acca past paper 2013_jun_qa

8/12/2019 ACCA PAst PAPER 2013_jun_QA

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Fundamentals Level Skills Module

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 pages 23.

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.

P

aperF6

(PK

N)

Taxation

(Pakistan)

Tuesday 4 June 2013

The Association of Chartered Certified Accountants


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SUPPLEMENTARY INSTRUCTIONS

1. Calculations and workings need only be made to the nearest rupee.

2. All apportionments should be made to the nearest month except where the exact number of days is given in the

question.

3. All workings should be shown.

TAX RATES AND ALLOWANCES

The following tax rates and allowances for the tax year 2013 are to be used in answering all questions on this

paper.

A. Tax rates for salaried individuals where salary income exceeds 50% of taxable income

Taxable income Rate of tax on taxable income

0 to Rs. 400,000 0%

Rs. 400,001 to Rs. 750,000 5% of the amount exceeding Rs. 400,000

Rs. 750,001 to Rs. 1,500,000 Rs. 17,500 plus 10% of the amount exceeding Rs. 750,000

Rs. 1,500,001 Rs. 2,000,000 Rs. 95,000 plus 15% of the amount exceeding Rs. 1,500,000


Rs. 2,500,001 and above Rs. 420,000 plus 20% of the amount exceeding Rs. 2,500,000

B. Tax rates for associations of persons and non-salaried individuals to whom the rates given in A are not applicable

Taxable income Rate of tax on taxable income

0 to Rs. 400,000 0%

Rs. 400,001 to Rs. 750,000 10% of the amount exceeding Rs. 400,000

Rs. 750,001 to Rs. 1,500,000 Rs. 35,000 plus 15% of the amount exceeding Rs. 750,000


Rs. 2,500,001 and above Rs. 347,500 plus 25% of the amount exceeding Rs. 2,500,000

C. Tax rates for companies

Small company 25% of taxable income

Public company/private company 35% of taxable income

D. Tax rates on capital gains on the disposal of securities

Where the holding period of a security is

less than six months 10%

more than six months but less than 12 months 8%

12 months or more 0%

E. Tax rates on capital gains on the disposal of immovable properties

Where the holding period of immovable property is

up to one year 10%

more than one year but not more than two years 5%

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F. Tax rates for income from property

(i) For individuals and associations of persons

Up to Rs. 150,000 0%

Rs. 150,001 to Rs. 400,000 5% of the gross amount exceeding Rs. 150,000

Rs. 400,001 to Rs. 1,000,000 Rs. 12,500 plus 75% of the gross amount exceeding

Rs. 400,000

Above Rs. 1,000,000 Rs. 57,500 plus 10% of the gross amount exceedingRs. 1,000,000

(ii) For companies

Up to Rs. 400,000 5% of the gross amount

Rs. 400,001 to Rs. 1,000,000 Rs. 20,000 plus 75% of the gross amount exceeding

Rs. 400,000

Above Rs. 1,000,000 Rs. 65,000 plus 10% of the gross amount exceeding

Rs. 1,000,000

G. Other tax rates

On dividends received from a company 10%

H. Rates of deduction/collection of tax at source

Sale of goods (general rate) 35%

Sale of immovable property 05%

Services (other than transport) 6%

Contracts 6%

Commission or brokerage 10%

Profit on debt 10%

Import of goods (general rate) 5%

I. Depreciation rates

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%}

J. Initial allowance

Eligible depreciable assets other than buildings 50% of cost

Eligible buildings 25% of cost

K. Pre-commencement expenditure

Amortisation rate for pre-commencement expenditure 20%

L. Benchmark rate

Interest free loans to employees 10% per annum

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This is a blank page.

Question 1 begins on page 5.

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ALL FIVE questions are compulsory and MUST be attempted

1 For the purpose of this question, you should assume that todays date is 15 July 2013.

Sahiwal Engineering Limited (SEL) is a public company incorporated under the Companies Ordinance, 1984 whose

shares were traded on the Lahore stock exchange from 1 July 2012 until 30 April 2013, on which date SEL was

delisted from the exchange. The control and management of the affairs of SEL was situated partly outside Pakistan

during the year ended 30 June 2013. More than 500 persons remained on the payroll of SEL during the year ended

30 June 2013.

SEL is engaged in the manufacture of engineering goods and its summarised income statement for the accounting

year ended 30 June 2013 is as follows:

Note Rs. Rs.

Turnover 1 90,000,000

Cost of sales 2 (58,000,000)

Gross profit 32,000,000

Less Expenditure

Administration expenses 3 7,000,000

Selling and distribution expenses 4 5,000,000

Financial charges 5 2,000,000

Provision for bad debts 6 1,500,000

Other expenditure 7 8,000,000

(23,500,000)

8,500,000

Other income 8 2,050,000

Net profit 10,550,000

Unless stated otherwise, SEL paid for all the expenditure through crossed cheques and tax was deducted and

deposited as required under the law. The goods manufactured by SEL are exempt from sales tax and SEL has not

opted to be assessed on the final tax basis on income arising from the sales of goods it manufactures.

Notes:

Note 1

Goods of Rs. 1,000,000 were sold to a public limited company which deducted tax from the payment made to SEL.

Due to an accounting error, only the net amount was recorded in the turnover.

Note 2

Cost of sales includes the following:

Rs.Write off of obsolete stock 500,000

Cess paid to the local government on the profits of the company 50,000

Note 3

Administration expenses include:

Rs.

