000
(iv) Payment to a management consultant in the matter of increasing
the company’s share capital. 49,000
(v) Payment to the Karachi Port Trust (KPT) being charges for not lifting
imported goods from the docks within the time stipulated in the
KPT rules. 50,000
(vi) Legal costs incurred for the purpose of standing as a surety for the
due performance of a supply contract entered into by Stylecrafts,
a subsidiary company of WPL, with the Ministry of Industries,
Government of Pakistan. 220,000
(5) Income shown in the accounts include: Rupees
(i) Accounting profit on the sale of a motor car. 388,000
(ii) Damages recovered against WPL’s claim for loss of trading profits,
from a supplier who failed to deliver a consignment of teak wood
within the time stipulated in the supply contract. 1,000,000
(iii) Unclaimed wages which had become time-barred.
Out of the Rs. 650,000, Rs. 491,628 had been charged
to tax by the Commissioner under the head ‘Income for business’
in the prior years as the amount had remained unpaid for
three years from the end of the year the deduction was allowed. 650,000
(6) Fixed assets
(i) The tax written down values of the company’s assets on 1 July 2007 were:
Rupees
Buildings 9,660,000
Motor cars 5,090,000
Furniture 2,400,000
Computers hardware 3,800,000
4
(ii) During the year a motor car was sold for Rs. 900,000. The cost of the motor car was Rs. 1,500,000 but
its cost was restricted to Rs. 1,000,000 for the purposes of claiming tax depreciation. The tax written down
value of the car at the time of its sale was Rs. 510,000.
(iii) On 1 December 2007, the following assets were purchased:
– one new motor car for Rs. 2,000,000
– ten new personal computers for Rs. 760,000
(iv) During the year Rs. 10,800,000 was expended on the construction of a residential building for workers.
The Rs. 10,800,000 included Rs. 2,000,000 for the cost of land. The workers occupied the building on
1 May 2008.
(i) Rs. 11,950,000 was expended on the in-house development of a computer software for designing
standardised office furniture. The software was used for the first time by WPL in its business chargeable to
tax on 1 January 2008. Considering the fast changing trends in furniture design it was not possible to
estimate the normal working life of the software. It was however decided by the management that the
Rs. 11,950,000 should be treated as deferred revenue expenditure and written off equally over five years.
Accordingly Rs. 2,390,000 (1/5 of Rs. 11,950,000) has been charged to cost of sales for the year ended
30 June 2008.
(ii) Sundry creditors include Rs. 700,000 being a provision made on 30 June 2008 for gratuities payable to
employees on their retirement under a gratuity scheme approved by the then Central Board of Revenue. The
Rs. 700,000 has been charged as an expense under the account head of salaries and wages.
(iii) On 3 November 2007, WPL sold 26% out of its 100% shareholding in Stylecrafts (subsidiary company) for
a gain of Rs. 180,000. The shares sold had been held for more than one year.
(iv) Stylecrafts furnished its return of income for the tax year 2008 to the tax department under the self
assessment scheme, on 1 December 2008, declaring a tax loss of Rs. 875,000 for its accounting year
ended 30 June 2008. The Chief Financial Officer of WPL wants Stylecrafts to surrender this loss of
Rs. 875,000 in favour of WPL, so that WPL can set off the Rs. 875,000 against its taxable income for the
tax year 2008.
(v) Advance tax paid by WPL for the tax year 2008 in quarterly instalments was Rs. 1,120,000.
Required:
(a) State, giving reasons, whether or not Woodcrafts Pakistan Limited is a public company for tax purposes.
(2 marks)
(b) Compute the taxable income of Woodcrafts Pakistan Limited for the tax year 2008 under the appropriate
heads of income, giving clear reasons/explanations for the inclusion or exclusion in the computation of taxable
income of each of the items listed.
separately from the other reasons/explanations. (25 marks)
(c) Calculate the tax payable by or refundable to Woodcrafts Pakistan Limited for the tax year 2008.
(3 marks)
(30 marks)
5 [P.T.O.
2 The following information is provided to you by Mr Abdullah
(1) Abdullah is a citizen of Pakistan and until 30 June 2007, he was an employee of the Karachi branch of ABC
Inc, a company incorporated in the United States. On 28 June 2007, Abdullah opted for early retirement under
a voluntary retirement scheme floated by ABC Inc. His resignation was accepted on the same day and ABC Inc.,
gave instructions to their bank to transfer, before 30 June 2007, Rs. 1,850,000 into the bank account of
Abdullah. The Rs. 1,850,000 is made up of the following:
Rupees
– Salary for the month of June 2007 300,000
– Gratuity under a gratuity scheme of ABC Inc. The scheme was not approved by
the Federal Board of Revenue and was applicable only to the employees in the
management cadre. 750,000
– Compensation for redundancy of employment 800,000
—————
1,850,000
—————
—————
The Rs. 1,850,000 was credited to Abdullah’s bank account on Monday 2 July 2007 as 30 June 2007 was a
bank holiday.
On retirement Abdullah was also entitled to a monthly pension of Rs. 20,000 payable on the first working day
of each month commencing from the month of July 2007.
(2) On 30 June 2007, Rs. 100,000 was payable by Abdullah to ABC Inc against a loan taken by him. On 16 July
2007 Abdullah informed ABC Inc that Rs. 70,000 was due to him as salary in lieu of unused privileged leave.
He required ABC Inc to apply the Rs. 70,000 toward part-repayment of the loan. ABC Inc did not pay the
Rs. 70,000 to Abdullah but on 16 July 2007 applied the Rs. 70,000 against the outstanding loan amount of
Rs. 100,000. On 30 June 2008, the balance amount of Rs. 30,000 outstanding against the loan, was waived
by ABC Inc.
(3) On 2 July 2007, Abdullah imported 5,000 units of pressure cookers. The entire consignment was sold to Kitchen
Appliances, a sole proprietorship concern. Abdullah wound up this activity of imports on 30 September 2007
after making a nominal profit of Rs. 7,500. The summarised profit and loss account for that period is as
follows:
Rupees Rupees
Sales 10,000,000
Cost of sales
– Cost of the 5,000 units 8,850,000
– Tax collected by the collector of customs on the value of the imported goods 442,500
– Damages paid to Kitchen Appliances against a claim for defective cookers 700,000 9,992,500
————— ——–———
Net profit 7,500
——–———
——–———
(4) On 1 August 2007, when Abdullah was no longer an employee of ABC Inc, he was allowed to participate in the
ABC Employee Share Scheme (Scheme). The custodian of the Scheme granted Abdullah the right to acquire
1,000 shares in ABC Inc at the exercise price of US$ 10 per share. There was no payment to be made for the
right to acquire the shares. The price of the shares in ABC Inc quoted on the New York Stock Exchange on
1 August 2007 was US$ 12 per share and the value of one right on that date was estimated by the custodian
to be US $2.
(5) On 1 August 2007, Abdullah was offered employment as the finance manager of PQR Ltd Karachi. As an
inducement for Abdullah’s agreement to enter into an employment relationship commencing from
1 September 2007, PQR Ltd proposed to give Abdullah a loan of Rs. 1,000,000 free of profit. On Abdullah’s
agreement to the proposal, he received the Rs. 1,000,000 from PQR Ltd on 1 August 2007 at which time
Abdullah was not an employee of PQR Ltd. The loan was repayable in 10 equal yearly instalments but Abdullah
repaid the full amount of the loan on 30 April 2008.
6
(6) Abdullah commenced employment with PQR Ltd on 1 September 2007. His terms of employment provided for
the following:
– 25% of basic salary each for utilities and medical;
– 45% of basic salary for housing.
(iii) One return business class air-fare for Abdullah’s personal travel to London in a year.
