Taxation

(Pakistan)
Monday 6 December 2010

Time allowed
Reading and planning:
Writing:

15 minutes
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.

The Association of Chartered Certified Accountants

Paper F6 (PKN)

Fundamentals Level Skills Module

SUPPLEMENTARY INSTRUCTIONS
1.
2.
3.

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

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

TAX RATES AND ALLOWANCES

The following tax rates and allowances for the tax year 2010 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
Up to Rs. 200,000*
Rs. 200,001 Rs. 250,000
Rs. 250,001 Rs. 350,000
Rs. 350,001 Rs. 400,000
Rs. 400,001 Rs. 450,000
Rs. 450,001 Rs. 550,000
Rs. 550,001 Rs. 650,000
Rs. 650,001 Rs. 750,000
Rs. 750,001 Rs. 900,000
Rs. 900,001 Rs. 1,050,000
Rs. 1,050,001 Rs. 1,200,000
Rs. 1,200,001 Rs. 1,450,000
Rs. 1,450,001 Rs. 1,700,000
Rs. 1,700,001 Rs. 1,950,000
Rs. 1,950,001 Rs. 2,250,000
Rs. 2,250,001 Rs. 2,850,000
Rs. 2,850,001 Rs. 3,550,000
Rs. 3,550,001 Rs. 4,550,000
Rs. 4,550,001 Rs. 8,650,000
Over Rs. 8,650,001

Rate of tax
0%
050%
075%
150%
250%
350%
450%
600%
750%
900%
1000%
1100%
1250%
1400%
1500%
1600%
1750%
1850%
1900%
2000%

* For a woman taxpayer, no tax is chargeable if taxable income does not exceed Rs. 260,000
B.

Tax rates for non-salaried individuals and association of persons

to whom the rates given in A are not applicable
Taxable income
Up to Rs. 100,000*
Rs. 100,001 Rs. 110,000
Rs. 110,001 Rs. 125,000
Rs. 125,001 Rs. 150,000
Rs. 150,001 Rs. 175,000
Rs. 175,001 Rs. 200,000
Rs. 200,001 Rs. 300,000
Rs. 300,001 Rs. 400,000
Rs. 400,001 Rs. 500,000
Rs. 500,001 Rs. 600,000
Rs. 600,001 Rs. 800,000
Rs. 800,001 Rs. 1,000,000
Rs. 1,000,001 Rs. 1,300,000
Over Rs. 1,300,000

Rate of tax
0%
050%
100%
200%
300%
400%
500%
750%
1000%
1250%
1500%
1750%
2100%
2500%

* For a woman taxpayer, no tax is chargeable if taxable income does not exceed Rs. 125,000

C.

Internally Displaced Persons Tax (IDPT)

For certain salaried individuals
IDPT on bonus

D.

Tax rates for companies

Public/private company
On taxable income
Minimum tax

E.

For individuals and association of persons

Up to Rs. 150,000
Rs. 150,001 to Rs. 400,000
Rs. 400,001 to Rs. 1,000,000
Above Rs. 1,000,000

(ii) For companies

Up to Rs. 400,000
Rs. 400,001 to Rs. 1,000,000
Above Rs. 1,000,000

I.

0%
5% of the amount exceeding Rs. 150,000
Rs. 12,500 plus 75% of the amount exceeding Rs. 400,000
Rs. 57,500 plus 10% of the amount exceeding
Rs. 1,000,000
5%
Rs. 20,000 plus 75% of the amount exceeding Rs. 400,000
Rs. 65,000 plus 10% of the amount exceeding
Rs. 1,000,000

Other tax rates

On dividends received from a company

H.

35%
6%
6%
10%
10%

Tax rate for income from property

(i)

G.

35%
05% of turnover

Rates of deduction of tax at source

Sale of goods
Services
Contracts
Commission or brokerage
Profit on debt

F.

30%

10%

Capital allowances
Depreciation
Buildings (all types)
Furniture and fittings
Plant and machinery (not otherwise specified)
Motor vehicles (all types)
Computer hardware

Rates
10%
15%
15%
15%
30%

Initial allowance

50% of cost

Benchmark rate
Interest free loan to employees

12% per annum

of the tax written down value

[P.T.O.

