SKANS School of Accountancy

Principal of Taxation MOCK (solution)

A.1
MR AHMED
Computation of taxable income
For TY 2018

Income from salary

Rs.
Basic salary (100,200 x 12)
1,202,400
Bonuses received
- Six months period ended 30.12.2015 40,600
- Six months period ended 30.06.2016 80,100 120,700
Reimbursement for car used for business (0.55 x 4,000) 2,200
purposes Exempt
Medical allowance (240,000- 600,000
1,202,400x10%)
Accommodation higher of 600,000 0r 45%
B.S
Car provided (900,000 x 5% x 8/12) 30,000
Benefit under employee share scheme 8,000 x (USD 5 – USD 1,632,000
3) x 102
3,587,300
Donation (54,000)
Income from capital gain
Gain on sale of shares in Qaz plc [6,000 x {(8.5 - 5) x 2,142,000
102]

5,675,300

Tax payable 597,000 + (5,675,300– 4,000,000) x 27.5% 1,057,707

Less: Tax credit on pension fund A / B x C = 912,055/5,145,656 x 50,000 (8,862)
C is Lower of:
a) Actual premium 50,000
b) 20% of taxable income 1,029,131 -----------
Tax payable 1,048,845

(W-1)
Income from property: Rs.
Rental income (15,600/3 x 8) or (15,600 + 15,600 + 15,600/3 x 2) 41,600
Non-adjustable amount (10,400/10) 1,040
42,640
TAX ON PROPERTY SBI
AS The gross amount of rent is less than 200,000 so, tax will be nil

Items not included

• Allowance for personal incidental expenses ignored because it for business purpose
• Cash loan to uncle is taxable in the hands of uncle, so ignored.
• No tax credit is allowed as it is renovation only.
A.2
(i) Derivative Products
“Derivative products” means a financial product which derives its value from the underlying
security or other asset, may be traded on stock exchange of Pakistan and includes
deliverable future contracts, cash settled future contracts, contracts of rights and
options.

(ii) Security
Security means share of a public company, voucher of Pakistan Telecommunication
Corporation, Modaraba Certificate, an instrument of redeemable capital, debt securities
and derivative products

A.3

RS (000)
Profit before tax 45,385
Add: Inadmissible expenses
Contribution to unapproved pension fund 2,00
Capital expenditure for improvement of 1,800
software
Capital expenditure for building ramps 6500
Car running expense for private use (50 x 70%) 35
Parking fines paid 30
Accounting Depreciation and amortization 1,87
Tax Gain on disposal of vehicles at Market value (5,250 - 3,320) 1,935
Tax bad debt recovery (W-1) 00
8,32
0
Less: Gain on sale of securities 30,000 x (120 – 35) 2,550
Accounting gain on vehicle 1700
Gain on disposal of shares in ML 100,000 x (85 – 50) + 100,000 x (75-50) 6,000
Accounting Bad debt recovery 90
(10,340)
Income from Business before depreciation and amortization – PSI 43,365
Less: b/f business loss before depreciation ( 3,550 + 2,900) (6,450)
36,915
Less: un- absorbed depreciation and amortization (2,550 + (W-2) 1,773) (4,323)
32,592
Income form capital gain [100,000 x (85 – 50) + 100,000 x (78-50)] x 75% 4,725
Income from business – FSI 600
Taxable Income 37,917

Tax payable 1,319,500 + (37,917,000 – 6,000,000) x 35%

12,490
Less: Foreign tax credit on income from
business: Lower of:
c) Pakistan average rate of tax (13,085/39,617 x 600) 198
d) Foreign income tax paid 70 (70) ---------
12,420
Add: Tax on securities (2,550 x 15%) 383
Tax payable
12803

Items not included:

1. As individual payment in advertisement is less than Rs. 10,000 therefore whole expenses
is allowed.
2. Legal expense being wholly and exclusively for business is allowed.
 3. unsuccessful marketing campaign being wholly and exclusively for business is allowed.
4. Production manager car running costs being wholly and exclusively for business is
allowed.
5. All if the financial charges being wholly and exclusively for business is allowed.

