PAKISTAN TOBACCO COMPANY

(PTC)
Taxation Project

Submitted to:
Dr. M. Arshad Hasan

SUBMITTED BY:
AFNAN UR REHMAN
AHMAD AWAIS
WASEEM ABBAS
FARHAN SAFDAR
Table of Contents
Introduction ................................................................................................................................2

Accounting Policies ....................................................................................................................2

Tax Matters Faced by the Company ............................................................................................6

Excise duty and Sales Tax .......................................................................................................6

Employee taxes .......................................................................................................................7

Dividends ................................................................................................................................8

Income tax ..............................................................................................................................9

Calculations of taxable profit from accounting profit ................................................................. 10

Reconciliation of above taxes .................................................................................................... 11

Tax issues ................................................................................................................................. 13

Payments made by the company ................................................................................................ 13

Dividends .............................................................................................................................. 13

Property Rentals .................................................................................................................... 14

Sales tax payed by the company and its implications ................................................................. 16

Employee tax ............................................................................................................................ 16

Income from property................................................................................................................ 17

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Introduction

Pakistan Tobacco Company (PTC) was incorporated in 1947 immediately after partition, when it

took over the business of the Imperial Tobacco Company of India which had been operational in

the subcontinent since 1905. The parent company of Pakistan Tobacco Company (PTC) is British

Tobacco Company which employs some 85,000 people worldwide at its operations in 180

countries. BAT has a position of market leader in more than 50 countries selling over 300 brands.

PTC brands are sold through the largest distribution network in the country with 250 distributors

reaching the remotest area. Pakistan Tobacco Company is the first multinational company which

started its operations in Pakistan. Pakistan Tobacco Company is the largest excise tax generator in

the private sector in the country. PTC is the first company in Pakistan which was awarded Class

A status, as part of the international total business excellence program MRPII, audited by the

internationally renowned consultants Oliver Wight. Subsequently, it was recertified and again

achieved Class A. Both its factories at Jhelum and Akora Khattak and its Leaf operations are ISO

9001 and 14001 certified, showing its world-class standards. The manufacturing sites are equipped

with some of the most modern machines in the industry in Pakistan.

Accounting Policies

Pakistan Tobacco Company maintains a system of internal control, and prepares and presents

financial statements in conformity with the approved accounting standards and the requirements

of the Companies Ordinance, 1984. Approved accounting standards comprise of such International

Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board as

are notified under the Companies Ordinance, 1984 (the Ordinance), and provisions of and

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directives issued under the Ordinance. In case requirements differ, the provisions or directives of

the Ordinance shall prevail.

The accounting policies set out below have been applied consistently to all periods presented in

these financial statements except for the changes in the accounting policy as explained below.

 The Companies Act, 2017 specifies certain disclosures to be included in the financial

statements. Accordingly, the Company has presented the required disclosures in these

financial statements and re-presented relevant comparatives. However, there has been no

change in the reported figures of profit, other comprehensive income and the statement of

financial position due to these re-presentations.

 The Company has early adopted IFRS 9 ‘Financial Instruments’ from January 01, 2018.

The adoption of this standard has no significant impact on the Company’s financial

statements. IFRS 9 sets out requirements for recognising and measuring financial assets,

financial liabilities and some contracts to buy or sell non-financial items. This standard

replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’.

 The Company has early adopted IFRS 15 ‘Revenue from Contracts with Customers’ from

January 01, 2018. Accordingly, the Company has changed its accounting policy for

revenue recognition in respect of certain marketing costs previously recognized as ‘selling

and distribution costs’. These costs are now recognized as a deduction from the gross

amount of sales as required under IFRS 15. Moreover, there is no impact on the recognition

of the revenues under this standard.

These financial statements have been prepared under the historical cost convention except as

otherwise stated in the respective accounting policies notes. Items included in these financial

statements are measured using the currency of the primary economic environment in which the

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Company operates (the functional currency), which is the Pakistan rupee (Rs). In preparing these

financial statements, management has made judgements, estimates and assumptions that affect the

application of the Company’s accounting policies and the reported amounts of assets, liabilities,

income and expenses. Actual results may differ from these estimates. A number of the Company’s

accounting policies and disclosures require the measurement of fair values, for both financial and

non-financial assets and liabilities. The management regularly reviews significant unobservable

inputs and valuation adjustments. If third party information is used to measure fair values, then the

management assesses the evidence obtained from the third parties to support the conclusion that

these valuations meet the requirements of IFRS.

‘Fair value’ is the price that would be received to sell and asset or paid to transfer a liability in an

orderly transaction between market participants at the measurement date in the principal or, in its

absence, the most advantageous market to which the Company has access at that date. The fair

value of a liability reflects its non-performance risk.

The accounting policies set out below have been applied consistently to all periods presented in

financial statements of PTC in 2018.

