PRINCIPLES OF TAXATION

Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.1 (a) Following options are available to Jamal (Salaried individual):

Option 1: By applying applicable tax rate to total taxable income
Rupees
Salary (500,0006) 3,000,000
Leave encashment 600,000
Arrear for 20W9 & 20X0 3,000,000
Total taxable income 6,600,000

Tax computations:
On Rs. 5,000,000 670,000
On balance [(6,600,000 – 5,000,000)  22.5%] 360,000
Tax liability under option 1 1,030,000

Option 2
Rupees
Salary (500,0006) 3,000,000
Leave encashment 600,000
3,600,000
Tax computation – Salary
On (Rs. 3,500,000) 370,000
On balance [(3,600,000 – 3,500,000)  20%] 20,000
390,000
Tax on amount received in arrear for the tax year 20W9
Received in 20W9 3,200,000
Received in 20X2 1,300,000
4,500,000

Tax on Rs. 3,500,000 370,000

On balance Rs. 1,000,000 @ 20% 200,000
570,000
Already paid (404,500)
165,500
Tax on amount received in arrear for the tax year 20X0
Received in 20X0 3,800,000
Received in 20X2 1,700,000
5,500,000

Tax on Rs. 5,000,000 670,000

On balance Rs. 500,000 @ 22.5% 112,500
782,500
Already paid (300,000)
482,500

Tax payable for arrears (165,500+482,500) 648,000

Total tax payable (390,000+648,000) 1,038,000
Tax saving (1,030,000-1,038,000) 8,000

Note: Since Provident fund is recognized, it is fully exempt.

Conclusion:
Jamal should select option 1 as it would result in tax saving of Rs. 8,000 (1,038,000 –
1,030,000).

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 PRINCIPLES OF TAXATION
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

(b) Under the ITO-2001, an individual cannot form a non-profit organization.

However, Dr. Jamal can run his clinic as a non-profit organization if:
(i) it is established for charitable purposes only;
(ii) he gets his clinic registered as a company or association of persons under
any law;
(iii) he gets approval of the Commission for specified period; and
(iv) none of the assets of his clinic are available for private benefit to any other
person.

A.2 (a) For the purpose of minimum tax liability, turnover is defined as:
(i) The gross sales/gross receipts, exclusive of sales tax and federal excise duty or
any trade discounts shown on invoices or bills, derived from the sale of goods
and also excluding any income taken as deemed.
(ii) The gross fees for the rendering of services, including commissions.
(iii) The gross receipts from the execution of contracts.
(iv) The company’s share of the above stated amounts of an association of persons of
which the company is a member.

In case of (i), (ii) and (iii) above, it does not include any amount covered by final
discharge of tax liability for which tax is separately paid or payable.

Following persons are required to pay minimum tax:

(i) a resident company
(ii) an individual having turnover of Rs. 10 million or above in the tax year 2017
or in any subsequent tax year
(iii) an association of persons having turnover of Rs. 10 million or above in the tax
year 2017 or in any subsequent tax year

(b) Computation of tax liability of Gillani & Co.

For the tax year 20X1
Situation 1 Situation 2
--------- Rupees ---------
Income tax payable under normal tax regime
Taxable income 1,600,000 1,600,000
Income tax
On Rs. 1,200,000 70,000 70,000
On balance Rs. 400,000 @ 15% 60,000 60,000
A 130,000 130,000

Income tax payable under minimum tax

Gross sales 12,500,000 11,000,000
Less: Sales tax (17/117) (1,816,239) 1,598,291
10,683,761 9,401,709

Turnover tax u/s 113 @ 1.50% B 160,256 *N/A

Tax liability of GC (Higher of A and B) 160,256 130,000

Carried forward of excess tax 30,256 -

*Because turnover is less than Rs. 10 million.

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 PRINCIPLES OF TAXATION
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.3 Muhammad Asghar

Computation of total income, taxable income and net tax payable/refundable
For tax year 2021 Rs.
Income from business
Profit before tax 2,468,000
Add: Inadmissible expenses / admissible income
Raw material and finished goods disallowed 20% 7,800,000×20% 1,560,000
Accounting depreciation 2,100,000
Provision for slow moving inventory 1,800,000
Expenditure on Eid-Milan party -
Penalty paid to a customer -
Donation paid to hospital established by local government 2,300,000
Installation charges of imported plant 375,000
Reward paid in cash to salesmen 500,000
8,635,000
Less: Admissible expenses / inadmissible income
Amortization of pre-commencement expenditure 3,400,000×20% (680,000)
Tax depreciation (1,900,000)
Initial allowance of imported plant (2,500,000+375,000)×25% (718,750)
Depreciation of imported plant (2,500,000+375,000–718,750)×15%×50% (161,719)
Dividend received from a listed company (174,000)
Gain on sale of shares in APL (660,000)
(4,294,469)
Income from other sources
Dividend received - FTR income (174,000+30,000=204,000/0.85) 240,000

Capital gain
Gain on disposal of APL (Treated as a public company because 60% shares of APL are held
by Fed Govt.) 660,000
Total income for the year from all sources 7,708,530

