Final-Term Exam Summer – 2021

Department of Business Administration

Subject: Taxation Management Submission Duration: 3 Hours

Instructor: Haris Hanif Submission Date: 5th September 2021
Program: MBA Max. Marks: 40

Please follow the instructions carefully:

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submission Time on Blackboard.
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answers.
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examine, explain, modify or develop concepts discussed in class.
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Q1: Mr. Salman, a Pakistani citizen, returned to Pakistan on 30 June 2020 after residing for six
years in Norway. On 1 July 2020 he joined a private hospital KKUH and received following
emoluments:

Rupees
Basic salary (per 500,000
month)
Medical allowance 60,000
(per month)
Leave fare assistance 240,000

On 1 January 2021, Mr. Salman resigned from the hospital and joined Dil (Private) Limited
(DPL), a company engaged in production of health care and dental products. Mr. Salman
received Rs. 3,000,000 from DPL as consideration for joining the company. DPL agreed to pay
following emoluments to Mr. Salman for the tax year 2021:

Rupees
Basic salary (per 800,000
month)
Medical allowance 80,000
(per month)
Utilities allowance 100,000
(per month)

On 1 January 2021, DPL provided him with refrigerator, cooking range and washing
machine for his use at home. The book value of these appliances was Rs. 200,000 and these
were returnable to the company after four years. 15% depreciation was charged by DPL on
these appliances.
On 31 March 2021, he was given an option to purchase 2,000 shares of DPL at Rs. 50 per
share. The breakup value of the company on that date was Rs. 150 per share.
On 1 April 2021, he received a loan of Rs. 5,000,000 from DPL for the purchase of a house.
The profit on loan was payable at the rate of 8% per annum. The prescribed bench mark
rate is 10% per annum.

Other information relevant to Mr. Salman for the tax year 2021 is as under:
On 15 April 2021, he fell ill and was admitted to KKUH where he had been
(i) working during his employment. The hospital incurred Rs. 50,000 on his
treatment but charged nothing to him.
On 30 April 2021, he received salary arrears of Rs. 900,000 from his ex-employer in
Norway.
Mr. Salman had 30 acres of agricultural land in Dheer which he did not cultivate
(iii) himself. During tax year 2021, he received annual rent of Rs. 600,000 from the
tenant cultivating the land.
 On 1 May 2021, he spent Rs. 800,000 on the renovation of his residential house. The
(iv) entire amount was obtained as a loan from a scheduled bank on which a profit of Rs.
20,000 was paid to the bank during the tax year 2021.
On 15 June 2021, he received insurance claim of Rs. 600,000 against theft of a
(v) painting which was stolen on 31 May 2021. The painting was purchased by him on 1
January 2021 for Rs.350,000. He had paid insurance premium of Rs. 24,000 and also
paid lawyer’s fee of Rs. 50,000 who represented him in the settlement proceedings.
On 15 July 2020, Mr. Salman received 20,000 shares in AB (Private) Limited (ABL),
(vi) a company incorporated under the Companies Ordinance, 1984 as a dividend in
specie. On 30 June 2021, he sold 15,000 shares in ABL for Rs. 425,000. The fair
market value of these shares, on the date of issue, was estimated at Rs. 25 per share.

Required
Under the provisions of Income Tax Ordinance, 2001 compute the taxable income and net tax
payable for the tax year 2021. Give brief reasons for the treatment of items in (v) and (vi) above.
Also explain the treatment of any items that are not appearing in your computation. (8 Marks)
Q2: Hope Limited (UL) is registered under the Sales Tax Act, 1990. The company is engaged in
the manufacture and sale of a range of fibre glass products. Following information has been
extracted from UL’s records for the month of May 2021.

Rupees
Purchases:
Local:
25,000,000
Raw material from registered suppliers

10,000,000
Raw material from un-registered suppliers

Import of raw material 4,000,000

Supplies:
Local:
20,500,000
Taxable supplies to registered persons

9,000,000
Taxable supplies to un-registered persons

6,000,000
Exempt goods

Export to Portugal 12,500,000

Additional information:
Raw materials purchased from a registered supplier in April 2021 were destroyed by
(i) fire. However, UL received full insurance claim of Rs. 1,000,000 against such loss.
Input tax paid on such raw material was however adjusted by UL in its April 2021
return.
On scrutiny of the company’s previous sales tax returns, the internal auditor has
(ii) pointed out that input tax on raw materials of Rs. 200,000 purchased in October 2020
from a local registered supplier has not been claimed / adjusted by UL.
UL under misapprehension collected additional sales tax of Rs. 64,000 from one of its
(iii) customers. 70% of the goods on which additional sales tax was collected are still
lying with the customer as unsold stock.
Taxable supplies to registered persons include the following:
(iv)

Goods worth Rs. 500,000 supplied to AB Limited which is registered as an exporter with the
Large Taxpayer Unit.