Revenue comprises the fair value and recognized when it is probable that the economic benefits

associated with the transaction will flow to the Company and the amount of revenue, and the

associated cost incurred or to be incurred, can be measured reliably and when specific criteria have

been met for each of the Company’s activities like sale of goods.

Income tax is also recognized in other comprehensive income if it is related to any item there or

directly in equity, respectively. The current income tax charge is calculated on the basis of the tax

laws enacted or substantively enacted at the balance sheet date. Deferred income tax is recognized,

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using the balance sheet liability method, on temporary differences arising between the tax bases

of assets and liabilities and their carrying amounts in the financial statements.

The assets acquired under finance lease are depreciated over the shorter of the useful life of the

asset or the lease term. The Company has entered into Ijarah arrangements with a financial

institution in respect of vehicles. Islamic Financial Accounting Standard (IFAS) No.2 “Ijarah”

was notified by SECP vide S.R.O 431 (I) /2007 on 22 May 2007. This said IFAS requires Ijrah

payments under such arrangements to be recognised as an expense over the Ijarah terms. Since

the arrangement of the company with the financial institutions in substance comply with the

conditions under International Accounting Standard – 17 “Leases”, it is classified as finance

lease accordingly. On the other hand, leases in which a significant portion of the risks and

rewards of ownership are retained by the lessor are classified as operating leases. Payments

made under operating leases are charged to profit and loss account on a straight-line basis over

the period of the lease.

The Company classifies non-derivative financial assets into loans and receivable category and

financial liabilities into other financial liabilities category on the date they are originated. The

Company derecognizes a financial liability when its contractual obligations are discharged or

cancelled, or expire. They are measured at fair value plus any directly attributable transaction costs.

Subsequent to initial recognition, these liabilities are measured at amortized cost using the

effective interest method. Financial assets, categorized as loans and receivables, are assessed at

each reporting date to determine whether there is objective evidence of impairment. Objective

evidence that financial assets are impaired includes default or delinquency by a debtor,

restructuring of an amount due to the Company on terms that the Company would not consider

otherwise, indication that a debtor or issuer will enter bankruptcy, adverse changes in the payment

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status, the disappearance of an active market for a security because of financial difficulties or

observable data indicating that there is a measurable decrease in the expected cash flows from a

group of financial assets.

Trade debts are recognized initially at fair value and subsequently measured at cost less provision

for doubtful debts. A provision for doubtful debts is established when there is objective evidence

that the Company will not be able to collect all amounts due according to the original terms of the

trade debts.

Final dividend distribution to the Company’s shareholders is recognised as a liability in the

financial statements in the period in which the dividend is approved by the Company’s

shareholders.

Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-

term highly liquid investments with original maturities of three months or less. Short term finance

facilities availed by the Company, which are payable on demand and form an integral part of the

Company’s cash management are included as part of cash and cash equivalents for the purpose of

statement of cash flows.

Tax Matters Faced by the Company

Excise duty and Sales Tax

Sales Tax is a tax levied by the Federal Government under the Sales Tax Act, 1990, on sale and

supply of goods and on the goods imported into Pakistan. Sales Tax on services is levied by the

Federal Government under The Islamabad Capital Territory (Tax on Services) Ordinance, 2001.

All goods are taxable except those that have been exempted under section 13 as mentioned under

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6th Schedule of the Sales Tax Act, 1990. For sales tax purposes goods include every kind of

movable property other than actionable claims, money, stocks, shares and securities. Under section

13 of The Sales Tax Act 1990, the Sixth Schedule of the Sales Tax Act, 1990 specifically and

explicitly mentions those goods on which exemption of sales tax is available. Other exemptions

are available through various notifications (SROs) issued by the Government under section 13.

The above figure shows the excise and sales tax paid by PTC in million rupees over the course of

last 5 years. In the tax year 2018 they paid a total excise and sales tax of 84,004,000,000 rupees

out of which 63,117,903,000 rupees was excise tax and 20,885,770,000 rupees was sales tax.

Employee taxes

The company pays the employees after deducting their income tax according to the tax slabs given

by the government as shown in the figure below. The tax withheld by the company of the

employees is later paid by the company to the government on behalf of the employees.

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Dividends

Pursuant to the provisions of the Finance Act 2017 effective July 1, 2017, the rates of deduction

of income tax from dividend payments under the Income Tax Ordinance have been revised as

follows:

(i) Rate of tax deduction for Filer of Income Tax

Return: 15%

(ii) Rate of tax deduction for Non-Filers of Income Tax Return: 20%

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To enable the Company to make tax deduction on the amount of cash dividend @ 15% instead of

20%, shareholders whose names are not entered into the Active Tax-payers List (ATL) provided

on the website of Federal Board of Revenue (FBR), despite the fact that they are filers, are advised

to immediately make sure that that their names are entered in ATL, otherwise tax on their cash

dividend will be deducted @ 20% instead of 15%.