(W-1)
Amount received 90,000
Less: Actual amount of bad debt 90,000
Less: Previously allowed as deduction (0) (90,000
) 0

(W-2) Tax amortization, depreciation and initial allowance

Initial allowance on ramps (650 x 15%) 98

Depreciation on ramp (650 - 98) x 10% 55
Amortization on improvement of intangible *(1,800/10 x 243/366) 120
Tax amortization and depreciation on other
assets 1,50
1,773
* Assume life is 10 years. 0

A.4

(b) Within six months of the commencing day and thereafter at intervals not exceeding five
years, the President shall constitute a National Finance Commission consisting of the Minister of
Finance of the Federal Government, the Ministers of Finance of the Provincial Governments, and
such other persons as may be appointed by the President after consultation with the Governors of
the Provinces

It shall be the duty of the National Finance Commission to make recommendations to the
President as to
:
a) the distribution between the Federation and the Provinces of the net proceeds of the taxes
mentioned in clause (3);
b) the making of grants-in-aid by the Federal Government to the Provincial Governments;
c) the exercise by the Federal Government and the Provincial Governments of the borrowing
powers conferred by the Constitution; and
d) any other matter relating to finance referred to the Commission by the President
A.5

(a) In this case both Pakistan and foreign source income of Mr. umer will be taxable because the
employment contract is more than 3 year.
(b) In this case foreign source income of Mr. umer will be exempt because he is short term
resident
Because his employment contract is of less than 3 years. Only Pakistan source income will
be Taxable.
A.6

i. Associates: Two persons are associate where the relationship between the two is such that one
may reasonably be expected to act in accordance with the intentions of the other, or both
persons may reasonably be expected to act in accordance with the intentions of a third person.
ii. Circumstances in which a member of an association of persons and the association may be
regarded as associates: Where the member, either alone or together with an associate or
associates under another application of section 85 of the Income Tax Ordinance, 2001, controls
fifty per cent or more of the rights to income or capital of the association;
iii. Situation in which members of an association of persons may not be regarded as associates:
Members of an association of persons may not be regarded as associates where the
Commissioner is satisfied that neither person may reasonably be expected to act in accordance
with the intentions of the other

A.7
A.8

(a) Revision of assessment by the Commissioner: An assessment order shall only be amended by
the Commissioner where, on the basis of definite information acquired from an audit or otherwise,
the Commissioner is satisfied that:-
i. any income chargeable to tax has escaped assessment; or
ii. total income has been under-assessed, or assessed at too low a rate, or has been the subject
of excessive relief or refund; or
iii. any amount under a head of income had been mis-classified. The Commissioner may also
amend the assessment if after making necessary enquiries he considers that the assessment
order is erroneous in so far it is prejudicial to the interest of revenue.

(b) Situations in which the Commissioner may be barred from revising the assessment order. The
Commissioner shall not revise any assessment order:-
i. after the expiry of five years from the end of the financial year in which the order was
issued or treated as issued.
ii. if an appeal against the order lies to the Commissioner (Appeals) or to the Appellate
Tribunal and the time within which such appeal may be made has not expired; or
iii. The order is pending in appeal before the Commissioner (Appeals) or has been made the
subject of an appeal to the Appellate Tribunal. Further an assessment shall not be amended
unless the taxpayer has been provided with an opportunity of being heard.

A.9
(a)
i. Tax credit for Life Insurance Premium:
A tax credit shall be allowed to a resident person other than a company for any payment of life
insurance premium legal provisions in this regard are discussed below:
Payment for Life Insurance Premium
Tax credit on payment is paid to A Life Insurance Premium is allowed subject to the following
conditions:
• The premium is paid to a life insurance company registered by the securities and exchange
commission of Pakistan under the insurance Ordinance 2000 in respect of life policy and;
• The person is driving income under any of the following heads:
➢ Salary or
➢ Income from business

ii. Computation of tax credit:

The tax credit is allowed for payment of life insurance premium shall be calculated according to the
following formula:
(A/B) X C
Where:
A is the amount of tax assessed to the person for the text here before allowance of any tax credit.
B is the person’s taxable income for the tax year.
C is the lesser of:
➢ Total amount of contribution or premium on life insurance policy paid by the person during
the year.
➢ 20% of taxable income of the taxpayer for the year or
➢ Rs 1.5 million

A.10
(i) Where a registered person did not deduct input tax within the relevant period, he may
claim such tax in the return for any of the 6 succeeding tax periods. In this case six
months are passed so adjustment made is unlawful.
(ii) Input tax on fixed assets or capital goods shall not be restricted to 90% of output.
So full amount claimed is as per law and no violation is made.
(iii) The value of goods supplied to SIL will be chargeable to tax at Rs. 500,000, being the
open market price of the supply. Where the consideration is received partly in money
and partly in kind, the open market price of the supply is treated as the value of the
supply.