Supplies of Rs. 2,000,000 to a domestic airline for regular maintenance of an aircraft weighing
8,500 kilograms.

Raw materials purchased from local registered suppliers include an invoice of Rs.
(v) 100,000 which was issued in the name of a director of UL.

All the above amounts are exclusive of sales tax, wherever applicable. Sales tax is payable at
the rate of 17%. The value of imported raw material is inclusive of custom duty and federal
excise duty. However, other goods are not subject to duty under the Federal Excise Act, 2005.
Required:
In the light of the provisions of Sales Tax Act, 1990 and Rules made thereunder, calculate the
sales tax payable by or refundable to UL for the tax period May 2021. (8 Marks)
Q3: Mr. Farhan acquired and disposed of 3,500 shares of a listed company, Big Limited (BL).
The details are as follows:

Dated Acquisition Disposal

No. of shares Rate No. of shares Rate
31-03-2020 1,400 20 - -
15-09-2020 700 22 - -
01-04-2020 900 18 - -
01-05-2021 - - 600 17
07-05-2021 - - 800 19
21-05-2021 - - 700 18
31-05-2021 500 23 400 25
31-05-2021 - - 1,000 27

Required:
Under the provisions of Income Tax Ordinance, 2001 and Rules made thereunder, calculate
the amount of capital gain / loss and tax thereon, if any, on the above transactions. Ignore
incidental expenses on cost of acquisition of securities. (8 Marks)
Q4: Mr. Bilal is an employee of King Brands Ltd. (a listed Co). In tax year 2021, his basic salary
aggregated to Rs. 1,500,000. The company offered him shares option for acquiring 5,000 shares
under employee share scheme. Cost of option amounted to Rs. 1,000. He exercised the option @
Rs. 50/share on 1st September, 2020. Fair market value (FMV) at the time of exercise of shares
was Rs. 70/share. After holding the shares for a period of 202 days, he disposed them off at:

a) Rs 90 / share
b) Rs 40 / share

Required
In each of the above scenarios, compute Mr. Bilal’s taxable income and tax liability for tax year
2021. (6 Marks)
Q5: Carrot Ltd (CL) is engaged in the manufacture, import and sale of electronic appliances for
the past twenty years. While reviewing the company’s tax provisions, you noticed the following
amounts appearing in the tax calculation for the year ended June 30, 2021.

(i) Expenditure of Rs. 450,000 on promotion of a product which is expected to generate revenue
for twelve years.
(ii) Bad debt in respect of a staff loan, Rs. 25,000.
(iii) Reimbursement of expenses of Rs. 300,000 to CL by the parent company. This amount was
incurred by CL in 2017 on marketing a new product imported from Dubai.
(iv) Initial allowance of Rs. 4,000,000 on a used equipment acquired locally from MSD Limited.
(v) Financial charges amounting to Rs. 100,000 and depreciation amounting to Rs. 200,000 on a
vehicle acquired on finance lease from Radish Leasing. Lease rentals paid during the year
amounted to Rs. 400,000. The principal cost of finance leased motor vehicle not plying for hire
is within maximum upper limit of Rs. 2,500,000

Required:
Under the provisions of Income Tax Ordinance, 2001 discuss the admissibility of each of the
above amounts for tax purposes. (5 Marks)
Q6: Short Questions (5 marks)

a. Determine the tax year for the period 1.09.2019 to 31.08.2020

b. Explain the residential status for tax year 2021: Mr. Raza is working as Director
Operations in the Ministry of Tourism. On 15 July 2020 he was posted to Pakistan
Embassy in Italy for two years.

c. XYZ purchased a second hand car from M/s ABC Ltd, an associated company. The cost
of that car is Rs.500,000 in the books of ABC Ltd whereas written down value of the said
car is Rs.350,000. One of the car dealers told the company that the value of the said car in
the market is Rs. 250,000. What is the value of the car as per the Income Tax Ordinance,
2001?

d. What is benchmark rate for tax purposes in case of interest free loan to employees?

e. Calculate the amount which will be treated as rent chargeable to tax under the head
“Income from Property” for the tax year 2021 if 0n August 2020 Mr. Islam received Rs.
345,000 as rent for leasing out factory, land, building and machinery