ALL FIVE questions are compulsory and MUST be attempted

1

Revolution Ltd (the company) is a company incorporated in Pakistan under the Companies Ordinance, 1984 and is
listed on all stock exchanges of Pakistan. The company is engaged in selling environmentally friendly bio-technology
products. The Chief Financial Officer (CFO) of the company has just produced the audited financial statement for the
accounting period ended on 30 June 2010 depicting paid-up capital of Rs. 100 million, gross turnover of
Rs. 50 million and net profit of Rs. 45 million. The tax manager of the company has also provided the following
additional information:
(1)

The company purchased a secret formula for certain innovative products at a total cost of Rs. 1,500,000 from
an Armenian citizen who was also resident in Armenia. Tax was duly deducted from this amount and deposited
into the treasury. The amount was paid using a crossed demand draft. The formula does not have an
ascertainable useful life and was used for 273 days during the accounting year ended on 30 June 2010. An
estimated amount of Rs. 1,000,000 was charged to the profit and loss account for the use of the formula during
the year.

(2)

A product was sold for Rs. 500,000 through a commission agent who retained his commission of Rs. 50,000
and remitted the balance of Rs. 450,000 to the company. The company has claimed the Rs. 50,000 as
commission paid in its selling expenses.

(3)

Repairs and maintenance expenses included:

(i) Rs. 200,000 spent on the replacement of worn out parts of a machine.
(ii) Rs. 500,000 spent on enhancing the useful life of another machine by five years, as well as increasing its
efficiency.

(4)

Rs. 4,000,000 was charged as accounting depreciation. The tax depreciation is yet to be computed but the
following schedule of fixed assets has been prepared by the companys tax manager:
Description of asset

Tax written down

value (TWDV) on
1 July 2009
Rs.
Buildings
5,000,000
Plant and machinery
4,000,000
Computers
2,000,000
Vehicles
4,000,000
Furniture and fittings
2,000,000
Note:

Addition

Rs.
0
2,000,000
500,000
2,000,000
500,000

TWDV of
assets
disposed
Rs.
0
100,000
50,000
0
50,000

Sale price
of assets
disposed
Rs.
250,000
50,000
0
100,000

(i) All purchases were made by payment in cash.

(ii) The addition to vehicles represents the purchase of a car for office use.
(iii) The sale prices indicate the fair market value except for the computer, which was sold to an
ex-employee. The computer would have fetched Rs. 100,000 in the open market.

(5)

The net profit includes a gain of Rs. 60,000 on the sale of fixed assets.

(6)

A trading liability of Rs. 500,000 was allowed as admissible expenditure on an accrual basis in the tax year
2003 but is still appearing as payable in the companys books. This amount has never been added back to
taxable income in any previous tax year.

(7)

The net profit includes gross rent of Rs. 600,000 received from Mr Shakeel, a local trader, for the use of a
warehouse. The following expenses relating to this warehouse were charged to the profit and loss account for
the year ended 30 June 2010.
Property tax paid
Repair allowance

Rs. 125,000
Rs. 120,000

No accounting depreciation has been claimed on this warehouse. The tax written down value of the buildings
in (4) above does not include this warehouse.
(8)

The supplies of the company were mainly made to persons who are not registered under the Sales Tax Act,
1990.

(9)

The company received share deposit money of Rs. 1,000,000 in cash from one of its shareholders. Complete
particulars of the depositor along with his source of income are available in the records of the company.

(10) An amount of Rs. 500,000 written off as a bad debt was charged as an expense. The details provided indicate
that out of this amount:
(i) Rs. 100,000 was on account of debtors who may default in future;
(ii) Rs. 200,000 was on account of a loan which was given to an ex-director who has left the country for good.
There are no chances of its recovery.
(iii) Rs. 200,000 was on account of long-outstanding debts owed by many small trade debtors and written off
as bad debts after exhausting all recovery measures. However, the measures did not include the filing of
suits of recovery in a court of law as the company considered that this was not cost effective.
(11) Miscellaneous expenses includes the write off of Benzene, a chemical used by the company as a raw material,
with a cost of Rs. 200,000, because it could not be used after its expiry date.
(12) The payment of utility bills during the year included a late payment surcharge of Rs. 100,000.
(13) The company failed to deduct tax from a payment of Rs. 300,000 which was made to a supplier supplying
chemicals under a contract for use in its laboratory. The amount was, however, paid using crossed cheques and
fully verifiable.
(14) The profit and loss account did not include the share of profit derived by the company from an association of
persons (AOP). The taxable income of the AOP was Rs. 1,000,000 and the companys share of this profit was
Rs. 440,000. The income of the AOP did not fall under the final tax regime (FTR).
Required:
(a) Compute the taxable income of Revolution Ltd for the tax year 2010, giving brief explanations of your
treatment of the items excluded from taxable income.
(24 marks)
(b) Compute the total tax payable by Revolution Ltd, including under the final tax regime, assuming that neither
the workers welfare fund nor quarterly advance income tax was payable by the company.
(4 marks)
(c) State, giving reasons, at what rate Revolution Ltd should have deducted tax on the payment made to the
contractor on account of his supply of chemicals (not being pharmaceuticals) for its laboratory. (2 marks)
(30 marks)

[P.T.O.