Less: Separate block of income

Dividend received - FTR income 240,000
Gain on disposal of public company 660,000
900,000
6,808,530
Less: Deductible allowance
Zakat paid/deducted (30,000)
Taxable income under NTR 6,778,530

Tax liability
Tax on Rs. 6,000,000 1,220,000
On balance 272,486
Tax liability under normal tax regime 1,492,486
Less: Tax credit on donation
Lesser of 2,300,000 or 30% of the taxable income i.e. Rs. 2,033,559 (1,492,486/
6,778,530×2,033,559) (447,746)
1,044,740
Dividend income: Tax at the rate of 15% - FTR 36,000
Gain on sale of shares of public company 99,000
Total tax payable 1,179,740
Less: Advance tax paid (200,000)
Withholding tax deducted (1,400,000)
Withholding tax deducted (Dividend) (36,000)
Tax collected at import stage (150,000)
Tax refundable 606,260

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 PRINCIPLES OF TAXATION
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.4 (a) (i&ii) Monthly cash allowance and payment of school fees
Any income received by a spouse as support payment under an agreement to live
apart shall be exempt from income tax. Hence, under the provision of law, monthly
cash amount of Rs. 50,000 and school fees of Rs. 10,000 paid by Ahmed would be
considered as support payment.
Both amount will be shown as exempt income under the head 'Income from other
sources' in Mrs. Ahmed's income tax return.
(iii) Rent received from the property
Since the ownership of the shop was transferred to Mrs. Ahmed, the rental income
from the shop will not be considered as support payment. Rental income of Rs.
880,000 (88,000×10) will be chargeable to tax under the head 'Income from
property in Mrs. Ahmed's income tax return.
(b) (i)  Where a loan is given to an employee then the amount will be included in
salary income of the employee in the following manner:
 If no interest is payable by the employee - the amount of interest
computed at the benchmark rate (i.e. 10%).
 If interest is payable at less than benchmark rate - the interest amount
computed at the benchmark rate less the actual amount of interest paid
by the employee.
 The interest for loan amount would be chargeable to tax only for amount
exceeding Rs. 1,000,000.
 If interest free loan is extended by the employer due to waiver of interest by
such employee on his accounts maintained with the employer (e.g. Provident
Fund), no amount of interest would be charged.
(ii) The following books of account are required to be maintained by a manufacturer
having turnover exceeding Rs. 2.5 million:
 Serially numbered and dated cash-memo / invoice /receipt for each
transaction of sale or receipt containing the following:
 taxpayer’s name or the name of his business address, national tax
number or CNIC and sales tax registration number, if any
 the description, quantity and, value of goods sold
 where a single transaction exceeds Rs. 10,000 with the name and
address of the customer
 Cash book and/or bank book
 Sales day book and sales ledger (where applicable)
 Purchases day book and purchase ledger (where applicable)
 General ledger
 Vouchers of purchases and expenses and where a single transaction exceeds
Rs. 10,000 with the name and address of the payee;
 Stock register of stock-in-trade (major raw materials and finished goods)
supported by gate in-ward and outward records and quarterly inventory of
all items of stock-in-trade including work-in-process showing description,
quantity and value.
(iii) Application of tax credits while computing the tax liability of the taxpayer:
If a taxpayer is allowed more than one tax credit for a year, the credits shall be
applied in the following order:
(i) Any foreign tax credit; then
(ii) Any tax credit allowed under Part X of Chapter III; such as
 Charitable donations
 Investment in shares and insurance
 Contribution to an approved pension fund
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 PRINCIPLES OF TAXATION
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

 Tax credit for employment generation by manufacturer u/s 64B

(iii) Second schedule credits (e.g. reduction in tax liability due to full time
teacher allowance.)
(iv) Any tax credit allowed for quarterly advance tax paid u/s 147 and for tax
collected / deducted at source u/s 168

A.5 (a) Definite information includes information on sales or purchases of any goods made by
the taxpayer, receipts of the taxpayer from services rendered or other receipts
chargeable to tax under the Ordinance on the acquisition / possession / disposal of any
money / asset / valuable article, or investment made or expenditure incurred by the
taxpayer.

(b)  Commissioner is empowered to amend further the original assessment order as

many times as may be necessary on the basis of audit or definite information that:
 any taxable income has escaped assessment;
 total income has been under assessed or assessed at too low tax rate or has
been the subject of excessive relief or refund; or
 any amount under a head of income has been misclassified.

The Commissioner may also amend the original assessment order if he considers
that the assessment order is erroneous in so far as it is prejudicial to the interest of
revenue.
However, the Commissioner can make amendment in the original assessment
order within the later of:
 five years from the end of the financial year in which the original assessment
order is issued or treated as issued by the Commissioner; or
– one year from the end of the financial year in which the amended assessment
order is issued or is treated as issued.
 Considering the above provisions of law, SGL’s position is as follows:
– Five year period will be completed on 30-06-2021 as the original assessment
order was filed on 30-09-2015 (financial year 30-06-2016)
– One year would be completed on 30-06-2021 as the amended assessment
order was issued on 24 February 2020 (financial year 30-06-2020).
Therefore, the Commissioner still have time to further amend the assessment order.
However, no further amendment can be made by the Commissioner unless the SGL has
been provided with an opportunity of being heard.