Accounting depreciation 1,000,000

Contribution to an unapproved superannuation fund 300,000

Amount paid to a non-resident company for securing the exclusive rights to

manufacture water-kits for cars in Pakistan for a period of eight years commencing

from 19 April 2013 1,600,000Donation in kind to a relief fund run by the Government of Sindh 1,000,000

Compulsory annual fee, paid in cash, to the Engineering Development Board

established by the Federal Government 200,000

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Note 4

Selling and distribution expenses include:

Rs.

Payment to Monsoon Hotel for holding the annual get-together function for the

employees of the company and their families 600,000

Salaries paid, in cash, to temporary employees in rural areas. Tax was deducted

as required under the law. The monthly salary of each employee was Rs. 16,000 800,000

Note 5

Financial charges include:

Rs.

Profit on debt paid to a subsidiary company of SEL on which no tax was deducted.

SEL and its subsidiary are entitled to group taxation under the provisions of the

Income Tax Ordinance, 2001 700,000

Note 6

The bad debts account comprises:

Rs.

Balance on 1 July 2012 2,000,000

Provision made during the year (2% of debtors) 1,500,0003,500,000

Trade debts written off being irrecoverable (800,000)

Loan to an associate written off being irrecoverable (300,000)

Balance on 30 June 2013 2,400,000

Note 7

Other expenditure comprises:Rs.

Accounting loss on sale of machinery 500,000

Provision for taxation 5,500,000

Provision for anticipated losses 2,000,0008,000,000

Note 8

Other income comprises:

Rs.

Recoveries against bad debts written off but not allowed as a deduction in the prior years 750,000Additional payment received on the delayed payment of a tax refund by the Federal

Board of Revenue 1,300,0002,050,000

Note 9

Creditors include:

Rs.

Rent payable which was allowed as a deduction, on the accrual basis, against the

income for the year ended 30 June 2009 400,000

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Note 10

The tax written down values (TWDV) of SELs fixed assets on 1 July 2012 were:

Rs.

Land 15,000,000

Office and factory buildings 9,000,000

Plant and machinery 4,000,000

Motor vehicles 1,500,000

Further information about SELs fixed asset transactions during the year to 30 June 2013:

(i) The construction of residential quarters for the factory workers was completed on 31 January 2013 at a cost of

Rs. 10,000,000 and the workers were allowed occupation on 15 March 2013. The cost includes the price of

the land paid at Rs. 3,000,000.

(ii) A new car for the business use of the chief executive was purchased on 15 February 2013 for Rs. 2,300,000.

The company incurred a further Rs. 200,000 to enhance the security and safety features of the car before

handing it over to the chief executive on 1 March 2013.

(iii) It is a consistent accounting policy of SEL that any item of furniture costing less than Rs. 75,000 is written off

immediately in the accounts as expense. Purchases of such items in the accounting year ended 30 June 2013amounted to Rs. 750,000.

(iv) Machinery having TWDV of Rs. 500,000 on 1 July 2012 was sold for Rs. 300,000 on 31 December 2012.

Note 11

In addition to the advance tax referred to in Note 1, tax paid by or collected from SEL during the year ended 30 June

2013 was:

Rs.

Income tax paid on the registration of the new car (as in Note 10(ii)) 50,000

Income tax paid along with electricity bills 900,000

Advance tax paid in cash in four equal instalments on the due dates 5,000,000

Required:

(a) State, with reasons, whether you consider Sahiwal Engineering Ltd (SEL) to be a resident or a non-resident

company. (2 marks)

(b) Compute the taxable income of SEL for the tax year 2013, giving clear explanations for the inclusion or

exclusion of each of the items listed in the notes.

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. (24 marks)

(c) Calculate the tax payable by/refundable to SEL for the tax year 2013.

Note: Ignore the minimum tax provisions. (4 marks)

(30 marks)

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2 For the purpose of this question, you should assume that todays date is 15 July 2013.

Mr Rizwan, resident in Pakistan, has provided the following information in respect of his tax affairs for the year ended

30 June 2013.

From employment with Highgrowth Ltd as technical officer

Mr Rizwan worked with Highgrowth Ltd (Highgrowth) throughout the year ended 30 June 2013. On reaching the

age of 55 years, he opted for early retirement with effect from 20 July 2013. He has provided the followinginformation relating to his employment with Highgrowth:

(i) Emoluments received in cash:

annual basic salary of Rs. 1,200,000;

technical allowance at 5% of his basic salary;

Rs. 50,000 in lieu of availing of his annual recreational leave;

utility allowance at 6% of his basic salary; and

Rs. 100,000 as consideration for consenting to a restrictive covenant refraining him from entering into

employment with any other competitive company for a period of one year.

(ii) Highgrowth provided Rizwan with fully furnished accommodation for his family in Lahore. The fair rent of the

accommodation was estimated to be Rs. 50,000 per month. Had the company not provided him with thisaccommodation, he would have been entitled to a house rent allowance at 60% of his basic salary.

(iii) A new car was taken on a finance lease on 1 January 2013 by Highgrowth exclusively for Rizwans private use.

The fair market value of the leased car at the commencement of the lease was Rs. 2,000,000. The total

payments to be made over the lease term of three years were Rs. 2,500,000. The company deducted

Rs. 72,000 from Rizwans salary for his personal use of the car for the six months to 30 June 2013.

(iv) Another car was provided for the business use of Rizwan. On 25 June 2013, in accordance with the terms of

his employment, Rizwan purchased this car from Highgrowth for Rs. 400,000. The fair market value of the car

on 25 June 2013 was Rs. 500,000.

(v) Highgrowth gave Rizwan a loan of Rs. 400,000 at a 2% mark-up on 1 October 2012 for the education of his

children. On 30 June 2013, Rizwan returned the principal amount of Rs. 350,000 along with the mark-uppayable on the total loan. The balance amount of Rs. 50,000 was, however, waived by Highgrowth on that

day.