Income tax

Taxable Income means Total Income reduced by donations qualifying straight for deductions and

certain deductible allowances. Total Income is the aggregate of Income chargeable to Tax under

each head of Income. Under the Income Tax Ordinance, 2001, all Income are broadly divided into

following five heads of Income:

1. Salary

2. Income from property

3. Income from business

4. Capital gains

5. Income from Other Sources

PTC is one of the largest tax contributors amongst the private sector of Pakistan. In 2018, the

Company contributed a total of Rs. 92.2 billion (up by Rs. 19.8 billion vs 2017) to the National

Exchequer in the form of excise duty, sales tax, custom duties, surcharges and income tax.

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Calculations of taxable profit from accounting profit

The figure below shows the profit and loss statement of the calculations of net profit of the year

from gross turn over. The gross turnover for the year 2018 was 137,115 million from which the

excise duties and sales tax was deducted which was 63,117 million and 20,885 million which gave

the net turnover of 53,112 million rupees. Gross profit of 23,283 million was calculated by

deduction of cost of sales which was 29,828 million. The operating profit of the company was

14,571 million which was calculated by deducting selling and distributing costs, administrative

expenses, other operating expenses and other income which had a total of 8,712 million from gross

profit. The profit before income tax was 15,279 million which was calculated by deducting finance

income and finance cost which had a net total of 708 million. Finally, the profit of the year was

10,337,992,000 rupees after paying the income tax expense of 4,941 million rupees.

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Reconciliation of above taxes

Pakistan Tobacco Company (PTC)

Tax payable and Tax liability
Tax Year 2018
Rs'000
gross profit 23,283,528
add:
finance income 742,648
other income 177,729 920,377
less:
Selling and Distribution Costs (4,950,293)
Administrative Expenses (2,558,072)
Other Operating Expenses (1,381,858)
Finance Cost (33,828) (8,924,051)
Total Taxable Income 15,279,854
Tax Iiability (4,941,862)
Net Income 10,337,992

The table above shows the calculations done in the excel sheet to reconcile the calculations of

accounting profit and taxable profit shown in the profit and loss statement using the notes provided

in the annual report shown in the figures below.

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12
Tax issues

Taxes faced by the company are

 sales tax

 withholding tax

 excise tax

 income tax

One critical factor faced by the company was to deduct withholding tax when they issued dividends

and government has different tax deduction rates for filers and non-filers of income tax.

Payments made by the company

Payments made by the company were as follow;

Dividends

Dividends are paid to the stock holders. 15% tax is deducted from the total amount paid to

the government tax return filer shareholders and 20% from the non-filers respectively.

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Property Rentals

The company has rental properties for two reasons which are administration and

Distribution. While paying this rent the company deducts tax at source (withholding tax)

from the landlord’s total amount of tax. The amount of tax deducted depends on the amount

of rent as the government has different taxation slabs according to the property rent.

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property rentals Rs'000

Raw material purchases and expenses 121,346

Selling and distribution costs 64,050

Administrative expenses 185,907

Total Rentals 371,303

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Sales tax payed by the company and its implications

Sales tax is deducted at source in the company before the product goes out in the distribution. As

the selling product is categorised in consumer goods it becomes viable to pay the 17% GST tax.

Moreover, the company pays excise tax which sums up to more than 60 Billion Rupees which is

applied to all tobacco companies in Pakistan by the government.

Employee tax

Hamza Mudassar
Senior Accountant
Taxable income and tax liabilty
tax year 2018

Gross Exemption Taxable

Basic Salary PKR 1,920,000.00 N/A PKR 1,920,000.00
Medical Allowance PKR 96,000.00 PKR 96,000.00 N/A
PKR
Reimbursement by company PKR 150,000.00 150,000.00 N/A
Total Taxable Income PKR 1,920,000.00
Total Tax Liability PKR 108,000.00

Employees are taxed according the tax slabs provided by the government, tax is charged on the

total salary except for the medical allowance which is less than 10% of the total salary so no tax is

charged on that. There is no exemption on any kind of reimbursement by the company to the

employee.

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Income from property

The above table shows the tax rate slabs of different income from properties set by the government.

Mr. Tauseef has rented out one of his property to Samsung in September 2018 at a rent of Rs.

40,000 per month. A security deposit of Rs . 270,000 was receive by Mr. Tauseef. Mr. Tauseef

paid a repair and maintenance charges during the year which were Rs. 60,000. He also paid legal

charges of Rs. 10,000. The below table shows the taxable income of Mr. Tauseef from the said

property in the year 2019.

Mr. Tauseef
Taxable income and Tax liability from Property
Tax Year 2019
(Rs)
Monthly Rent * 12 480,000
Securit Deposit / 10 27,000
Repair and Maintanance Charges 60,000
Legal Charges (10,000)
Total Taxable Income 557,000
Total Tax Liability 14,000

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