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 PRINCIPLES OF TAXATION
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

Ans.6 Hadi Associate

Computation of Sales Tax Payable / Refundable
For the tax period February 2021
Taxable Sales tax
amount @ 17%
SALES TAX CREDITS (INPUT TAX) -------- Rupees --------
Taxable goods from registered customers 1,890,000
Less: Goods purchased from Haq Enterprises - Suspended (100,000)
Goods purchased in cash (85,000)
Goods purchased from AB traders, not declared in its return (50,000)
1,655,000 281,350
Taxable goods from un-registered customers 1,000,000 -
Packing material from un-registered person 445,000 -
Sales tax paid on electricity bill - September 2020 90,000 13,000
294,350
Fixed assets purchased 2,500,000 425,000
Total input tax 719,350
Add: Credit brought forward from previous month 415,000
Less: Inadmissible / un-adjustable input tax (W-1) (199,634)
934,716
SALES TAX DEBITS (OUTPUT TAX)
Taxable goods to registered customers 2,750,000
Add: Discount given to associated undertaking 75,000
Less: Goods against which payment was received in Nov 20 (120,000)
2,705,000 459,850
Taxable goods to un-registered customers 1,050,000 178,500
Export - taxable goods (Zero rated) 1,500,000
Taxable supplies goods used for business promotion 150,000 25,500
Total supplies / output tax for the month 5,405,000 663,850
Admissible credit (90% of output tax i.e. Rs. 597,465 or input tax excluding fixed
assets (627,662) whichever is lower. (597,465)
Sales tax payable 66,385
Less: Input tax on fixed assets – machine [Taxable supplies portion only(W-1)] (307,054)
Sales tax to be carried forward – fixed assets 240,669
Sales tax to be carried forward – taxable supplies (627,662–597,465) 30,197
270,866

Further tax payable on sale to un-registered person (1,050,000–130,000=920,000×3%) 27,600

Sales tax refundable [117,946+81,688(W-1)] 199,634

No adjustment would be made in the sales tax return on account of slow moving stocks

W-1: Apportionment of input tax

Total supplies relating to
Fixed assets Taxable supplies
-------------------- Rs. --------------------
Local taxable goods 3,905,000 307,054 212,662
Export - goods 1,500,000 117,946 81,688
5,405,000 425,000 294,350

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 PRINCIPLES OF TAXATION
Suggested Answers
Certificate in Accounting and Finance – Spring 2021

A.7 (a) (i) Short paid amounts recoverable without notice:

Where a registered person pays the amount of tax less than the tax due as
indicated in his return, the short paid amount of tax along with default
surcharge shall be recovered from such person by stopping removal of any
goods from his business premises and through attachment of his business bank
accounts, without giving him a show cause notice and without prejudice to any
other action prescribed under section 48 of this Sales Tax Act or the rules made
thereunder:

(ii) Extra tax

The Federal Government is empowered to levy and collect tax at such extra
rate or amount not exceeding 17% in addition to the amount of sales tax or
retail tax, levied under Sales Tax Act, 1990. This tax shall be levied on the value
of such goods or class of goods, on such persons or class of persons, in such
mode, manner and at time and subject to such conditions and limitations as
may be prescribed.

Capacity tax
On the goods specified in the Tenth Schedule, in lieu of levying and collecting
tax on taxable supplies, the tax shall be levied and collected, in the mode and
manner specified therein on-:
 production capacity of plants, machinery, undertaking, establishments or
installations producing or manufacturing such goods; or
 fixed basis, as it may deem fit, from any person who is in a position to
collect such tax due to the nature of the business.

(b) Since Fahad has already accounted for the output tax in the sales tax return for the
supplies, it can issue a debit note in the month of February 2021 when the error was
detected, and increase the amount of output tax in the return for February 2021 by
Rs. 45,000.

Time limitation of 180 days shall not apply in the given case as it is applicable only in the
case of decrease in output tax and increase in input tax. The above increase of output tax
may be declared without any time limitations.

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 PRINCIPLES OF TAXATION
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Certificate in Accounting and Finance – Spring 2021

A.8 (a) Following are the different ways by which taxes can be used for the development of
country:
 The Government can declare some areas as free zone, industrial zone, and economic
zone and provide tax incentives to such areas. Such incentives could attract
businessman/industrialist who may opt to establish business concerns/industrial
units that would bring employment, opportunities and overall prosperity in these
under developed areas.
 Taxing the rich at higher rates while taxing the low income groups at lower tax
rates.
 Imposition of high custom duty rates on luxury items or items which are also
manufactured in Pakistan. This promotes local manufacturers and industry.
 Tax credits on charity/donations to promote welfare activities.
 Tax exemptions to charity organization /educational institutions to promote these
activities.

(b) Powers of the Provinces to legislate on taxes

Following taxes are covered in the scope of legislation of Provinces
 Agriculture income tax
 Sales tax on services
 Taxes on transfer of immovable property
 Professional tax
 Tax on luxury houses
 Tax on registration of luxury vehicles

(The End)

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