(vi) Rizwan was provided with the services of a domestic servant for the full year. The monthly cost to Highgrowth

for the provision of this service was Rs. 7,000.

(vii) Rizwan was issued 1,000 shares in Highgrowth on 25 June 2013 under the companys employee share

scheme. There is a restriction on Rizwan not to sell or transfer the shares before 25 June 2014. On 25 June

2013, the breakup value of each share of Highgrowth was Rs. 15 per share against a face value of Rs. 10 per

share. Rizwan did not sell any of the shares during the year ended 30 June 2013.

(viii) Highgrowth deducted Rs. 125,000 as tax from Rizwans salary and this was deposited with the Commissioner

Inland Revenue as required under the law.(ix) Rizwan incurred expenses of Rs. 150,000 relating to self-education which was directly connected with his

employment at Highgrowth. The expenses included fees, books and travel, etc.

Share of income from Agrofriends

On 1 January 2013, Rizwan commenced a partnership with Mr Aqeel running a small consultancy firm, Agrofriends.

Profits are shared 40% to Rizwan and 60% to Aqeel.

The accounting year of Agrofriends ends on 30 June. The taxable income of the firm for the year ended 30 June 2013

was computed at Rs. 1,600,000 before adjustment on account of capital allowances (initial allowance and

depreciation) on computers purchased on 25 June 2013. The computers were put into use for the first time in

Pakistan on 30 June 2013. The total cost incurred on these computers was Rs. 200,000. Agrofriends has already

paid income tax on its income as required under the law.

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Share of income from property

Rizwan and his brother, Saeed, jointly own a freehold house in Islamabad which is let out. Each brother has a 50%

share in the house. The house was let throughout the tax year 2013 to Mr Waseem, at a monthly rent of US$ 1,500.

The total rent amount was paid in advance on 1 July 2012, on which date the exchange rates were:

State Bank of Pakistan rate 1 US$ = Rs. 885

Open market rate 1 US$ = Rs. 900

Required:

Compute Mr Rizwans taxable income and income assessable under the final/fixed tax regime and his total tax

payable for the tax year 2013. Give reasons for the treatment of any items excluded from the taxable income or

for which no expense/deduction is allowed.

(25 marks)

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Required:

Compute the tax payable by Mr Bilal for the tax year 2013 on the taxable income arising from the above

transactions. Give brief reasons for your treatment of each item. (16 marks)

(20 marks)

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4 (a) Briefly explain the basic features of direct and indirect taxes. Give two examples of each. (4 marks)

(b) Mr Naveed, a businessman, filed his return for the tax year 2012 on 30 September 2012. The Federal Board of

Revenue (FBR) selected him for an audit of his income tax affairs. During the audit proceedings, it was found

that he had failed to maintain records as required under the Income Tax Ordinance, 2001. As a result of the audit

proceedings, his taxable income and tax thereon were determined at Rs. 1,500,000 and Rs. 300,000,

respectively. The Commissioner has issued him a show cause notice to levy a penalty for non-maintenance of

the records.

Required:

(i) Calculate the amount of penalty which can be levied on Mr Naveed for non-maintenance of the records

as required under the Income Tax Ordinance, 2001;

(ii) State the time periods for which records are required to be maintained for a tax year in different

situations.

Note: The total marks will be split equally between each part. (4 marks)

(c) Briefly explain the procedure to be followed when the Federal Board of Revenue (FBR) exercises its powers

to exempt a taxpayer from penalty and default surcharges. (3 marks)

(d) For the purpose of this part, you should assume that todays date is 15 July 2013.

Ms Kausar filed her return of income for the tax year 2011 on 30 September 2011 at Rs. 700,000. Today, she

has discovered that, due to an omission, a taxable amount of Rs. 100,000 had not been declared in the original

return. Although no notice for audit or amendment has yet been received from the Commissioner Inland Revenue,

she intends to revise the return immediately.

Required:

State:

(i) the documents Ms Kausar will be required to file with the revised return;

(ii) whether it will be necessary to submit reasons for the revision of the return along with revised return;

(iii) whether Ms Kausar will be liable to pay any default surcharge or penalty on account of revision of her

return; and

(iv) whether Ms Kausar can revise the return without seeking the permission of the Commissioner Inland

Revenue.

Notes:

1. No computation is required in this part of the question.

2. The total marks will be split equally between each part. (4 marks)

(15 marks)

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Answers


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Fundamentals Level Skills Module, Paper F6 (PKN) June 2013 Answers

Taxation (Pakistan) and Marking Scheme

Notes:

1. The suggested answers provide detailed guidance on the subject for use as a study aid to the question paper. Candidates were

not expected to produce answers with this extensive detail, which would not be possible in a three hour exam.

2. All references to legislation shown in square brackets are for information only and do not form part of the answer expected from

candidates.

Marks

1 Sahiwal Engineering Limited

(a) Since Sahiwal Engineering Ltd (SEL) is a company incorporated in Pakistan under the Companies Ordinance,

1984, it shall be treated as a resident taxpayer in Pakistan. For a company incorporated under the

Companies Ordinance, 1984, the other test that the place of control and management of the company should

be wholly situated in Pakistan at any time in a tax year needs not to be satisfied to qualify as a resident

company. 20

(b) Taxable income for the tax year 2013 (accounting year ended 30 June 2013)

Note Rs. Rs.