(iv) A company maintained motor car for his business and private use.
(v) Abdullah is not entitled to free medical treatment or hospitalisation or to the reimbursement of such charges.
(7) Other information submitted by Abdullah
(i) Abdullah accepted the benefit of the return air passage to London on 2 April 2008 which cost PQR Ltd
Rs. 217,500.
(ii) In order to provide the benefit of a company maintained motor car to Abdullah, a new motor car was
purchased by PQR Ltd on 1 October 2007, for Rs. 1,500,000.
(iii) Abdullah received a special monthly allowance of Rs. 20,000 from PQR Ltd to meet entertainment expenses
wholly and necessarily to be incurred in the performance of his duties as a finance manager.
(iv) Tax deducted at source by PQR Ltd from Abdullah’s salary for the relevant tax year was Rs. 1,100,000.
(v) On 1 June 2008 Abdullah resigned from PQR Ltd and left Pakistan for Dubai on the same day and remained
in Dubai until 30 June 2008. He commenced employment with Lotus Associates, Dubai on 1 June 2008
at a consolidated salary of US$ 10,000 per month. He was also provided with residential accommodation
which cost Lotus Associates US$ 4,000 per month.
(vi) On 1 May 2008 Abdullah disposed of the right to purchase the 1,000 shares in ABC Inc for Rs. 215,000.
(vii) On 1 May 2008, by a notice in writing to the Commissioner, Abdullah had elected to be taxed on the amount
of the compensation for redundancy received from ABC Inc at the average rate of tax paid by him on his
total income for the preceding three tax years. This tax rate worked out at 15%.
(viii) Abdullah is the owner of a building in the Defence Housing Society. On 1 September 2007, he rented the
building to Mr X for Rs. 76,000 a month, which amount includes Rs. 10,000 for providing a security guard
for the building. The following expenses were incurred by Abdullah on the building:
Rupees
Repairs and renovation 20,000
Ground rent 3,000
Insurance 6,000
———–
29,000
———–
———–
Abdullah paid Rs. 5,000 a month as salary to the security guard.
(ix) Abdullah rented a factory building in the Korangi Industrial Estate on 1 July 2006 and paid three years rent
in advance at the rate of Rs. 650,000 per annum. On 1 July 2007, Mr Bee wanted to sub-lease the building
from Abdullah at an annual rental of Rs. 2,000,000. As an inducement for Abdullah’s agreement to enter
into a sub-lease arrangement for two years, Bee proposed to pay Abdullah a deposit of Rs. 3,000,000 which
would not be adjustable against the rent. On Abdullah’s agreement to the proposal, Bee paid Abdullah on
2 July 2007:
– Rs. 4,000,000 as rent in advance for two years; and
– Rs. 3,000,000 as a deposit which was not adjustable against the rent.
(x) On 2 July 2007 Abdullah invested Rs. 500,000 in the purchase of new shares in Classic Cars Ltd, a public
company listed on the Lahore Stock Exchange. Classic Cars Ltd had offered the new shares to the public
and Abdullah was an original allottee of the shares.
7 [P.T.O.
Required
(a) Compute the taxable income of Mr Abdullah under the appropriate heads of income for the tax year 2008,
giving clear reasons/explanations for the inclusion or exclusion in the computation of taxable income for each
of the items listed.
Note: the reasons/explanations for the items not included in the computation of income should be shown
(b) Calculate the tax payable by or refundable to Mr Abdullah for the tax year 2008. (5 marks)
(25 marks)
8
Question 3 begins on page 10.
9 [P.T.O.
3 (a) Medico Pakistan Ltd (MPL) is a company incorporated in Pakistan under the Companies Ordinance, 1984 and
is engaged in the business of manufacturing pharmaceuticals. 49% of the shares in MPL are owned by Chin Inc
(CI), a company incorporated in a country which has no tax treaty with Pakistan for the avoidance of double
taxation. CI’s only income in Pakistan is from the dividends received from MPL. On 30 June 2008, CI disposed
of its 49% share holding in MPL to a tax resident of the United Kingdom (UK). The sale transaction was
completed in the UK and the sale consideration was also received by CI in the UK. The sale of the shares in MPL
resulted in a gain of US$ 75,000 to CI.
CI is of the view that the US$ 75,000 is not chargeable to tax in Pakistan since the entire transaction of the sale
was completed outside Pakistan and the sale consideration was also received outside Pakistan.
Required:
State, giving reasons, whether or not the view of Chin Inc is correct. (3 marks)
(b) Mr Prospector (P), a non-resident for Pakistan tax purposes, holds 50% of the shares in Black Gold Inc (BGI), a
company incorporated in a country which has no tax treaty with Pakistan for the avoidance of double taxation.
BGI is a non-resident company for Pakistan tax purposes. BGI entered into an agreement with the Government
of Pakistan (GOP) under which BGI was given the right to explore for and exploit crude oil and natural gas in an
area of Pakistan. This right to explore for and exploit crude oil and gas is the principal asset of BGI in Pakistan.
The profit and loss share in the venture of exploration and production of oil and gas was 51% to GOP and 49%
to BGI. BGI commenced operations in Pakistan as a branch on 1 January 2007.
On 30 June 2008, P disposed of his entire share holding in BGI to Mr Q, a tax resident of the United Kingdom
(UK). The sale transaction was completed in the UK and the sale consideration was also received by P in the
UK. The sale of the shares in BGI resulted in a gain of US$ 2,500,000 to P.
P is of the view that since he was a non-resident in the tax year 2008 and the gain of US$ 2,500,000 arose
from the sale of the shares in BGI, which is a non-resident company for Pakistan tax purposes, the
US$ 2,500,000 is not chargeable to tax in Pakistan.
Required:
State, giving reasons, whether or not the view of Mr Prospector is correct. (3 marks)
(c) The following information is furnished to you by Mr Vakil, the executor to the estate of the late Mrs Moneybags
(M).
(1) M died on 1 June 2008
(2) On the basis of M’s return of income for the tax year 2007 (accounting year ended 30 June 2007) furnished
to the tax department under the self-assessment scheme, the position of M’s unadjusted losses was as
follows:
– Rs. 768,640 loss for the tax year 2007 on account of forward trading in raw cotton on the cotton
exchange. The forward contract was settled otherwise than by actual delivery of cotton.
– Rs. 560,650 capital loss sustained under the head ‘Capital gains’ which is made up as follows:
Accounting year ended on: Rupees
30 June 2002 215,650
30 June 2001 345,000
————
560,650
————
————
(3) At the time of M’s death, she was survived by her three children whose details are as follows:
(i) Ginnie, her daughter, is an author. She left Pakistan for London on 30 December 2007 and has been
living in London since then.
(ii) Peechu, her son, is an artist living in Paris. During the year ended 30 June 2008, he came to Pakistan
for the Eid holidays on 21 March 2008 for a week.
(iii) Roshi, her daughter, has always been resident in Pakistan.
10
(4) On 20 June 2008, Mr Vakil, in accordance with the last will and testament of M, transferred the following
assets of M to the beneficiaries:
(i) To Roshi:
– 1,000 shares in Zee (Private) Ltd which M had acquired on 2 July 2007 for Rs. 20,000.
– A residential house in Shaheen Housing Society, which had been inherited by M in 1970 and was
then valued at Rs. 11,500,000.
(ii) To Ginnie:
– The rupee equivalent of US$ 40,000 which was kept by M in a safe deposit vault. The
US$ 40,000 was converted into Pakistan rupees through an authorised dealer in foreign exchange
at the rate of US$ 1 = Rs.64. The US$ 40,000 had been purchased by M in 1985 for
Rs. 800,000.
– Rs. 3,419,017 being the credit balance in M’s bank account.
(iii) To Peechu:
– A rare Chinese manuscript of the Sung Dynasty which had been purchased by M in 1950 for
