Extra Reading Time: 18 Minutes Writing 7 @ wi) a Ww ) wi) wi «vid (oo) BUSINESS TAXATION [G5] ICMA iene FALL 2016 EXAMINATIONS Pakistan ‘Thursday, the 23rd February 2017 02 Hours 50 Minutes eeu ‘Attempt all questions, Write your Roll No. in the space provided above. Answers must be neat, relevant and brief. Itis not necessary to maintain the sequence, Use of non-programmable scientific calculator of any model is allowed Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper. In marking the question paper, the examiners take into account clarity of exposition, logic of arguments, effective presentation, language and use of clear diagram’ chart, where appropriate DO NOT write your Name, Reg, No. or Roll No., or any irrelevant information inside the answer script ‘Question No. 1 ~ “Multiple Choice Questions" printed separately, is an integral part of this question paper. Question Paper must be returned to invigilator before leaving the examination hall DURING EXTRA READING TIME, WRITING IS STRICTLY PROHIBITED IN THE ANSWER SCRIPT EXAMINEES ARE ADVISED TO MANAGE SOLUTIONS) ANSWERS WITHIN PROPOSED TIME Marks Question No. 2 Proposed Time : 45 Min. | Total Marks : 24 {2)_ Inthe light ofthe Income Tax Ordinance, 2001, define the folowing terms: (i) Finance society 02 (ii) Imputable income 02 (b) Softex Pakistan Limited (SPL) is a renowned listed company, operating in Pakistan. Assume in the tax year 2017, the company has announced the redundancy scheme to its employees at different level of management in order to decrease its cost and increase its operational efficiency. Mr. Israr Raza has been working as a head of the department in Information Technology Department of SPL for last ten years. He opted the scheme and resigned from the company with effect from April 01, 2017. He has provided the following information relating to his assessment: + Monthly salary of Rs. 465,000 was paid to him by the company consisting of the following: Rupees Basic salary 300,000 Uiilty allowance (@ 10%) 30,000 House rent allowance (@ 45%) 135,000 465,000 * Company maintained, an 1800cc car was provided to him both for business and private use. ‘The car was purchased three years ago at a market price of Rs. 2,500,000. It was allowed to Mr. Israr to purchase car at an accounting book value of Rs. 1,000,000, He bought the car from the company and sold in the open market at a price of Rs. 1,500,000. * Monthly fuel of 250 litres and communication allowance of Rs. 5,000 per month were allowed during the year. * Mr.israr incurred actual medical expenses of Rs.120,000 during the year which were reimbursed to him by the company equal to one basic salary in accordance with the terms of his employment. + SPL waived 25% of his outstanding interest free loan balance of Rs.2,400,000 which was provided to him on July 01, 2016, while the remaining loan was adjusted from his final settlement. He has received the following payments from the company: Rupees ‘Compensation under the redundancy scheme 3,500,000 Gratuity under unapproved scheme 2,200,000 + Tax of Rs. 1,197,000 was withheld by SPL from the above payment. ara 2016 1084 PTOAdditional Information: Following further information is also available: + Mr-israr has a house, which he let out to Digital Ltd. since 2015 at a monthly rent of Rs, 80,000, including Rs. 10,000 for the services of a servant. Due to a dispute over certain repair issues regarding the rented house, Digital Ltd. has not paid Rs. 140,000 out of rent payable for the month of January and February 2017. Mr. Israr sent a legal notice to Digital Lia, either to pay the Rs.140,000 or vacate the house. Digital Ltd. vacated the house on June 30, 2017. Following are the expenditures! deductions in respect of the house in the year ended June 30, 2017: Rupe Depreciation of a house 600,000, Bank charges for the clearance of the cheques for the rent paid by Digital Ltd 14,000 Profit paid to a bank on a loan for the reconstruction of a portion of house 112,000 Legal expenditure for preparing the legal notice to Digital Ltd. for recovery of rent 38,000 Legal fee paid to a lawyer in cash for defending the title of the house challenged by Mr. Israr’s relative in a court of law, 40,000 * Digital Ltd. deducted amounting to Rs. 22,000 in respect of tax from the payment of rent made during the tenancy agreement, Required: Compute the amount of taxable income, tax liability and tax payable by/ (refundable) to Mr. Israr Raza for the tax year 2017 by giving appropriate notes to support your calculations. The average tax rate for the preceding three years was 18%. Question No. 3 Proposed Time : 40 Min. | Total Marks : 20 (a) As per section 21 (d) of the Income Tax Ordinance, 2001, any entertainment expenditure in excess of limits or in violation of conditions prescribed in the Rule 10 of the Income Tax Rules, 2002, are ‘ot allowed as deduction in computing the income of a person chargeable to the tax under the head ‘Income from Business” Required: Keeping in view the Rule 10 of the Income Tax Rules, 2002, discuss the following (i) _ the term ‘entertainment expenditure’ (ii) the condition of admissibility of entertainment expenditure under the above Rule. (iii) the limitations laid down in the above Rule on the deduction of entertainment expenditure. {b) Explain the conditions where no gain or loss shall be taken to arise on the disposal of an asset, and how the consideration would be determined for an asset disposed of in a non-arm’s length transaction under the provisions of section 79 and 78 of the Income Tax Ordinance, 2001 (c) Discuss what shall be the treatment of a depreciable asset under section 22 of the Income Tax Ordinance, 2001, if itis disposed of in any tax year. Question No. 4 Proposed Time : 45 Min. | Total Marks : 24 {a) Under the Income Tax Ordinance, 2001, explain what do you understand from the concept of ‘carry