(a) Mr Sannan, a Pakistani citizen born on 1 January 1974, had resided in Canada for ten years until 30 June 2009.
On 1 July 2009 he returned to Pakistan and joined Hi-Tech (Pvt) Ltd (HPL), a company engaged in the
production of bio-products. HPL paid him Rs. 2,500,000 as consideration for joining the company as an
employee on 1 July 2009. However, HPL is entitled to recover 50% of this amount if Mr Sannan leaves the
company before 30 June 2012.
The annual emoluments received by Mr Sannan from HPL during the year ended 30 June 2010 were as follows:
Basic salary
Medical allowance
Leave fare assistance

Rs. 10,000,000
Rs. 500,000
Rs. 400,000

Other information relevant to Mr Sannan for the tax year 2010 is as follows:
(1)

An option to purchase 1,000 shares of HPL was given to him on 31 December 2009 at Rs. 20 per share
when the break up value of the company was Rs. 100 per share.

(2)

HPL provided him with laptop, TV, and multi-media of the latest models for his use at home on 1 July
2009. The book value of these gadgets was Rs. 1,000,000 and 20% depreciation was charged by HPL.
The gadgets are returnable to the company after five years.

(3)

The basic salary received of Rs. 10,000,000 does not include Rs. 500,000, given by HPL, in cash, on
behalf of Mr Sannan as a donation to a hospital established by the government of Sindh.

(4)

HPL gave him a loan of Rs. 3,000,000 on 1 January 2010 for the purchase of a house. HPL charged him
profit on this loan at the rate of 8% per annum. On the same date Mr Sannan also obtained a loan of
Rs. 2,000,000 from a scheduled bank on which the bank charged him profit at the rate of 13% per annum.
In addition, his uncle gave him a gift of Rs. 3,000,000 in cash for the purchase of the house. Mr Sannan
purchased the house for Rs. 8,000,000 on 10 January 2010. The profit on the loans was duly paid to
both the bank and the company up to 30 June 2010.

(5)

Salary of Rs. 500,000 was received by Mr Sannan in arrears from his ex-employer in Canada.

(6)

Rs. 1,000,000 was received by Mr Sannan on account of rent for his apartment in the USA.

(7)

Mr Sannan spent Rs. 300,000 on purchase of books and subscription of research magazines to keep his
professional knowledge updated.

(8)

Mr Sannan paid Rs. 2,000,000 to head-hunter recruitment consultants in Pakistan to help him secure his
employment with HPL.

(9)

Mr Sannan made a cash payment of Rs 500,000 on account of Zakat under the Zakat and Ushr Ordinance,
1980.

(10) As per the terms of his employment, Mr Sannan was entitled to reimbursement of his medical and
hospitalisation charges. Such reimbursement during the year ended 30 June 2010 was Rs. 50,000.
(11) Mr Sannan received Rs. 100,000 as profit on his profit and loss sharing account maintained with the bank.
The bank withheld Rs. 10,000 as tax from this amount.
(12) Mr Sannan purchased the following shares on 25 March 2010:

shares for Rs. 3,500,000 in Faisalabad Fabrics (Pvt) Ltd, as an original allottee;
shares for Rs. 300,000 in Good Luck Ltd, a company quoted on the Lahore Stock Exchange
(Guaranteed) Ltd, on the initial offer of the companys shares to the general public.

(13) Mr Sannan contributed Rs. 700,000 to an approved pension fund under the Voluntary Pension System
Rules, 2005.
(14) Mr Sannan received a dividend of Rs. 1 per share on account of his holding of 350,000 shares in
Faisalabad Fabrics (Pvt) Ltd. No tax was deducted by the company from this dividend on the understanding
that Mr Sannan had bought the shares out of his foreign earnings.