Rs. 7,000,000. The manuscript was considered by M to be her own personal asset.
– 10,000 shares in Moneybags Investment Ltd (MIL). The shares were inherited by M from her
father who, as the founder member of MIL, had acquired the shares for Rs. 10 per share. The
break-up value of one share in MIL on 20 June 2008, as determined by a firm of Chartered
Accountants, was Rs. 120.
– An original painting of the early Italian period, which had been purchased by M in 1945 for
Rs. 7,500,000. The painting was considered by M to be her own personal asset.
(i) J B Boots Associates, a firm of surveyors and valuers was appointed by Mr Vakil to determine the fair
market value, as on 20 June 2008, of the Chinese manuscript, the painting of the Italian period, the
residential house and the 1,000 shares in Zee (Private) Ltd.
J B Boots reported that:
– the Chinese manuscript was valued at Rs. 1,000,000. The condition of the manuscript had
deteriorated due to careless storage;
– the painting was valued at Rs. 25,000,000;
– the residential house was valued at Rs. 30,000,000; and
– the break-up value of one share in Zee (Private) Ltd was Rs. 5.
(ii) M had retired from the employment of Exotic Sea Foods Inc (ESF) on 31 December 2006. M was
hospitalised for a month prior to her death. Despite M’s terms of employment not providing for any
medical benefits after retirement, the hospital bill of Rs. 1,174,300 was paid by ESF directly to the
hospital on 28 May 2008.
(iii) On 1 May 2008, M had donated Rs. 2,000,000 to a hospital in Karachi run by the Federal
Government.
Required:
(i) Compute the taxable income of the late Mrs Moneybags under the appropriate heads of income for the
tax year 2008, giving clear reasons/explanations for the inclusion or exclusion in the computation of
taxable income of each of the items listed.
Note: the reasons/explanations for the items not included in the computation of income should be shown
(ii) Calculate the tax payable by or refundable to Mrs Moneybags for the tax year 2008. (2 marks)
(20 marks)
11 [P.T.O.
4 Mr Chaiwalla, a resident for Pakistan tax purposes, is engaged in the business of operating a number of café’s in
Karachi under the name of Doodpati Chai. The assessment of Chaiwalla for the tax year 2007 (accounting year ended
30 June 2007) was selected for audit under section 177 of the Income Tax Ordinance, 2001.
(1) On completion of the audit the Commissioner issued a notice to Chaiwalla requiring him to give reasons, within
seven days of the receipt of the notice, why the assessment for the tax year 2007 should not be
amended to:
(i) Disallow Rs. 150,000 paid to Doodpati Inc Bahamas, for the use of the brand name ‘Doodpati’, since no
tax was deducted from the amount remitted to Doodpati Inc.
(ii) Disallow Rs. 50,000 paid to Mr Consultant for suggesting cost-cutting measures in the café’s, since no tax
was deducted from the amount paid to Mr Consultant.
(iii) Treat Rs. 40,000 received from Ali Canteen Stores Lahore as income chargeable to tax. The Rs. 40,000
received had been credited to Chaiwalla’s capital account.
(iv) Treat Rs. 36,000 received from Orchids Farms Ltd as income chargeable to tax. The Rs. 36,000 received
had been credited to Chaiwalla’s capital account.
(v) Disallow Rs. 7,500 salary paid in cash to Mr A, a temporary worker employed for the month of May 2007.
(2) Chaiwalla is not in agreement with the Commissioner’s proposal to amend the assessment. As required in the
notice issued by the Commissioner, Chaiwalla has submitted his objections to the proposed amendments in
writing together with the following reasons and explanations:
(i) Payment of Rs. 150,000 to Doodpati Inc on account of royalty
No tax was required to be deducted from the payment of Rs. 150,000 made to Doodpati Inc (DI) since:
– DI had no permanent establishment in Pakistan in the tax year 2007 and consequently the royalty
income of DI is not chargeable to tax in Pakistan; and
– DI is a company incorporated in the Bahamas where no income tax is payable.
(ii) Payment of Rs. 50,000 to Mr Consultant
The Rs. 50,000 was a payment by way of an advance and therefore tax was not deducted from the
payment. The total amount payable to Mr Consultant for the assignment is Rs. 120,000 and when the
balance amount of Rs. 70,000 is paid, tax would be deducted at the prescribed rate on the total amount of
Rs. 120,000.
(iii) Rs. 40,000 received from Ali Canteen Stores Lahore
The amount received from Ali Canteen Stores Lahore relates to the business of a coffee house previously run
by Chaiwalla in Lahore. The coffee house business ceased to exist on 31 December 2002. As on
31 December 2002, Ali Canteen Stores Lahore owed Chaiwalla Rs. 40,000 in respect of the sale of coffee
beans. The Rs. 40,000 had not been recognised as the taxable income of Chaiwalla, since the system of
accounting was on the cash basis.
The receipt of Rs. 40,000 is a capital receipt and is not chargeable to tax since:
– it is not a profit or gain of a business carried on by Chaiwalla at any time during the tax year 2007;
– it is not traceable to any source of income in the tax year 2007; and
– the receipt relates to the coffee house business which had ceased business on 31 December 2002 i.e.
before the commencement of the tax year 2007.
(iv) Rs. 36,000 received from Orchids Farms Ltd
This amount represents a dividend received from Orchids Farms Ltd (OFL). OFL’s income is derived wholly
from agriculture and is therefore exempt from tax. The dividend of Rs. 36,000 being paid from an exempt
income is therefore not chargeable to tax.
(v) Salary of Rs. 7,500 paid in cash
Rs. 7,500 was paid in cash to A, a temporary worker, as A did not have a bank account.
12
Required:
State giving reasons, whether or not in each case, the amendments proposed by the Commissioner is or is not in
accordance with the provisions of the tax statute.
Note: the allocation of marks is as follows: issues (i), (ii) and (iv), 3 marks each; issue (iii) 4 marks and
issue (v) 2 marks.
(15 marks)
13 [P.T.O.
5 (a) Barq Ro (Pakistan) Ltd (BRPL), a registered person under the Sales Tax Act, 1990, is engaged in the manufacture
and sale of insulated cables. BRPL’s financial year is the year ended on 30 June annually. The management of
BRPL decided to start a new unit for the manufacture of underground cables that would require specialised
machinery. The machinery was purchased on 1 May 2008 and the new unit commenced production on 4 May
2008.
The business transactions of BRPL for the month of May 2008 were as follows:
Rupees
Payment for purchase of raw materials 7,448,850
Payment for advertisements 7,850,000
Payment for the purchase of machinery for the new unit 5,395,500
Sale of taxable goods in Pakistan 6,535,000
Export of cables to Tanzania 5,790,000
Notes:
(1) All payments are stated inclusive of sales tax.
(2) The figures for the sale of taxable goods and export are stated exclusive of sales tax.
Required:
Calculate the sales tax payable by or refundable to Barq Ro (Pakistan) Ltd for the month of
May 2008 giving clear explanations for the treatment accorded to the following items in determining the
amount of input tax on:
– the purchase of raw materials and advertisements; and
– the purchase of machinery for the new manufacturing unit. (7 marks)
(b) Mr Yousha, a registered person under the Sales Tax Act, 1990, is carrying on business in the name of Yousha
Associates. Yousha is informed by his chief accountant that a credit note has to be issued to a debtor in respect
of an invoice issued on 30 June 2008. The chief accountant intends to issue the credit note in the month of
January 2009.
Required:
State, giving reasons, whether or not you are in agreement with the chief accountant’s proposal to issue the
credit note in the month of January 2009. (3 marks)
(10 marks)
14
Answers