Income from businessNet profit as per income statement 10,550,000 05

Add:

Sales under recorded due to an accounting error (1) 35,000 10

Cess paid to the local government (2) 50,000 05

Accounting depreciation (3) 1,000,000 05

Contribution to an unapproved superannuation fund (4) 300,000 05

Acquisition of manufacturing rights (5) 1,600,000 05

Charitable donation made in kind (6) 1,000,000 10

Salaries paid in cash (7) 800,000 10

Provision for bad debts (8) 1,500,000 05

Other expenditure (9) 8,000,000 15

Rent payable since the tax year 2009 (10) 400,000 10

Purchase of furniture (11) 750,000 05

15,435,000

Less:

Amortisation of acquisition of manufacturing rights (5) 40,000 15

Trade debts written off (12) 800,000 10

Recoveries against bad debts written off in prior years (13) 750,000 10

Additional payment for delayed tax refunds (14) 1,300,000 05

Tax loss on sale of machinery (11) 200,000 10

Initial allowance (11) 1,750,000 10

Tax depreciation (11) 2,662,500 30

(7,502,500)

Income from business 18,482,500

Income from other sources (14) 1,300,000 10

Total/taxable income 19,782,500

Items not included in the computation of taxable income

(i) Write off of obsolete stock Rs. 500,000

Writing off of obsolete stock is incidental to the carrying out of the business and allowable as a

deduction. [s.20 and general principles of taxation] 10

(ii) Compulsory annual fee to the Engineering Development Board Rs. 200,000

Any expenditure, in aggregate, under a single accounting heading in excess of Rs. 50,000 other than

by crossed bank cheque or crossed bank draft or any other banking instrument is not deductible with

certain exceptions. One of the exceptions is any fee expenditure. Hence, the Rs. 200,000 paid, in cash,

to the Engineering Development Board established by the Federal Government is deductible and no

adjustment is required. [2nd proviso to s.21(l)] 10

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Marks

Note 9

Other expenditure

(1) Accounting loss on sale of machinery Rs. 500,000

An accounting loss or profit resulting from the disposal of an asset is tax neutral. Therefore, to nullify

its effect, the amount of the accounting loss is added back in the total income. A loss is only allowable

where the consideration received on the disposal of a fixed asset is less than the tax written down of

the asset. [s.22(8)(b)]

(2) Provision for taxation Rs. 5,500,000

Provision for taxation is in the nature of an appropriation of profit and not expenditure to earn business

income. Hence, it is not allowable under the law. [s.21(a)]

(3) Provision for anticipated losses Rs. 2,000,000

Tax law allows only losses which are revenue in nature and which have occurred during the relevant

tax year. Anticipated losses are not allowable. [s.34(1)]

Note 10

Where a taxpayer is allowed a deduction for any expenditure in deriving income under the head Income from

Business and the person has not paid the liability to which the deduction relates within three years of the

end of the tax year in which the deduction was allowed, the unpaid amount of the liability is chargeable totax in the first year following the end of the three years.

Since the liability on account of rent payable was allowed in the tax year 2009 and it has not been paid by

the end of the tax year 2012, it is added back in the tax year 2013. [s.34(5)]

Note 11

Fixed assets

(1) Initial allowance and tax depreciation:

Asset TWDV on Addition/ Initial TWDV Rate of Depreciation

1 July 2012 (deletion) allowance for depreciation

during at 25% of depreciation

the year addition

of eligible

buildings

(1) (2) (3) (4) = (5) = (2 + 3) (6) (7)

(3) x 25% (4)

Rs. Rs. Rs. Rs.

Land 15,000,000 3,000,000

(see (a))

Office and

factory

buildings 9,000,000 9,000,000 10% 900,000

Residential

quarters 7,000,000 1,750,000 5,250,000 10% 525,000

(see (a)) (see (b))

Plant and

machinery 4,000,000 (500,000) 3,500,000 15% 525,000Motor vehicles 1,500,000 2,500,000 4,000,000 15% 600,000

(see (c))

Furniture 750,000 750,000 15% 112,500

(see (d))

Total 1,750,000 2,662,500

[ss.22 and 23 read with 3rd Sch]

Sub-notes to Note 11 (1)

(a) Land is not eligible for depreciation. The cost of construction of the residential quarters is,

therefore, reduced by Rs. 3,000,000, being the price of land. [s.22(15)]

(b) Only the cost representing the construction of the residential quarters is eligible for initial allowance

and depreciation. The rate of initial allowance in the tax year 2013 is 25% [previously it was50%]. Depreciation is charged on the cost of construction of the residential quarters af ter the initial

allowance has been deducted. Use of the eligible asset for even one day is sufficient for a valid

claim of depreciation and initial allowance.

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Marks

(c) For the tax year 2013 and onwards, a car having a cost of Rs. 2,500,000 is eligible for

depreciation on its full cost [the previous maximum cost was Rs. 1,500,000]. Further, a car is not

eligible for initial allowance. [ss.22(13)(a) and 23(5)]

The cost incurred to enhance the security and safety features of the car is capitalised and eligible

for depreciation.

(d) Furniture is eligible for tax depreciation but not for an initial allowance. [ss.22 & 23(5)(b)]

(2) Debiting of the cost of the furniture purchased during the year to the income statement is not allowable,

hence Rs. 750,000 must be added back in the total income, being capital expenditure. [s.21(n)]

(3) The loss on the sale of machinery of Rs. 200,000 (representing excess TWDV of Rs. 500,000 over the

sale proceeds of Rs. 300,000) is an admissible deduction. [s.22(8)]

Note 12

Trade debts written off Rs. 800,000

Since trade debts are irrecoverable and have actually been written off (and not merely provided for) in the

books of accounts, the amount is allowable as a deduction. [ss.29(1) & (2)]

Note 13

Recoveries against bad debts Rs. 750,000

Since the amount recovered belongs to the bad debt of prior years, its recovery in the current tax year wouldonly be taxable if it had previously been allowed as a deduction. Since the amount was not allowed as a

deduction in previous years, taxable income is reduced by the same amount to avoid double taxation.