Required:
Compute Mr Sannans taxable income and total tax payable for the tax year 2010, assuming that no tax was
withheld by his employer, Hi-Tech (Pvt) Ltd. Give brief reasons for the treatment of the items excluded from
taxable income or for which no expense deduction is allowed.
(20 marks)
(b) On 15 October 2010, the Commissioner of Income Tax (Enforcement and Audit Division), having jurisdiction of
Hi-Tech (Pvt) Ltd, issued the company with a show notice asking for various explanations regarding the
non-deduction of tax and claiming additional tax from the company for the default period of 1 January 2010 to
15 October 2010.
Required:
Assuming that Mr Sannan paid the tax (as computed in part (a)) on 30 September 2010, state the arguments
that Hi-Tech (Pvt) Ltd (HPL) can use to respond to the following issues raised in the show notice:
(i)

Why the amount of tax that HPL failed to deduct from the salary paid to Mr Sannan during the year
ended 30 June 2010 should not be recovered from the company.
(ii) Why HPL may not be made liable to pay additional tax on the amount of tax not deducted for the period
of default stated in the show notice.
(iii) Why the amount of salary paid to Mr Sannan should not be treated as an inadmissible expense in
computing HPLs taxable income.
(3 marks)
(c) State the tax implications, other than on account of a capital gain or loss, that would arise if the shares in
Good Luck Ltd were sold by Mr Sannan on 25 September 2010.
(2 marks)
(25 marks)

[P.T.O.

(a) Mr Shahid, a resident in Pakistan, disposed of the following assets during the year ended 30 June 2010 in the
manner indicated below:
(1)

10 August 2009: Sold his personal car to his brother for Rs. 800,000. The fair market value of the car was
Rs. 1,000,000 and it had been purchased by him on 10 June 2009 at total cost of Rs. 1,200,000.

(2)

12 October 2009: Sold a statue of Buddha for Rs. 250,000. The statue had been gifted to him by his wife
in 2003 when the market value of the statue was Rs. 150,000. His wife had purchased the statue for
Rs. 100,000 from an antique shop on 10 July 2000.

(3)

10 November 2009: Sold 5,000 shares in Innovation Ltd, a company quoted on the Lahore Stock
Exchange but unquoted on all other stock exchanges of Pakistan, for Rs. 800,000. The shares had been
received as a gift from his mother on 30 September 2008, on which date they were traded at Rs. 100 per
share.

(4)

1 January 2010: 4,000 shares in ABC Ltd, an unlisted company, were sold for Rs. 500,000. He had
acquired these shares as under:
4 April 2006
7 August 2008
8 December 2008

1,000 shares costing Rs. 50,000

2,000 shares costing Rs. 110,000
1 for 3 rights issue was taken up fully, costing Rs. 40 per share; the company
also issued bonus shares at the rate of 1 share for each 3 shares in issue before
the rights issue.

(5)

15 February 2010: An oil painting, which had been hanging in his drawing room, was sold for
Rs. 550,000. The painting had been acquired on 1 January 2010 in exchange for an old car, which at
that time had a market value of Rs. 200,000.

(6)

20 February 2010: An antique vase purchased for Rs. 250,000 on 15 August 2001 was sold for
Rs. 800,000 through an auctioneer who was paid Rs. 75,000 in cash as commission. Tax was deducted
from the amount of commission paid and deposited with the Commissioner of Income Tax.

(7)

21 February 2010: A silver necklace was sold for Rs. 100,000. The necklace had been purchased on
3 January 2003 for Rs. 250,000.

(8)

1 March 2010: Sold his farmhouse for Rs. 5,000,000. The farmhouse had been purchased on
1 December 2009 for Rs. 4,000,000.

(9)

15 April 2010: Sold 8,000 shares in KLM (Pvt) Ltd for Rs. 20 per share. He had purchased the shares on
30 June 2009 from his brother, Mr Akmal, for Rs. 10 per share. However, capital gains in the hands of
Mr Akmal had been worked out by the taxation officer on the basis that the consideration received was
Rs. 15 per share.

(10) 15 July 2009: Received compensation from the government of Rs. 800,000 for plant purchased for
Rs. 600,000 on 1 July 2009. The plant was for the manufacture of black polythene shopping bags but
before it was installed, the government had introduced a law to ban such bags. On 20 August 2009 he
purchased new plant capable for producing white bags for Rs. 900,000.
Mr Shahid has unadjusted losses determined by the tax department for previous tax years as follows:
Tax year
Income from business
Income from other sources
Capital loss on shares of:
a company listed on Lahore Stock Exchange
a private limited company

2006
2009

Loss
Rs.
100,000
50,000

2005
2007

100,000
90,000

Required:
Compute the taxable income of Mr Shahid under the head capital gains and the tax due thereon for the tax
year 2010. Give reasons for your treatment of each item.
(18 marks)

(b) Mr Shahid purchased 5,000 shares in Toy (Pvt) Ltd for Rs. 50 per share on 1 January 2010. These shares were
still held by him on 30 June 2010 at which time the shares were being traded among shareholders of the
company for Rs. 20 per share. There is no likelihood that the share price will resurge to Rs. 50 in the near future.
Required:
Explain the treatment Mr Shahids impending loss on the shares held in Toy (Pvt) Ltd, on 30 June 2010
under the Income Tax Ordinance, 2001.
(2 marks)
(20 marks)

[P.T.O.