Fundamentals Level – Skills Module, Paper F6 (PKN) December 2008 Answers and
Taxation (Pakistan) Marking Scheme
Marks
1 (a) A public company for Pakistan tax purposes, inter alia, means a company in which not less than 50% of the
shares are held by a foreign company owned by a foreign government [s.2(47)(ab)]. 50% of the shares
in Woodcrafts Pakistan Limited (WPL) are held by Swedecrafts Company Inc (SCI) which is a foreign company, 2
but SCI is not wholly owned by a foreign government. Therefore WPL is not a public company for Pakistan tax —
purposes.
(b) Woodcrafts Pakistan Ltd

Tax year 2008
Add: Transfer to dividend equalisation reserve (Note 1) 3,000,000 1
Donation to Poor Patients Hospital (Note 3) 600,000 1
Consultancy charges for proposed increase in the
share capital (Note 4) 49,000 1
Legal costs (Note 5) 220,000 1
Provision for gratuity (Note 6) 700,000 1
Tax profit on the sale of motor car (Note 7) 90,000 2
Accounting amortisation of software (Note 8) 2,390,000 1
—————– 7,799,000
—————–
16,799,000
Less: Accounting profit on the sale of motor car (Note 7) 388,000 1
Amortisation of an intangible (Note 8) 594,235 2
Unclaimed wages previously taxed (Note 9) 491,628 1·5
Initial allowance (Note 10) 4,780,000 1·5
—————– 13,185,863
—————–
3,613,137
Capital gains
Gain on the disposal of shares (Note 12) 135,000 1
—————–
—————–
—————–
included in the computation of taxable income [1 mark each for items (i), (ii) and (iii) and 2 marks for item 5
(iv)] as follows: —–
25
–—
Items not included in the computation of taxable income.
(i) Any expenditure for a transaction paid or payable under a single head of account aggregating in excess
of Rs. 50,000 made other than by a crossed bank cheque or a crossed bank draft is not deductible with
certain exceptions. One of the exceptions is any expenditure on account of a travel fare [s.21(l)(b)(iii)].
The Rs. 250,000 for air fare paid in cash is deductible and has therefore not been included in the
computation of taxable income.
(ii) Rs. 50,000 paid to the Karachi Port Trust for not lifting the imported goods from the docks within the
prescribed time, is an expenditure incurred wholly and exclusively for the purposes of business and is
therefore a deductible expenditure. The payment is not a fine or penalty for the violation of any law, rule
or regulation.
(iii) Rs. 1,000,000 received as damages from a supplier of raw materials, under the terms of the supply
contract, was for the loss of trading profits suffered by Woodcrafts Pakistan Limited (WPL). The receipt
of Rs. 1,000,000 is in the ordinary course of business and is therefore the taxable income of WPL.
17
Marks
(iv) The provisions of group relief (s.59B), inter alia, state that a subsidiary company can surrender its
assessed tax loss (excluding capital loss) for the tax year in favour of its holding company provided
certain conditions are fulfilled. One of the conditions is that where none of the companies in the group
is a listed company on a registered stock exchange in Pakistan, the holding company should own at
least 75% of the share capital of the subsidiary company surrendering the loss.
Neither WPL or Stylecrafts (Private) Limited (Stylecrafts) is a listed company and after the disposal by
WPL of 26% of its holding in Stylecrafts, WPL did not hold the minimum requirement of 75% of the
share capital of Stylecrafts. Therefore, Stylecrafts cannot surrender its tax loss of Rs. 875,000 to WPL
and consequently the Rs. 875,000 cannot be set off by WPL against its taxable income for the tax
year 2008.
(c) Computation of tax payable