[s.29(3) & s.73]

Note 14

Additional payment for delayed refund Rs. 1,300,000

Under the law, if an excess amount of tax paid by a taxpayer is not refunded by the tax department within

the prescribed time limit, the taxpayer is entitled to an additional amount from the tax department. Taxability

of such additional amount was disputable. Through an amendment in the Finance Act, 2012, it has been

made taxable under the head Income from Other Sources. Therefore, it is deducted from the head Income

from Business and taxed under the head Income from Other Sources.

(c) Tax liability for the tax year 2013

Rs. Rs.

Taxable income for the tax year 2013 (from (b)) 19,782,500

Tax at 35% 6,923,875 05

Tax credit admissible on the donation in kind to the relief fund run by the

Government of Sindh.

The value of the donation in kind (Rs. 1,000,000) is 505% of the

taxable income which is within the allowable upper limit of 20% of taxable

income. Hence a tax credit is allowable on this amount as below:

Tax assessedx Value of donation in kind

Taxable income

6,923,875 x 1,000,000 [ss.61(1) & (2)] (350,000) 1519,782,500

6,573,875

Less tax already paid

Tax deducted from payment on account of sales to a public company 35,000 05

[ss.153(3) & 168]

Tax paid at the time of registration of car [ss.168 & 231B] 50,000 05

Tax collected along with electricity bills [ss.168 & 235] 900,000 05

Advance tax paid in four instalments [s.147] 5,000,000 05

(5,985,000)

Tax payable with return [s.137] 588,875

4030

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Marks

2 Mr Rizwan

Taxable income and tax payable for the tax year 2013 (accounting year ended 30 June 2013)

Rs.

Income from salary

Basic salary [s.12(2)(a)] 1,200,000 05

Technical allowance (Rs. 1,200,000 x 5%) [s.12(2)(c)] 60,000 10

Payment in lieu of recreational leave [s.12(2)(a)] 50,000 10

Utilities allowance (Rs. 1,200,000 x 6%) [s.12(2)(c)] 72,000 10

Payment for honouring restrictive covenant [s.12(2)(e)(v)] 100,000 20

Perquisite representing accommodation (working 1) 720,000 20

Perquisite representing car (working 2) 27,178 20

Benefit on purchase of car (working 3) 100,000 10

Waiver of outstanding loan of Rs. 50,000 [s.13(9)] 50,000 05

Services of domestic servant to Rizwan (working 4) 84,000 10

Income under the head salary 2,463,178

Income from business

Share of profit from AOP Agrofriends (working 5) 0 25

Income from property [taxable under fixed tax regime] (working 6) 796,500 20

Total taxable income 3,259,678

Tax payable on taxable income

Rs. Rs.

Tax on income from property (working 6) 42,238 05

Tax on taxable income other than income from property (working 7) 428,053 25

Total tax payable 470,291

Less tax deducted at source by the employer [s.149] (125,000) 05

Tax payable with return [s.137] 345,291

Explanation of items not included in the computation of taxable income

(i) Car provided for business use

A car was provided to Rizwan for business use. No personal benefit is derived by him, hence, no amount is

taxable as a perquisite. [ss.12 & 13] 10

(ii) Concessional loan Rs. 400,000

Any loan advanced at a profit rate which is less than the benchmark rate constitutes a perquisite. However,

by virtue of an amendment in the Finance Act, 2012, no amount on account of the concessional rate of profit

is taxable if the loan amount does not exceed Rs. 500,000. [2nd proviso to s.13(7)] 10

(iii) Benefit of shares allotted to Rizwan under an employee share scheme

Although the shares of the company were allotted to him at a price lower than the breakup value (which is

assumed to be the fair market value in the absence of any other information about their valuation), there was

a restriction on the sale or transfer of the shares. Where the issuance of shares is subject to a restriction on

the transfer of the allotted shares, no amount is chargeable to tax to the employee until the earlier of:

(a) the time the restriction is removed; or

(b) the time the employee actually disposes of the shares.

Neither of these events occurred before 30 June 2013. Hence, no amount is taxable as salary of Rizwan for

the tax year 2013. [s.14(3)] 10

(iv) Expenditure on self-education

No deduction is allowable for any expenditure incurred by an employee in deriving his salary income.

[s.12(4)] 10

(v) Share from association of persons (AOP), Agrofriends

As an AOP is taxed separately from its members, where the AOP has paid the tax, the share of profit received

by a member of the AOP out of the income of the AOP is exempt from tax. However, it shall be added for

the determination of the tax rate applicable to his other income (working 7). [s.92(1)] 10

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Workings:

Working 1

Accommodation provided to Rizwans family is a perquisite of Rizwan provided by his employer and is taxable.

The value of this perquisite is equal to the amount that would have been paid by the employer if such

accommodation were not provided, subject to a minimum value being equal to 45% of the basic salary. Since

Rizwan was entitled to a 60% house rent allowance, had he not been provided with the accommodation, the same

amount is taken as the value of the perquisite as computed below:

Rs.

Basic salary 1,200,000

Value of the perquisite (1,200,000 x 60%) 720,000

The fair rent of the accommodation at Rs. 50,000 per month is not relevant for the purposes of computing the

value of the perquisite representing accommodation. [s.13(12) read with rule 4 of the income tax rules, 2002]

Working 2

The car was provided for Rizwans exclusive personal use on 1 January 2013 by leasing it on the same day.