forward of losses’ with regard to each of the following heads of income: (i) Non-speculation business losses (ii) Speculation business losses (iii) Capital losses (b) Sunshine Enterprises (SE) is an Association of Persons, running its business in Pakistan. SE has Pakistan as well as foreign source incomes including income from speculation’ non-speculation businesses, capital gain and other sources etc, Following are the details of its income for the tax year 2017: eral 2016 2of4 Marks 20 02 02 05 09 02 03, 04 02+ SE has Pakistan source income of Rs. 2,800,000. + SE's foreign source incomes, tax paid thereon and foreign losses brought forward are as follows: Rupees Head of Income ‘Speculation Non-Speculation Capital ‘Other Business Business Gai Sources Foreign income! (loss) 600,000 (1,100,000) 750,000 1,350,000 Foreign tax paid 150,000 7 75,000 187,500 Foreign losses brought forward from latest year (250,000) 7 (1,400,000) - ‘+ The foreign tax credit relating to income from other sources was remained unadjusted during the last tax year amounted to Rs. 40,000. Required: Calculate the taxable income and tax liability of Sunshine Enterprises for the tax year 2017. Also calculate its foreign tax losses (if any) to be carried forward to the next year. {c) As per section 116 of the Income Tax Ordinance, 2001, the Commissioner Inland Revenue is empowered to require any taxpayer (being an individual) to furnish a wealth statement within a time period specified in the notice. Enumerate which information should be contained in the wealth statement Question No. 5 Proposed Time : 20 Min. | Total Marks : 12 {a) Define the term ‘manufacture’ as per section 2 of the Sales Tax Act, 1990. (b) Mr. Amir is engaged in the business of manufacturing and import of fast moving consumer goods (FMCGs). Recently he is planning to open a retail business across the different cities of Pakistan through various general stores. These general stores will supply the goods from wholesale to general consumers. Mr. Amir is intending to get registered each general store under the Sales Tax Act, 1990. Required: Briefly explain the following in the light of the relevant provisions of the Sales Tax Act, 1990: + Whether Mr. Amir will be required to obtain a separate registration for each general store? + Whether Mr. Amir will be classified as a retailer or he is required to comply with certain conditions? {c) Tehmoor Private Limited (TPL) supplies different cosmetic products to different vendors. In the month of January 2017, TPL sent a consignment of 1,000 cosmetic products to Shaheen Limited (SL). SL found that 50% of the consignment was expired and decided to return the products to TPL. ‘Suppose both TPL and SL are registered taxpayers under the Sales Tax Act, 1990. Required: (i) Enumerate what procedure should be followed by SL, if it returns the 50% of consignment to TPL due to expiry of products. (ii) List out the information which a debit and credit notes should contain, while retuming the goods. ara 2016 3of4 Marks 10 05, 03, 04 03, 02 PTOMarks Question No. 6 Proposed Time : 20 Min. | Total Marks : 10 Talha Furnitures Ltd. (TFL) is engaged in the production and supply of wide range of office furnitures i.e. revolving chairs, tables, shelves, computer trollys etc. It has been in operation for a number of years and registered under the Sales Tax Act, 1990. TFL’s business transactions for the month of December 2016 were extracted from records as follows: Rupees Taxable sales made to registered persons '9,000,000 Taxable sales made to unregistered persons 1,500,000 Scrap sales 300,000 Total sales 10,800,000 The company used following modes of payments for purchase of raw materials: > Paid cash directly into the business bank account of the suppliers 1,980,000, Payment made through a crossed cheque which was deposited into 1,510,000 a personal bank account of the suppliers > Online transfer of payment was made from business bank account §,510,000 of the company to the business bank account of the suppliers which was verified from the bank statements, Total payments 9,000,000 Additional Information: All amount for the sales of goods stated above are exclusive of sales tax, All the payments for purchases stated above are inclusive of sales tax. Annormal rate of tax of 17% applies to all transactions to registered persons. ‘Goods of Rs. 900,000 were retumed from registered person in December 2016 and proper debit and credit note were issued. ‘An advance payment of Rs. 700,000 recieved on December 25, 2016 for the supply of goods to be made in April 2017 TFL has a sales tax credit brought forward from November 2016 of Rs. 300,000. Required: Compute the sales tax liability of TFL in respect of its sales tax retum for the month of December 2016. Substantiate the answer with appropriate workings, 10 THE END EXTRACT OF TAX RATES FOR SALARIED TAXPAYERS. Toxabe income sr no ate of Tax Whore the taxable care excoods Re 3000 00 but doe ol excoed Rs 3,500,000 Fs 359,500 + 225% ol he aout excoedng Re 000,000 Wher the tasale nom exosds Re 1400000 bt das not exon Re 4000000, Fe 472,000 + 25% ofthe oun oxcedng Re 3600000 Wher the tarale nome ecesds Re. 4000000 at das not exes a 7,000000 Wher the table inom exceeds Re 7,000,000 Re 697,000 +27 5% ofthe aroun exceeding Re 000000 Re 14220 + 208 ofthe aroun exceeding Re 7,000,000 EXTRACT OF TAX RATES FOR NON SALARIED IN )DIVIDUALS AND AOPs. sr No arable income ate of Tax (Wher thetarale come excods Ra. 400000 ba des not exend Re 2.500000 Fa, 500+ 28 of he oun excedng Re 600,000 Wher the tsale nome exoeds Ra 2600000 bat das not exon Re 4000000, Wher the tarale nome ecosds Rs 4000000 bt doesnot exon Re 6,000 000, Fe 44.500 + 25% ofthe oun excedng 2,600,000 Re 719,50 + 30% ofthe oun exceding Re 4000000 ‘Wher the tule nome excode Re 6000000 Fs 191,50 + 95% ofthe amount exeedng Re 6,000,000 4of4