Rupees
Tax credit on donation of Rs. 600,000 (Note A) (196,777) 2
—————
1,115,071
Advance tax paid (1,120,000) 0·5
—————
Tax refundable 4,929
—————
—————
—––
3
——
30
——
Note (A) As the donation of Rs. 600,000 is to a hospital established in Pakistan by the Provincial
Government of Sindh, Woodcrafts Pakistan Limited is entitled to a tax credit [s.61(1)(b)]. The tax
credit is allowed at the average rate of tax (before allowance of tax credit) on the lower of the
amount of the donation or 15% of the taxable income of the company [s.61(2)].
Rupees
The lesser of Rs. 600,000 (donation) or
Rs. 562,220 (15% of taxable income) (C) 562,220
————–
A/B x C
1,311,848 / 3,748,137 x 562,220 196,777
————–
Notes referred to in the computation of taxable income.
Note (1) The transfer of Rs. 3,000,000 to dividend equalisation reserve account is an appropriation of
profit. Therefore the Rs. 3,000,000 is not deductible.
Note (2) Accounting depreciation is not a deductible charge. Tax depreciation and initial allowances are
deductible at the rates prescribed in the Third Schedule.
Note (3) The donation to the Poor Patients Hospital is not a deductible charge, but WPL is entitled to a tax
credit under a prescribed formula [s.61(1)(b) and (2)].
Note (4) The expenditure relating to the proposed increase in the share capital is capital in nature.
Therefore, the Rs. 49,000 is not deductible expenditure.
Note (5) Legal costs of Rs. 220,000, incurred by WPL for standing as a surety for the due performance of
a supply contract undertaken by Stylecrafts (Private) Limited (a subsidiary of WPL), is not
deductible since it is not expenditure incurred for the purposes of WPL’s business. A subsidiary
company is a separate legal entity from its parent. Therefore, WPL as the parent company, cannot
be allowed a deduction for the Rs. 220,000.
Note (6) The provision of Rs. 700,000 made on 30 June 2008 is not for an ascertained liability and is
therefore not a deductible charge.
Note (7) The accounting profit or loss on the disposal of a depreciable asset is ignored for tax purposes.
Therefore, the accounting profit of Rs. 388,000 on the sale of the motor car is not taxable
income.
For the purposes of computing the taxable income, it is the tax profit or loss that is chargeable to
tax or allowed as a deduction. The tax profit or loss on the disposal of a depreciable asset is the
difference between the consideration received and the tax written down value of the asset.
18
Marks
As the cost of the motor car was restricted for claiming tax depreciation, the consideration received
on its disposal is to be adjusted as follows:
Rupees
Sale consideration received (A) 900,000
Restricted cost for depreciation purposes (B) 1,000,000
Actual cost (C) 1,500,000
A x B/C
900,000 x (1,000,000/1,500,000) 600,000
Rs. 600,000 is to be treated as the sale consideration
for calculating the tax profit or loss on the disposal of
the motor car
Tax written down value 510,000
—–———
Tax profit on the disposal of the motor car 90,000
—–———
—–———
Note (8) Rs. 11,950,000 expended on the in-house development of computer software is considered to
be an intangible for tax purposes (s.24). There is no concept of deferred revenue expenditure for
tax purposes. Therefore, the Rs. 2,390,000 (1/5 of Rs. 11,950,000) charged to cost of sales is
not a deductible charge.
For tax purposes, the cost incurred in acquiring or developing an intangible is allowed to be
amortised over the normal useful life (NUL) of the intangible, proportionate to the number of days
the intangible is used in the tax year in deriving income chargeable to tax. If the NUL of an
intangible cannot be ascertained, the intangible is treated as having a NUL of 10 years.
Rupees
Cost of the computer software 11,950,000
——–———
Normal useful life of the software in whole years 10 years
——–———
Amortisation for one whole year 1,195,000
——–———
Amortisation for 182 days (1 January 2008 to
30 June 2008) in a year of 366 days
(1,195,000 x 182/366) 594,235
——–———
Note (9) For accounting purposes Rs. 650,000 representing time barred unclaimed wages has been
treated as income. Rs. 491,628 out of the Rs. 650,000 had been charged to tax by the
commissioner as business income in prior years. Therefore the Rs. 491,628 is not income
chargeable to tax in the tax year 2008.
Computer Initial
Building hardware allowance
Rs. Rs. Rs.
Cost of workers’ residential building 10,800,000
Less: Cost of land (Note) (2,000,000)
—————
8,800,000
—————
Cost of computers 760,000
—————
—————
4,780,000
—————
—————
Note: Initial allowance and depreciation is allowed on immovable property excluding the cost of land.
19
Plant and Computer Motor
Rate of machinery Buildings hardware vehicles Furniture Total
depreciation 15% 10% 30% 15% 15%
Written
down value 19,500,000 9,660,000 3,800,000 5,090,000 2,400,000
Disposal — — — 510,000
––––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
19,500,000 9,660,000 3,800,000 4,580,000 2,400,000
––––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Depreciation 2,925,000 966,000 1,140,000 687,000 360,000 6,078,000
––––––––––– –––––––––– –––––––––– –––––––––– ––––––––––
Additions 8,800,000 760,000 2,000,000
Initial allowance (4,400,000) (380,000) *
–––––––––– –––––––––– ––––––––––
Written down value 4,400,000 380,000 2,000,000
–––––––––– –––––––––– ––––––––––
Depreciation 440,000 114,000 300,000 854,000
–––––––––– –––––––––– –––––––––– ––––––––––
6,932,000
––––––––––
––––––––––
* Any road transport vehicle not plying for hire is not eligible for initial allowance.
Note (12) 75% of the capital gain of Rs. 180,000 on the disposal of the shares in Stylecrafts (Private) Limited is chargeable
to tax, since the shares were held for more than one year. Therefore, Rs. 135,000 (75% of 180,000) is chargeable
to tax under the head ‘capital gains’.
20
Marks
2 Mr Abdullah
Tax year 2008
Salary
From ABC Inc.
Salary for June 2007 (Note 1) 300,000 0·5
Gratuity (Note 1A) 675,000 1
Compensation for redundancy of employment (Note 1B) 800,000 1
Encashment of unused leave pay (Note 2) 70,000 1
Waiver of loan (Note 3) 30,000 0·5
Pension – Rs. 240,000 exempt from tax (Note 4) — 0·5
From PQR (Pakistan) Ltd.
Basic salary – Rs. 300,000 x 9 (Note 6) 2,700,000 0·5
Cash allowances:
– utilities – 25% of Rs. 2,700,000 (Note 6A) 675,000 0·5
– housing – 45% of Rs. 2,700,000 (Note 6A) 1,215,000 0·5
– medical (Note 6B) 405,000 1
Benefit of profit free loan (Note 7) 75,000 1
Special allowance (Note 10) 180,000 1
From Lotus Associates Dubai – exempt from tax (Note 11) — 2
————— 7,607,500
Income from property (Note 12) 660,000 1
Income from other sources:
Security guard connected with the renting of building (Note 12) 50,000 0·5
Sub-lease of land (Note 13) 1,350,000 1
————— 1,400,000
—————
—————
—————
included in the computation of taxable income [1 mark each for items (1) and (2) and 2 marks for 4
item (3)] as follows: –——
20
–——
(1) The tax collected by the collector of customs amounting to Rs. 442,500 (5% of the value of the
imported pressure cookers) is the final tax on the income arising out of the import of the pressure
cookers [s.148(7)]. Therefore, the actual profit of Rs. 7,500 is not chargeable to tax under any head of
income [s.169(2)(a)].
(2) The value of a right or option to acquire shares in an employee share scheme granted to an employee,
is not chargeable to tax [s.14(1)]. Therefore, the value of one right on the date of the grant at US$ 2 is
not chargeable to tax.
(3) An amount received by an owner of a building from a tenant which is not adjustable against the rent
payable is considered as rent chargeable to tax in 10 equal instalments under the head ‘Income from
property’. However, there is no provision for treating a non-adjustable amount received by a tenant of a
building as income chargeable to tax. As Abdullah is not the owner of the building which he has sub-
leased to Mr Bee, the Rs. 3,000,000 received from Mr Bee, which is not adjustable against the rent
payable, is not income chargeable to tax.
21
Marks
(b) Computation of tax payable Rupees Rupees
Less: Income to be taxed separately:
Less: – compensation for redundancy of employment 800,000 0·5
Less: – ‘income from property’ 660,000 0·5
———— (1,460,000)
—————
8,207,500
—————
Tax on balance of Rs. 8,207,500 at 19% 1,559,425 0·5
Tax on Rs. 800,000 (compensation for redundancy) at 15% (Note 1B) 120,000 0·5
Tax on Rs. 660,000 (income from property) at 5% (Note 12) 33,000 0·5
—————
1,712,425
Tax credit on purchase of shares (Note 14) (53,140) 2
Tax deducted at source by PQR Ltd from salary income (1,100,000) 0·5
—————
Tax payable 559,285
—————
————— –––––
5
——–
25
——–
——–
Note (1) An amount or perquisite is treated as received by an employee from the exercise of employment
regardless of whether the amount is paid or provided by a past or future employer [s.12(5)(b)].
All income included under the head ‘salary’ is chargeable to tax on a receipt basis [s.12(1)].
On 30 June 2007 (Abdullah’s tax year 2007) ABC Inc was required to pay Abdullah an
aggregate amount of Rs. 1,850,000 being Rs. 300,000 for salary for June 2007,
Rs. 750,000 for gratuity (Note 1A) and Rs. 800,000 for compensation for redundancy of
employment (Note IB). The Rs. 1,850,000 was transferred to Abdullah’s bank account on
2 July 2007 and was therefore actually received by Abdullah in his accounting year ended
30 June 2008 [s.69(a)]. The amounts received from ABC Inc (past employer) for salary,
gratuity and compensation for redundancy, are therefore chargeable to tax in the tax year 2008.
Note (1A) As the gratuity received by Abdullah was neither from an approved gratuity fund nor under an
approved gratuity scheme of ABC Inc applicable to all employees, the amount of the gratuity
exempt from tax is 50% of the amount received or Rs. 75,000 whichever is the lower. [Clause
13(iv) of Part I of the Second Schedule].
Rupees
Gratuity 750,000