According to the tax law, 10% of the fair market value (FMV) of the car on 1 January 2013 shall be treated as a

perquisite received by him. The lease rentals to be paid by the company are not taken into consideration when

computing the value of the perquisite. Since the car was provided for half of the year, the value of the perquisite

is worked out proportionately. Further, the amount paid by the employee is also to be deducted. Therefore, the

perquisite shall be computed as below:

Rs.

FMV of the car 2,000,000

10% of the FMV (2,000,000 x 10%) 200,000

Restricted to the number of days (181) it was used during the tax year 2013

(200,000 x 181/365) 99,178

Less amount paid by Rizwan (72,000)

Amount to be treated as salary 27,178

[ss.13(3) & (6) read with rule 5 of the income tax rules, 2002]

Working 3

Rs.

Fair market value of the car on 25 June 2013 500,000Less:

Amount paid by Rizwan (400,000)

Perquisite on account of acquisition of car 100,000

[s.13(11)]

Working 4

Since the services of a domestic servant were provided to Rizwan by the employer, the amount Rizwan will be

chargeable to tax will include the total amount paid to the domestic servant as computed below:

Rs.

Monthly salary of domestic servant 7,000

Annual salary (7,000 x 12) 84,000

[s.13(5)]Working 5

Share from Agrofriends

Agrofriends is an AOP of which Rizwan has a 40% share in the profits.

Rs.

Taxable income before adjustment on account of capital allowances on computers 1,600,000

Initial allowance on computers (Rs. 200,000 x 50%) [s.23] (100,000)

Tax depreciation on computers (Rs. 200,000 100,000) x 30% [s.22] (30,000)

Taxable income of the AOP 1,470,000

Rizwans share (1,470,000 x 40%) 588,000

Working 6

Income from property

The property is jointly owned with his brother and each has a specific share; therefore, the share in property

income is to be assessed in the hands of individual partners and not as an association of persons. [s.66]

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Since the rent is received in foreign currency, it must be converted into Pakistan rupees at the State Bank ofPakistan rate prevailing on the day the amount was received, i.e. on 1 July 2012 as below:

Total annual rent of the property in US$ (1,500 x 12) US$ 18,000

Rs.

Total rent in Pakistan Rupees (18,000 x 885) [s.71] 1,593,000Rizwans 50% share 796,500

Tax payable on Rs. 796,500[Rs. 12,500 plus 75% of the gross amount exceeding Rs. 400,000](12,500 + 75% x (796,500 400,000)) 42,238

[s.15 read with Div VI of Pt I of the 1st Sch]

Working 7

Rs.

Taxable income including Income from property 3,259,678Less Income from property to be taxed separately [working 6] (796,500)

2,463,178

Add share from the Agrofriends for rate purposes [working 5] 588,000

Taxable income plus share from Agrofriends 3,051,178

Rs. 588,000 being the share of profit [working 5] received by Rizwan from the AOP Agrofriends is exempt fromtax. [s.92(1)] However, for the purpose of determining the rate of tax applicable to the other taxable income(Rs. 2,463,178), Rs. 588,000 is included in Rizwans income as if it were chargeable to tax. [s.88] Thecomputation is as below:

Rs. Rs.

Tax payable on taxable income including share from AOP[Rs. 420,000 plus 20% of the amount exceeding Rs. 2,500,000](420,000 + 20% x (3,051,178 2,500,000)) (A) 530,236Taxable income if the share of profits from the AOP were chargeable to tax (B) 3,051,178Actual taxable income (C) 2,463,178Tax on taxable incomeA/B x C

(530,236/3,051,178 x 2,463,178) 428,053

3 (a) Immunity from enquiries into the nature and sources of amounts invested in shares

No enquiries as to the nature and sources of an amount invested in the shares of a public company tradedat a registered stock exchange in Pakistan shall be made provided that the following conditions are fulfilled:

(1) the investment is made any time between 24 April 2012 and 30 June 2014;

(2) the amount remains invested for a minimum period of 120 days in the prescribed manner;

(3) tax on the capital gains, if any, is discharged in accordance with the rules provided in the EighthSchedule to the Income Tax Ordinance, 2001; and

(4) a statement of investments is filed with the Commissioner Inland Revenue along with the return ofincome and wealth statement for the relevant tax year within the due date as provided in the law.

[s.118]

[Rule 2(2) of the 8th Schedule] 40

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(b) Mr Bilal

Tax payable for the tax year 2013 (accounting year ended 30 June 2013)

Transaction Note Capital gain/(loss) Tax

Rs. Rs.

Capital gains/(losses) and tax on the disposal of

immovable properties taxable as a separate block

On the sale of agricultural land (1) 2,020,000 202,000 30On the exchange of the plot in Lahore (2) 1,500,000 75,000 15

On the sale of the flat in Karachi (3) 0 0 10

Capital gains on securities taxable as a separate block

On the sale of call options (4) 50,000 5,000 20

On the sale of shares in Turbo Motors Ltd (5) 248,940 19,915 30

Income under the head Capital gains assessable

to tax along with other heads of income

On the sale of shares in Farid Sugar Mills (6) 1,125,000 15

Less:

Capital loss brought forward (7) (440,500) 10

Total taxable income 684,500

Tax at 10% of the amount exceeding Rs. 400,000

(684,500 400,000) x 10% 28,450 05

[Para (1) of Div I, Pt I of the 1st Sch]

Tax payable under the final tax regime (FTR)

Rs. Rs.