(a) Mr Yousha is registered under the Sales Tax Act, 1990 as a manufacturer of taxable consumer goods [canned
foods]. In the tax year 2010, all his goods were sold to companies registered under the Sales Tax Act, 1990 and
the companies duly deducted tax at 35% on the payments made to Mr Yousha on account of these supplies.
Mr Youshas accountant thinks that he is entitled to a tax credit at 25% of the tax payable on account of these
supplies in the tax year 2010.
Required:
State, giving reasons, whether the opinion of Mr Youshas accountant is correct, based on the Income Tax
Ordinance, 2001.
(4 marks)
(b) Mr Subaiyal is confused about the difference between the two expressions total income and taxable income.
Required:
Explain for the benefit of Mr Subaiyal the difference between the two expressions based on the Income Tax
Ordinance, 2001.
(3 marks)
(c) Mr Waail, a resident of Pakistan, derived the amounts as under in the tax year 2010:
(1) Rs. 1,000,000 from crops grown on his agricultural land situated in Canada.
(2) Rs. 1,500,000 gross, received from the poultry farm he established in June 2009 in Rawalpindi.
(3) Rs. 1,000,000 from the deposit of a prospective buyer of his flat, forfeited by Mr Waail when the buyer
failed to fulfil the terms of the contract for the sale of the flat.
Required:
State, giving reasons, whether the amounts received by Mr Waail will be taxable or exempt for the tax year
2010, based on the Income Tax Ordinance, 2001.
Note: you should ignore the effect of any tax treaty provisions.

(3 marks)

(d) Modern Agricultural Farms Ltd is a public listed company that derives its total income from growing sugarcane
on its own farms situated in Faisalabad. On 30 November 2009, the company paid a dividend to its
shareholders, but no tax was deducted as the company derived its income from agriculture.
Required:
State, giving reasons, whether the company can be treated as a defaulter for the non-deduction of tax from
the dividend paid.
(2 marks)
(e) Mr Ukasha derived taxable income of Rs. 1,000,000 from his wholesale business of trading in pesticides in the
tax year 2010. During the same tax year, as a member of an association of persons (AOP), he also received his
share of the AOPs profit of Rs. 600,000. The AOP had already paid tax on all of its taxable income fully covered
under the normal law.
Required:
Compute the tax liability of Mr Ukasha for the tax year 2010.

(3 marks)
(15 marks)

10

For the purpose of this question, you should assume todays date is 4 July 2010.
Zubair Enterprises Ltd (ZEL), a registered person under the Sales Tax Act, 1990, is engaged in the production of
consumer goods. The companys business transactions for the month of June 2010 were:
Rs.
Sale of taxable goods to registered persons
Sale of taxable goods to unregistered persons
Less: Trade discount at 10%

Rs.
20,000,000

25,000,000
(2,500,000)

Exports of goods sold to Saudi Arabia

Payment for purchases of raw materials for manufacturing
taxable local supplies
Payment for purchases of raw materials for manufacturing exports

22,500,000
18,000,000
42,000,000
16,000,000

The companys records further show that:

(1) The figures for the sales of goods (including exports) are all stated exclusive of sales tax.
(2) The rate of discount is in conformity with the normal business practice in the industry but was not shown on the
tax invoices.
(3) Goods with the value of Rs. 100,000 were given free of cost to the Chief Executive of the company in accordance
with his terms of employment.
(4) All payments were made inclusive of sales tax and paid through crossed cheques.
(5) Payment on account of the purchase of a new machine for the manufacture of goods meant for export only, of
Rs. 10,000,000 (inclusive of sales tax) was made during May 2010. The machine was used for the first time
in June 2010.
(6) Input tax of Rs. 100,000 pertaining to the raw materials purchased for the manufacture of taxable goods in
November 2009 could not be claimed due to an oversight.
Required:
(a) Calculate the sales tax payable or refundable to Zubair Enterprises Ltd, for the month of June 2010, giving
explanations for treatment of:

the
the
the
the

trade discount allowed to unregistered persons;

goods given to the Chief Executive;
input tax on the machinery purchased for the manufacture of goods meant for export only; and
input tax not claimed in the return for November 2009.
(7 marks)

(b) Zubair Enterprises Ltd (ZEL) has made purchases of taxable goods from a registered person but suspects that the
registered person has not paid the tax in respect of these supplies.
Required:
State whether the amount of tax unpaid by the supplier can be recovered from ZEL, together with any actions
that the company might take to mitigate any potential liability.
(3 marks)
(10 marks)

End of Question Paper

11