Exempt from tax – Rs. 75,000 is lower than 50% of the gratuity (75,000)
————
Chargeable to tax as salary 675,000
————
————
Note (1B) Rs. 800,000 received as compensation for redundancy by Abdullah under the voluntary
retirement scheme of ABC Inc is considered to be a profit in lieu of or in addition to salary and
is chargeable to tax as salary [s.12(2)(e)(iii)]. Abdullah has opted to have the Rs. 800,000
taxed as a separate block of income at the average rate of tax on his total income for the
preceding three tax years [s.12(6)]. Tax on the Rs. 800,000 is calculated separately at 15%
being the average rate of tax of Abdullah for the preceding three years.
Note (2) A person shall be treated as having received an amount, benefit, or perquisite if, inter alia, the
amount is applied on behalf of the person, at the instructions of the person [s.69(b)]. Abdullah
is treated as having received the Rs. 70,000 due to him for unused leave pay as the
Rs. 70,000, at his instructions, was applied by ABC Inc toward the part-repayment of the
outstanding loan amount of Rs. 100,000.
employer is a perquisite chargeable to tax [s.13(9)]. The waiver by ABC Inc of the loan balance
of Rs. 30,000 payable by Abdullah to ABC Inc, is a perquisite provided by ABC Inc to Abdullah
and is therefore chargeable to tax as salary income.
22
Marks
Note (4) The monthly pension received by Abdullah is exempt from tax since Abdullah is a citizen of
Pakistan, the pension received is from a former employer (ABC Inc) and Abdullah does not
continue to work for ABC Inc or any associate of ABC Inc [clause 8 of Part I of the Second
Schedule].
Note (5) A gain on the disposal of a right or option entitling the holder to acquire shares under an
employee share scheme is chargeable to tax to an employee under the head ‘salary’ [s.14(5)].
As no payment was required to be made by Abdullah when he was granted the right to acquire
1,000 shares in ABC Inc, the consideration of Rs. 215,000 received on the disposal of the
right is his gain which is chargeable to tax as salary income.
Note (6) Abdullah’s period of service with PQR Ltd was for nine months – from 1 September 2007 to
31 May 2008. Therefore the basic salary and cash allowances have been calculated for nine
months.
Note (6A) The cash allowances for utilities and housing are both fully taxable.
Note (6B) As Abdullah’s terms of employment provide that he is not entitled to any free medical treatment
or hospitalisation or the reimbursement of medical or hospitalisation charges, any medical
allowance received by him not exceeding 10% of his basic salary is exempt from tax
[clause 139(b) of Part I of the Second Schedule).
Rupees
Medical allowance (25% of 2,700,000) 675,000
Exempt from tax (10% of 2,700,000) (270,000)
————
————
Note (7) The loan of Rs. 1,000,000 given by PQR Ltd to Abdullah on 1 August 2007, on which no
profit was payable by Abdullah, is a perquisite provided by PQR Ltd to Abdullah. The value of
the perquisite chargeable to tax is the profit on the loan of Rs. 1,000,000 computed at the
benchmark rate of 10% per annum [s.13(7)]. (The benchmark rate for the tax year 2008 is
given in the preamble to the examination paper). As the loan was repaid on 30 April 2008, the
profit is to be computed for nine months. The profit chargeable to tax is Rs. 75,000 (10% of
Rs. 1,000,000 x 9/12).
Note (8) The air-fare of Rs. 217,500 paid by PQR Ltd for Abdullah’s personal travel to London is a
perquisite and is chargeable to tax as the salary income of Abdullah.
Note (9) As the motor car purchased for Rs. 1,500,000 on 1 October 2007 is used by Abdullah partly
for private and partly for official use, the taxable benefit of the perquisite is 5% of the cost of
the car proportionate to the number of months the car was available for Abdullah’s use. As
Abdullah resigned from the employment of PQR Ltd on 1 June 2008, the car was used by him
for eight months.
Rupees
Annual benefit – 5% of Rs. 1,500,000 75,000
———–
For eight months (from 1 October 2007 to 31 May 2008) 50,000
———–
Note (10) Any special allowance or benefit or other perquisite specifically granted to meet expenses
wholly and necessarily incurred in the performance of the duties of an office are exempt from
tax except an allowance for entertainment or conveyance [clause 39 of Part I of the Second
Schedule]. The special allowance of Rs. 180,000 (Rs. 20,000 x 9 months) received by
Abdullah, to meet entertainment expenses to be incurred in the performance of his duties, is
therefore chargeable to tax.
Note (11) If a citizen of Pakistan leaves Pakistan during a tax year and remains abroad during that tax
year, any salary income earned by the individual outside Pakistan is exempt from tax [s.51(2)].
Abdullah is a resident for Pakistan tax purposes in the tax year 2008 and normally his
foreign-source salary for the tax year 2008 would be chargeable to tax in Pakistan. However,
since Abdullah left Pakistan for Dubai on 1 June 2008 (tax year 2008) and remained in Dubai
till 30 June 2008 (the end of the tax year 2008), the salary income earned in Dubai from his
employment with Lotus Associates is exempt from tax.
Note (12) Rent received or receivable by the owner of land or a building is chargeable to tax under the
head ‘Income from property’ [s.15(1)]. However, where the rent includes any amount for the
provision of amenities, utilities or other services connected with the renting of a building, such
amount is chargeable to tax under the head ‘Income from other sources’ [s.15(3A)].
23
Marks
Rupees
Rent received from Mr X for 10 months at Rs. 76,000 per month 760,000
Less: Amount included in the rent for the services of a security guard
Less: for 10 months at Rs. 10,000 per month 100,000
————
Rent chargeable to tax 660,000
————
————
Rs. 660,000 is chargeable to tax as ‘Income from property’. The 660,000 is the gross amount
of the rent which is chargeable to tax at the rate of 5% [s.15(6) read with Division VI of Part I
of the First Schedule]. As the gross rent is chargeable to tax, no deductions are allowable in
computing the income from property.
The Rs. 100,000 included in the rent received for providing the services of a security guard is
chargeable to tax under the head ‘Income from other sources’ [s.39(1)(fa)]. Permissible
deductions in computing the income under this head include any expenditure paid in deriving
the income other than expenditure of a capital nature [s.40(1)]. The income chargeable to tax
for the provision of the security guard is Rs. 50,000 [Rs. 100,000 less Rs. 50,000
(Rs. 5,000 x 10 months) salary paid to the guard].
Note (13) The income earned from the sub-leasing of the Korangi building taken on rent by Abdullah is
chargeable to tax under the head ‘Income from other services’ [s.39(1)(e)]. Rs. 650,000 rent
paid by Abdullah for the building is deductible being expenditure (which is not of a capital
nature) paid in deriving the income chargeable to tax [s.40(1)]. Therefore, the income
chargeable to tax from the sub-lease of the Korangi building to Mr Bee is Rs. 1,350,000
(Rs. 2,000,000 rent received from Bee less Rs. 650,000 rent paid for the building).
Note (14) Abdullah is eligible to a tax credit on the investment of Rs. 500,000 on the purchase of new
shares in Classic Cars Ltd since Classic Cars Ltd is a public company listed on a stock
exchange in Pakistan, the new shares were offered to the public and Abdullah is an original
allottee of the shares [s.62(1)].
The credit is to be calculated on the lower of (a) the cost of acquiring the shares (b) 10% of
the person’s taxable income for the year or (c) Rs. 300,000 [s.62(2)]. Since both the cost of
acquiring the shares (Rs. 500,000) and 10% of taxable income (Rs. 966,750) are more than
Rs. 300,000, the tax credit is calculated on Rs. 300,000 only as against Rs. 500,000
invested in the purchase of the shares.
Rupees
A/B x C
1,712,425/9,667,500 x 300,000 53,140
—————
3 (a) The income of a non-resident person, under any head of income, is computed by taking into account only
amounts that are Pakistan-source income [s.11(6)]. Chin Inc being a non-resident is chargeable to tax only
on income which is Pakistan-source income.
Any gain arising on the disposal of shares in a resident company shall be Pakistan-source income
[s.101(13)]. Medico Pakistan Ltd (MPL) is a resident company since it is incorporated under the
Companies Ordinance, 1984 [s.83(a)]. Chin Inc made a gain of US$ 75,000 on the disposal of its
shareholding in MPL (a resident company). Therefore the US$ 75,000 is the Pakistan-source income of
Chin Inc. The view of Chin Inc that because the transaction of the sale was completed outside
Pakistan and the sale consideration was also received outside Pakistan, the US$ 75,000 is not chargeable 3
to tax in Pakistan is erroneous. ——
(b) Any gain from the alienation, inter alia, of any share in a company, the assets of which consist wholly or
principally, directly or indirectly of immovable property in Pakistan or from any other interest in or over
immovable property including a right to explore for or exploit natural resources in Pakistan shall be
Pakistan-source income [s.101(10)].
Mr Prospector (P), being a non-resident for Pakistan tax purposes in the tax year 2008, is chargeable to
tax only on income which is Pakistan-source income [s.11(6)]. The gain of US$ 2,500,000 has arisen
from the disposal by P of his shares in Black Gold Inc (BGI), a non-resident company engaged in the
exploration and production of crude oil and gas in Pakistan. Since the principal asset of BGI in Pakistan is
24
Marks
the right to explore for and exploit crude oil and gas (natural resources) in Pakistan, the gain of
US$ 2,500,000 made by P on the disposal of his shares in BGI is his Pakistan-source income and is 3
chargeable to tax in Pakistan. Therefore, P’s view is erroneous. ——
(c) (i) Mrs Moneybags (deceased)