Dividend income (6) 1,500,000 10

Tax on dividend income at 10% (1,500,000 x 10%) (6) 150,000 05

Total tax 480,365

Less: tax already paid

on the sale proceeds of agricultural land at 05% of total

proceeds Rs. 9,000,000 (9,000,000 x 05%) [s.236C] 45,000 05

on cash withdrawals from bank [s.231A] 12,000 05(57,000)

Tax payable with return 423,365

16

20

Notes:

Note 1

Sale of agricultural land

Through an amendment in the Finance Act, 2012, a gain on the disposal of immovable properties held not

beyond two years has been made chargeable to tax according to the rates prescribed for such capital gains

in the First Schedule to the Income Tax Ordinance, 2001. The capital gain on the disposal of agricultural

land is computed as below:

Rs. Rs.

Consideration received 9,000,000

Less:

Purchase price [s.76(2)(a)] 6,500,000

Transfer fees [s.76(2)(b)] 160,000

Expenditure on the valuation of the property [s.76(2)(b)] 40,000

Brokerage to real estate agent [s.76(2)(b)] 80,000

Expenditure to improve the fertility of the land [s.76(2)(c)] 200,000

(6,980,000)

Capital gain 2,020,000

Tax at 10% as the holding period of the land was less than one year

(2,020,000 x 10%) [Div VIII of Pt I of 1st Sch] 202,000

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Note 2

Exchange of a plot of land in Lahore with a plot in Okara

The exchange of an asset is also treated as a disposal of the asset for tax purposes. [s.75(1)(a)]

The fair market value of the plot that was obtained in exchange with Mr Asad is less than the fair market

value of the plot Bilal gave to him. Tax law in such situations prescribes that the fair market value of the asset

disposed of shall be taken as the consideration received. [s.77(1)] Consequently, the capital gain/(loss) is

worked out by taking the consideration received at Rs. 7,500,000. Other factors given in the question, such

as the expected future increase in the value of the plot received in exchange, are not relevant for the

computation of the capital gain.

Rs.

Deemed consideration on the disposal on 15 July 2012 7,500,000

Less:

Cost of the plot on 15 February 2011 (6,000,000)


Tax at 5% as the holding period of the land was more than one year and less than

two years (1,500,000 x 5%) [Div VIII of Pt I of 1st Sch] 75,000

Note 3Sale of flat in Karachi

Rs.

Consideration received for the sale on 10 August 2012 5,000,000

Less cost incurred at the time of purchase on 1 January 1995 (4,000,000)1,000,000

Since the disposal was made after holding the flat for more than two years, no gain is taxable under the law.

[s.37(1A)]

Note 4

Sale of call options

Gain on the sale of securities is taxed as a separate block of income. The definition of a security includesderivative products, e.g. call options. [s.37A(3)] The capital gain on the sale of the call options is, therefore,

treated as a gain on securities and tax thereon is computed as below:

Rs. Rs.

Consideration received on the sale of 100,000 call options at

Rs. 25 per call option on 25 June 2013 (100,000 x 25) 250,000

Less:

Cost incurred on 20 June 2013 at Rs. 19 per call option

(100,000 x 19) 190,000

Other admissible expenditure 10,000

(200,000)

Capital gain 50,000

Tax on the capital gain of Rs. 50,000 at 10% as the holding period

is less than six months (50,000 x 10%) [Div VII of Pt I of 1st Sch] 5,000

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Note 5

Sale of shares in Turbo Motors Ltd

Since 50% of the shares in Turbo Motors Limited are held by the Government of Balochistan, the company

is treated as a public company for the purposes of the computation of any capital gain/(loss) despite the fact

that it is not a listed company. Shares of a public company are included in the definition of a security. The

capital gain/(loss) is computed as below:

Rs. Rs.

Consideration received on the sale of 5,000 shares at

Rs. 170 per share (5,000 x 170) 850,000

Less:

Purchase price at Rs. 120 per share (5,000 x 120) 600,000

Capital value tax paid (5,000 x 120 x 001%) 60

Commission on purchase of the shares (5,000 x 01) 500

Commission on sale of the shares (5,000 x 01) 500

(601,060)248,940

Tax at 8% of the capital gain as the holding period is more than six months

but less than 12 months (248,940 x 8%) [Div VII of Pt I of 1st Sch] 19,915

Note 6

Sale of FSM shares

A dividend in specie derived in the form of shares of a company registered under the Companies Ordinance,

1984, is taxed at the time of disposal of such shares and not at the time of their receipt. In this instance,

although 150,000 shares were received as a dividend in specie in the tax year 2011, the dividend was not

taxable in that year, but in the tax year 2013, when the shares were disposed of. Therefore, the fair market

value of these shares on the date of acquisition, i.e. Rs. 10 per share, will be taxed as dividend income in

the tax year 2013.

The amount of dividend taxed is treated as the cost of these shares and taken into account for the purpose

of the calculation of the capital gain:

Dividend income

Rs.

Dividend in the form of 150,000 shares in Farid Sugar Mills (Pvt) Ltd

at Rs. 10 per share taxed in the tax year 2013 1,500,000

Capital gain

Rs.

Consideration received on 1 January 2013 3,000,000

Cost of the dividend in specie (1,500,000)


Since the shares were held by Bilal for more than one year, only 75% of the

capital gain is taxable (1,500,000 x 75%) [s.37(3)] 1,125,000

Note 7

Capital loss

Bilal had a brought forward loss of Rs. 440,500 relating to the tax year 2010 arising from a disposal of

shares in a private company. Bilal is entitled to carry forward this loss for a period of six years following the

year in which it arose and set it off against capital gains (which are not taxable as a separate block). Since

there were no capital gains in the tax years 2011 and 2012, it has rightly been brought forward for offset

against the capital gains accruing to Bilal on the disposal of capital assets (other than immovable properties

and securities). [s.59]

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4 (a) Direct and indirect taxes

Taxes are broadly categorised into direct and indirect taxes. Indirect taxes are also called consumption taxes.

A direct tax is one which is demanded from the very person who it is intended or desired should pay it,

whereas an indirect tax is one which is demanded from one person in the expectation and with the intention

that they shall pass on the burden of the tax to another person, ultimately to the end consumer of the goods

or services. In other words, in the case of indirect taxes, the immediate payer of the tax only acts as an

intermediary or a tax collecting agent.

Examples of direct taxes include: income tax, wealth tax and property tax.

Examples of indirect taxes include: sales tax, federal excise, customs duty and provincial sales tax. 40

(b) Mr Naveed

(i) Penalty payable for non-maintenance of records

Where a person does not maintain records as required under the Income Tax Ordinance, 2001 or the

rules made thereunder, a penalty of Rs. 10,000 or 5% of the amount of tax payable on taxable income,

whichever is higher, can be levied by the Commissioner.

On the basis of income tax liability determined by the Commissioner, Mr Naveed is liable to pay the

penalty below:

Rs.Tax due 300,000

5% of tax 15,000

Since the amount calculated at 5% of the tax is higher than Rs. 10,000, Mr Naveed shall be liable to

pay a penalty of Rs. 15,000 for the non-maintenance of records as required under the Income Tax

Ordinance, 2001. [Sr. No. 7 of table under s.182] 20

(ii) Period of maintenance of records

Records are required to be maintained for six years after the end of the tax year to which they relate.

However, where any proceedings are pending before any authority or court, the taxpayer is required to

keep the records until the final decision of the proceedings. [s.174(3)] 2040

(c) Exemption from penalty and default surcharge by the Federal Board of Revenue (FBR)

The FBR is empowered to exempt any person or class of persons from payment of the whole or part of any

penalty or default surcharge payable under the Income Tax Ordinance, 2001 in the following manner:

(1) The exemption may be published as a notification or as an order in the official Gazette of Pakistan.

(2) The reasons for the exemption shall be given in the notification or the order so published.

(3) The conditions or limitations, if any, applicable to such exemption from payment of the penalty or

default surcharge shall also be given in the notification or the order. [s.183] 30

(d) Ms Kausar

Ms Kausar can revise her return, on her own, without waiting for any notice from the Commissioner for thisomission. The points raised in the question are answered as follows:

(i) The revised return shall be accompanied by the revised accounts or the revised audited accounts, as

the case may be. [s.114(6)(a)]

(ii) Ms Kausar will have to give the reasons for the revision of the return, in writing, duly signed by her.

[s.114(6)(b)]

(iii) Ms Kausar will be liable to pay a default surcharge on the amount of tax evaded by the omission of the

amount for the period starting from the date it was due (30 September 2011) to the date it is actually

paid.

However, she will not be liable to pay any penalty as she is revising the return without receiving any

notice of audit or amendment of the assessment from the Commissioner Inland Revenue. [s.114(6A)]

(iv) Ms Kausar can revise her return to declare the correct amount of income without seeking any

permission from the Commissioner Inland Revenue. [s.114(6)] 40

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5 (a) Mr Usman

Sales tax payable/(refundable) for March 2013

Rs.

Output tax

Sale of taxable goods to the registered and unregistered persons

(Rs. 80,000,000 + Rs. 16,000,000) x 16% 15,360,000 05

Sale of goods against international tender Rs. 10,000,000 [exempt] 0 05Sale of exempt goods to a local charity Rs. 10,000,000 0 05

Export of goods to Turkey (Rs. 5,000,000 x 0%) 0 0515,360,000

Input tax

Purchase of raw materials for the manufacture of both taxable and exempt

supplies (working) 7,944,143 30

Input tax relating to the machinery (10,000,000 x 16/116) (also see explanation) 1,379,310 05

9,323,453

Sales tax payable/(refundable)

Output tax 15,360,000

Input tax (9,323,453)

Payable 6,036,547 05

Working:

Rs.

Input tax on the purchase of raw materials from registered persons

for manufacturing both taxable supplies and exempt supplies

(Rs. 70,000,000 x 16/116) 9,655,172

Input tax on the purchase of raw materials from unregistered persons 0

9,655,172

Less input tax on purchases returned (Rs. 1,000,000 x 16/116) (137,931)

9,517,241

Apportionment of Rs. 9,517,241 to taxable supplies

Rs. Rs.

Value of taxable supplies

sales to registered persons 80,000,000

sales to unregistered persons 16,000,000

exports to Turkey 5,000,000

(A) 101,000,000

Value of taxable supplies + exempt supplies

(Rs. 101,000,000 + Rs. 20,000,000) (B) 121,000,000

Input tax to be apportioned (C) 9,517,241

A/B x C

101,000,000/121,000,000 x 9,517,241 7,944,143

Explanation:

With effect from 1 July 2011, input tax paid on fixed assets is allowable fully in the tax period the input tax

is paid. Further, the restriction on the adjustment of input tax in excess of 90% of the output tax does not

apply in the case of fixed assets or capital assets. [Proviso to s.8B] 1070

(b) Time of supply

The Sales Tax Act, 1990 defines time of supply as below:

(i) For goods supplied under a hire purchase agreement

The time at which the agreement for the supply of goods under hire purchase is entered into is treated

as the time of supply for such goods. 10

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(ii) For goods supplied otherwise than under a hire purchase agreement

The time of supply is the time at which the goods are delivered or made available to the buyer. 10

(iii) For the rendering of services

The time of supply in relation to services is the time at which the services are rendered or provided to

the person obtaining such services. [s.2(44)] 10

3010

acca past paper 2013_jun_qa

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