Tax year 2008

Salary
From Exotic Seafoods Inc
– Benefit of free medical treatment (Note 1) 1,174,300 1
Capital gains
On the transmission of assets on the death of Mrs Moneybags
– Gain on conversion of US$ 40,000 into rupees (Note 2) 1,320,000 1·5
– Gain on 10,000 shares in Moneybags Investment Ltd (Note 2A) 825,000 1
– Gain on the painting (Note 2B) 13,125,000 1·5
—————–
15,270,000
Set off of capital loss brought forward (Note 3) (215,650) 1
—————– 15,054,350
—————–
—————–
The relevant notes for the explanation of the treatment of items included in the computation of taxable
In addition to the above, specific marks will be awarded for the explanation of the treatment of items
not included in the computation of taxable income (1 mark for each item) 6
——
12
——
Items not included in the computation of taxable income.
(1) The unadjusted loss of Rs. 768,640 sustained in the tax year 2007 is a loss from speculative
business, as the loss arose from a forward contract for the purchase of cotton which was settled
otherwise than by actual delivery of the commodity [s.19(2)]. An unadjusted loss from
speculative business can be carried forward for six years immediately succeeding the tax year in
which the loss was sustained [s.58]. Normally the speculation loss of Rs. 768,640 could have
been carried forward up to the tax year 2013 (six years immediately succeeding the tax year
2007 in which the loss was sustained), but as Mrs Moneybags (M) died on 1 June 2008, the
loss of Rs. 768,640 lapsed on that date, since only the person who has sustained any loss can
carry forward the loss.
(2) A capital loss cannot be carried forward to more than six years immediately succeeding the tax
year in which the loss was incurred. The brought forward loss of Rs. 345,000 sustained in the
accounting year ended 30 June 2001 lapsed on 30 June 2007 (tax year 2007) and is therefore
not available to be set off against the capital gains of the tax year 2008. The Rs. 345,000 was
erroneously shown as an unadjusted loss in the return of income for the tax year 2007.
(3) The transmission of an asset by succession or under a will is treated as a disposal of the asset by
the deceased at the time the asset is transmitted [s.75(2)]. Under the non-recognition rules, no
gain or loss is taken to have arisen on the disposal of an asset, inter alia, on the transmission of
the asset to a beneficiary on the death of a person, provided the person acquiring the asset is not
a non-resident person at the time of the acquisition [s.79(1)(b) and s.79(2)].
No gain or loss is taken to have arisen on the transmission of the 1,000 shares in Zee (Private)
Ltd to Roshi on the death of M, as Roshi was not a non-resident person at the time of her
acquisition of the 1,000 shares. Therefore, the transaction of the transmission of the shares is not
included in the computation of taxable income.
(4) A gain or loss under the head ‘capital gains’ can only arise on the disposal of a capital asset. A
capital asset has been defined to mean property of any kind whether or not connected with a
business but does not, inter alia, include any immovable property [s.37(5)(c)]. Therefore the
question of computing any gain or loss on the transmission of the residential house in the
Shaheen Housing Society does not arise.
25
Marks
(5) There can be no gain or loss on the transfer of cash from one person to another. Therefore, the
transmission of the amount of Rs. 3,419,017 to Ginnie has no impact on the computation of
taxable income.
(6) Moveable assets held for personal use (with certain exceptions) are excluded from the definition
of a capital asset and are therefore outside the ambit of capital gains. The exceptions include a
rare manuscript. Any gain on the disposal of a rare manuscript is income chargeable to tax as
capital gains, but any loss on the disposal of a rare manuscript is not recognised as a capital loss
[(s.37(5)(d) and s.38(5)(c)]. Consequently the loss of Rs. 6,000,000 (cost of the manuscript
Rs. 7,000,000 less Rs. 1,000,000 the fair market value of the manuscript on the date of its
transmission to Peechu) is not recognised as a loss and is therefore not included in the
computation of taxable income.
(ii) Computation of tax payable Rupees
Less: Tax credit on donation (Note 4) (500,000) 1·5
—————
Tax payable 3,557,163
————— ——
2
——
20
——
Note (1) An amount or perquisite is treated as received by an employee from an employment
regardless of whether the amount or perquisite is paid or provided by a past or prospective
employer [s.12(5)(b)].
A perquisite includes any amount paid by an employer to discharge an obligation of an
employee to another person [s.13(10)]. The Rs. 1,174,300 paid by Exotic Sea Foods Inc
(ESF) (past employer) to the hospital for the medical treatment of Mrs Moneybags (M) is a
perquisite provided by ESF to M and is therefore chargeable to tax under the head ‘salary’.
Note (2) The transmission of assets under the will of M is treated as a disposal of the assets by M at
the time the asset is transmitted [s.75(2)].
The non-recognition rule [s.79] referred to in item (3) of the ‘items not included in the
computation of taxable income’, under which no gain or loss is taken to have arisen on the
disposal of an asset, inter alia, on the transmission of the asset to a beneficiary on the
death of a person, is not applicable on the transmission of the Rs. 2,560,000 [the rupee
equivalent of the US$ 40,000 at the exchange rate of US$ 1 = Rs. 64] to Ginnie, since
Ginnie at the time of receiving the Rs. 2,560,000 was a non-resident person for Pakistan
tax purposes. She was a non-resident person since she was neither present in Pakistan for
a period of 183 days or more [s.82(a)] nor was she an employee of the Federal or
Provincial Government posted abroad in the tax year 2008 [s.82(b)].
Foreign exchange held as an investment is a capital asset and when it is converted into
rupees it is considered as a disposal of the capital asset. As the US$ 40,000 has been held
by M since the time of its purchase in 1985, the US$ 40,000 is a capital asset. The
conversion of the US$ 40,000 into rupees resulted in a capital gain of Rs. 1,760,000,
which is made as follows:
Rupees
Consideration received on conversion of the US$ 40,000 –
US$ 64 = Rs. 1 2,560,000
Cost of the US$ 40,000 – purchase price 800,000
—————
Gain 1,760,000
—————
As the US$ 40,000 was held by M for more than one year,
75% of the gain is chargeable to tax (75% of Rs. 1,760,000) 1,320,000
—————
26
Marks
Note (2A) The non-recognition rule [s.79] is not applicable to the transmission of the following assets
to Peechu on the death of M, since Peechu was a non-resident person at the time he
received the assets.
– the 10,000 shares in Moneybags Investment Ltd (MIL)
– the Italian period painting (Note 2B)
The transmission of the 10,000 shares in MIL to Peechu, considered as a disposal of the
shares, resulted in a capital gain of Rs. 1,100,000 to M, which is calculated as follows:
Rupees
Consideration received – Rs. 120, the break-up value of one share
in MIL on 20 June 2008, as determined by a firm of Chartered
Accountants, is treated to be the fair market value (FMV) of 1,200,000
one share in MIL. (10,000 x 120)
Cost – Rs. 10 per share (10,000 x 10) 100,000
—————
Gain 1,100,000
—————
As the shares in MIL were held by M for over one year,
75% of the gain is chargeable to tax (75% of 1,100,000) 825,000
—————
Note (2B) Moveable assets (with certain exceptions) held for personal use are excluded from the
definition of a capital asset. The exceptions include a painting, sculpture, drawing or other
works of art. The Italian period painting is therefore considered to be a capital asset and its
transmission to Peechu resulted in a capital gain of Rs. 17,500,000 which is calculated as
follows:
Rupees
Consideration received – the FMV of the painting on
20 June 2008 as determined by the valuer 25,000,000
Cost of the painting 7,500,000
–—————
Gain 17,500,000
–—————
As the painting was held by M for more than one year, 75%
of the gain is chargeable to tax (75% of 17,500,000) 13,125,000
–—————
Note (3) An unadjusted capital loss under the head ‘Capital gains’ can be carried forward for six
years immediately succeeding the tax year in which the loss was sustained to be set-off
only against the profits under the head ‘Capital gains’. Therefore, the unadjusted loss of Rs.
215,650 sustained in the year ended 30 June 2002 is set off against the profits for the
year ended 30 June 2008 (tax year 2008).
Note (4) The donation of Rs. 2,000,000 to a hospital in Pakistan run by the Federal Government is
entitled to a tax credit [s.61(1)]. The tax credit is allowed at the average rate of tax (before
allowance of any tax credit) on the lower of the amount of the donation or 30% of the
taxable income of the individual [s.61(2)].
Rupees
The lesser of Rs. 2,000,000 (donation) or
Rs. 4,868,595 (30% of taxable income) (C) 2,000,000
A/B x C
4,057,163/16,228,650 x 2,000,000 500,000
–—————
27
Marks
4 (1) The following issues raised by the Commissioner are in accordance with the provisions of the tax statute.
(i) Payment of Rs. 150,000 to Doodpati Inc on account of royalty
Doodpati Inc (DI) is a non-resident company and its Pakistan-source income is chargeable to tax in
Pakistan. The right to use a trademark or a brand name falls within the definition of royalty
[s.2(54)(a)].
The payment of Rs. 150,000 to DI for royalty is a Pakistan-source income of the
non-resident DI, since payment has been made by a resident (Mr Chaiwalla) for the right to use the
brand name ‘Doodpati’, and the brand ‘Doodpati’ has not been used by Chaiwalla for any business carried
on by him outside Pakistan through a permanent establishment [s.101(8)]. The Rs. 150,000 3
received by DI is therefore chargeable to tax. As no tax was deducted from the Rs. 150,000 remitted
to DI, the Rs. 150,000 is not a deductible charge [s.21(c)].
(ii) Rs. 40,000 received from Ali Canteen Stores Lahore
Where income has been derived by a person in a tax year, inter alia, from any business that has
ceased before the commencement of that year and that income would have been taxable had there
been no cessation, then the provisions of the tax statute apply to that income as if the business had
not ceased at the time the income was derived [s.72].
Under the provision of s.72, the business of the coffee house is treated as having been carried on by
Chaiwalla in the tax year 2007 as the Rs. 40,000 was received by Mr Chaiwalla in the tax year 2007.
Therefore, the Rs. 40,000, though relating to the coffee house business that had ceased, is considered 4
to be income chargeable to tax in the tax year 2007.
(iii) Rs. 36,000 received from Orchids Farms Ltd
The exemption from tax of any income, in the absence of a specific provision to the contrary, is limited
to the original recipient of the exempt income and does not extend to any person receiving any
payment out of that income [s.55].
The income of Orchids Farms Ltd (OFL) being wholly agricultural income is exempt from tax. As the
benefit of the exempt income of OFL cannot extend to any other person receiving any payment out of
the exempt income, the Rs. 36,000 received by Chaiwalla as dividend from OFL is therefore chargeable 3
to tax.
(2) The following issues raised by the Commissioner are not in accordance with the provisions of the tax
statute.
(i) Payment of Rs. 50,000 to Mr Consultant
Only a ‘prescribed person’ making a payment in full or part including a payment by way of advance to
a resident, inter alia, for the rendering of or providing of services, is required to deduct tax [s.153(1)(b)].
A ‘prescribed person’ does not include an individual. Therefore, Chaiwalla assessed as an individual, 3
was not required to deduct tax from the payment of Rs. 50,000.
(ii) Salary of Rs. 7,500 paid in cash
Any salary paid exceeding Rs. 10,000 per month other than by a crossed cheque or direct transfer of
funds to the employee’s bank account, is not allowed as a deductible charge [s.21(m)]. Rs. 7,500
paid as salary for the month of May 2007 to the temporary worker A in cash is less than Rs. 10,000. 2
Therefore, the Rs. 7,500 is deductible expenditure.
–——
15
——–
28
Marks
5 (a) Barq Ro (Pakistan) Limited
Rupees
Output tax
On the sale of taxable goods (Rs. 6,535,000 x 15%) 980,250 0·5
On export of cables to Tanzania (zero rated) — 1
–————
980,250
–————
Input tax
On payment for purchases of raw materials and advertisements (Note 1) 882,225 2·5
On payment for machinery of the new unit (Note 2) 58,647 2·5
–————
940,872
–————
Tax payable for the month of May 2008
Output tax 980,250
Input tax 940,872
–————
39,378 0·5
–————
–———— ——
7
——
Note (1) A registered person is not allowed to adjust input tax for a tax period in excess of 90% of the
output tax for that tax period (s.8B of the Sales Tax Act, 1990)
Rupees
Input tax
On payment for purchase of raw materials (Rs. 7,448,850 x 15/115) 971,589
On payment for advertisements (Rs. 850,000 x 15/115) 110,870
—————
1,082,459
—————
Restricted to 90% of output tax for May 2008 (90% of Rs. 980,250) 882,225
—————
—————
The balance of Rs. 200,234 would be allowed as input tax for the month of August 2008 i.e.
the second month following the end of the financial year ending on 30 June 2008, subject to the
fulfilment of certain conditions.
Note (2) The input tax on Rs. 5,395,500 paid for the acquisition of the machinery of the new unit is
allowed to be adjusted in 12 equal monthly instalments after the start of production of the new
unit (first proviso to section 8B)
Rupees
Input tax on payment for machinery of the new unit
5,395,500 x 15/115 703,761
Input tax allowable in 12 monthly instalments ————
(Rs. 703,761/12 = 58,647). The first instalment is allowed
as input tax for May 2008 58,647
————
————
(b) A credit note can be issued within 180 days of the date of the relevant supply. As the supply was made
on 30 June 2008, the 180 days would expire on 27 December 2008. Therefore the credit note cannot
be issued by Yousha Associates in the month of January 2009 unless the Collector, at the request of
Yousha Associates, extends the period for the submission of the credit note. The Collector has been
empowered to extend the period of 180 days by a further 180 days at the request of the supplier
in writing giving reasons for the desired extension in time. 3
–——
10
–——
29

ACCA F6 Taxation Solved Past Papers

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ACCA F6 Taxation Solved Past Papers

Uploaded by

Copyright:

Available Formats

Paper 2.

WEDNESDAY 8 DECEMBER 2004

Time allowed 3 hours

This paper is divided into two sections

Section A BOTH questions are compulsory and MUST be

Section B THREE questions ONLY to be answered

Tax rates and allowances are on pages 2–3

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

The Association of Chartered Certified Accountants

FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

A. Tax rates for individuals and associations of persons

C. Tax rates for companies

D. Tax rates on dividends received from companies

E. Tax rates on certain payments to non-residents

F. Rates of advance collection or deduction of tax at source

Initial allowance 50% of cost

H. Value of free unfurnished accommodation where salary is Rs. 600,000 or more

(c) State the particulars to be included on a sales tax invoice. (4 marks)

End of Question Paper

FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

(b) Mr Irfan Zaidi

(c) COMPUTATION OF TAX LIABILITY

TAX DEDUCTED AT SOURCE CONSIDERED AS FINAL TAX

Items not included in the computation of income

(b) The following services are chargeable to sales tax:

Items not included in the computation of income:

(2) Eligibility of PEPL to be assessed on a final tax basis.

WEDNESDAY 8 JUNE 2005

Time allowed 3 hours

This paper is divided into two sections

Section A BOTH questions are compulsory and MUST be

Section B THREE questions ONLY to be answered

Tax rates and allowances are on pages 2–3

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

The Association of Chartered Certified Accountants

FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

D. Tax rates for companies

E. Tax rates on dividends received from companies

F. Rates of advance collection or deduction of tax at source

Initial allowance 50% of cost

For the tax year 2003:

For subsequent tax years:

End of Question Paper

FOR FREE ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

(b) PQR Ltd

(c) Tax liability

INCOME FROM OTHER SOURCES

(b) COMPUTATION OF TAX LIABILITY Rupees

TAX DEDUCTED / COLLECTED AS FINAL TAX Final tax

5 (a) The information required by Alibaba is as under

6 (a) Offer of employment from ABC Limited. Tax year 2005

(b) Offer of employment from PQR Limited. Tax year 2005

(c) Salary income after deduction of tax

WEDNESDAY 7 DECEMBER 2005

Time allowed 3 hours

This paper is divided into two sections

Section A BOTH questions are compulsory and MUST be

Section B THREE questions ONLY to be answered

Tax rates and allowances are on page 3

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination