SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 1 of 7

BUSINESS TAXATION [S3] – STRATEGIC LEVEL-1

Marks
Question No. 2
(a) Tax Avoidance Scheme: 05
“Tax Avoidance Scheme” means any transaction where one of the main purposes of a person in
entering into the transaction is the avoidance or reduction of any person's liability to tax under the
Income Tax Ordinance, 2001.
Re-characterisation or Disregard of Transaction by Commissioner:
For the purposes of determining liability to tax under the Income Tax Ordinance, 2001, the
Commissioner may:
1. Re-characterise a transaction or an element of a transaction that was entered into as part of a
tax avoidance scheme;
2. Disregard a transaction that does not have substantial economic effect; or
3. Re-characterise a transaction where the form of the transaction does not reflect the
substance.

(b) Payment on Execution of Contracts by Non-Resident: 03

Every person making a payment to a non-resident person in full or part on account of a
construction contract shall deduct tax @ 6% of gross amount paid.
The tax so deducted shall be final tax on the income of a non-resident person arising from the
contract.

(c) (i) Disposal of Investment in a Subsidiary: 06

Disposal of investment in a Pakistan subsidiary to an associated undertaking at an arm's
length price is a valid transaction and has no special tax implications.
There is a capital loss of Rs.10 million which may be set-off and carried forward for
adjustment against capital gains only for a maximum period of six (6) tax years.
(ii) Research and Development Expenditure:
It is an intangible. Total research and development expenses shall not be allowed as
deduction in the year of its incurrence, rather, shall be amortized on the basis of its useful
life. Where the useful life of an intangible cannot be ascertained, the asset shall be
amortized over a period of ten (10) years. This year an amount of Rs.300,000 (i.e., 1/10 of
Rs.3,000,000) shall be allowed as admissible deduction.
(iii) Payment of Consultancy Fee to a Non-Resident:
Payment made by Famous Technologies Limited (FTL) as consultancy fee to a non-resident
firm for the purpose of ascertaining technical feasibility of establishing a subsidiary company
in a foreign country is a Pakistan-source income of that non-resident, thus is taxable in
Pakistan.
FTL had an obligation to deduct tax at source under section 152 of the Income Tax
Ordinance, 2001. As the payment is made without tax deduction, the following provisions
shall be applicable to FTL.
The defaulting person shall, without prejudice to any other liability, be personally liable to pay
the tax if he fails:
(i) To deduct or collect the tax at source; or
(ii) To deposit the tax deducted or collected within the prescribed period.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable to
attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 2 of 7
BUSINESS TAXATION [S3] – STRATEGIC LEVEL-1
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Before recovery of the tax, an opportunity of being heard shall be provided to the defaulting
person. Further, the amount of tax shall not be recovered from the defaulting person, if the
person from whom it was to be deducted/collected has already paid the amount of tax.
However, the defaulting person shall be liable to pay the default surcharge.
The defaulting person shall be liable to pay default surcharge on such amount @ 18% per
annum for the period of its non-payment.
While computing the total income of the defaulting person, the payment on which tax at
source was not deducted shall not be allowed as admissible expense.

(d) Mr. Khalid

Wealth Statement and Wealth Reconciliation Statement
for the tax year ended June 30, 2018
Rupees
Opening net wealth 20,350,000 0.50
Add: Business income 3,810,000 0.50
Agricultural income 3,750,000 0.50
Capital gain (350,000 – cost 200,000 – tax 22,500) 127,500 01
28,037,500 0.25
Less: Personal expenses 2,937,500 0.50
Shares gifted to brother [not taxable due to non-
recognition rule assuming that brother is resident] 100,000 3,037,500 0.50
Closing net wealth 25,000,000 0.25

Reconciliation:
Rupees
Agricultural land in Sukkur 7,500,000 0.50
Residential property in Karachi 4,500,000 0.50
Investment in listed shares (1,650,000 – 200,000 – 100,000) 1,350,000 01
Advance against bungalow 1,500,000 0.50
Business capital (6,000,000 + 3,810,000 – 700,000) 9,110,000 01
Motor vehicle 1,600,000 0.50
Cash at bank 1,100,000 0.50
Cash in hand 240,000 0.50
Bank loan (2,250,000 – 350,000) (1,900,000) 0.75
25,000,000 0.25

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable to
attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 3 of 7
BUSINESS TAXATION [S3] – STRATEGIC LEVEL-1
Marks
Question No. 3
(a) Non-Recognition of Gain or Loss on Disposal of an Asset: 06
Normally, the gain or loss on disposal of an asset is taken into account. However, under the
following cases no gain or loss shall be taken to arise, if the person acquiring the asset is a
resident person:
1. Where disposal is between spouses under an agreement to live apart;
2. Where disposal is by reason of the transmission of the asset to an executor or beneficiary on
the death of a person;
3. Where disposal is by reason of a gift of the asset;
4. Where disposal is by a company to its members on its liquidation;
5. Where disposal is by an association of persons to its members on its dissolution.
However, under this case the assets should be distributed in accordance with the
interest of members in the capital of AOP.
Notes:
A. If the person acquiring the asset is a non-resident person, the gain or loss on
disposal of assets shall be computed as per normal procedure.
B. Under all the above cases it shall be treated that:
(i) The person is acquiring the asset of the same character as the person disposing of
the asset; and
(ii) The person is acquiring the asset at a cost that is equal to the cost of the asset at
the time of disposal to the person disposing it off.
6. Where the disposal is by reason of the compulsory acquisition of the asset under any law. In
order to avail this benefit the consideration received on disposal shall be reinvested (within
one year of the disposal) in an asset of similar kind.

(b) Cost and Disposal Value in Non-Arm’s Length Transactions: 02

The fair market value of the asset at the time of the transaction shall be taken respectively as
cost and disposal consideration to the buyer and the seller, if the asset is purchased or sold in
non-arm’s length transaction.

(c) (1) A deduction for entertainment expenditure shall be limited to expenditure incurred by a person 06
which is:
(a) expenditure incurred outside Pakistan on entertainment in connection with business
transactions or where such expenditure is allocated as head office expenditure;
(b) expenditure incurred in Pakistan on entertainment of foreign customers and suppliers;
(c) expenditure incurred on entertainment of customers and clients at the person's business
premises;
(d) expenditure incurred on entertainment at a meeting of shareholders, agents, directors or
employees; or
(e) expenditure incurred on entertainment at the opening of branches.
(2) A person shall be allowed a deduction under sub-rule (1) only for expenditure incurred on the
entertainment of persons related directly to the person's business.
(3) In this rule, "entertainment" means the provision of meals, refreshments, and reasonable
leisure facilities in accordance with the tradition of business and subject to overall norms and
customs of business in Pakistan.
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable to
attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 4 of 7
BUSINESS TAXATION [S3] – STRATEGIC LEVEL-1
Marks
(d) (i) Penalty for the violation of any law, rule or regulation is not admissible and therefore penalty 06
for the late submission of statement under the Income Tax Ordinance, 2001 is not allowable
tax expense.
(ii) Depreciation on leased assets is not allowed instead lease rentals are admissible for tax
purpose.
(iii) Business expenditures are required to be paid through banking channel with certain
exceptions where payment is allowed to be made in cash without any limit. One of the
exceptions is utility bills and therefore payment of utility bills in cash is admissible for tax
purpose.

Question No. 4
Mr. Waqar
Tax Year 2018
Computation of taxable income and tax liability
Rupees
Salary
Basic salary (Rs.250,000 x 12) 3,000,000 0.50
Cost of living allowance (Rs.50,000 x 12) 600,000 0.50
Bonus 250,000 0.50
Company maintained car for personal use (Rs.1,800,000 x 10% x 4/12) 60,000 01
Rent free accommodation, higher of:
45% of basic salary or 1,350,000 0.50
Actual rent 960,000 1,350,000 0.50
Taxable salary 5,260,000 0.50
Income from Property:
Rent 960,000 0.50
Income from Business:
Brokerage fee 100,000 0.50
Less: Expenses (20,000) 80,000 0.75
Capital Gain u/s 37:
Disposal of shares in MZ:
Sale proceed 250,000 0.50
Less: Cost (10,000 x 22) (220,000) 30,000 0.75

Consideration received i.e. insurance claim for painting 500,000 0.50

Less: Purchase cost (300,000) 0.50
Insurance premium (25,000) 0.50
Lawyer’s fee (50,000) 0.50
Capital gain 125,000 0.50
75% of capital gain as the holding period is more than one year 93,750 0.75
Total income 6,423,750 0.75
Less: Zakat deducted by the bank 25,000 0.50
Taxable income 6,398,750 0.50
Less: Property income (taxable at separate rates) 960,000 0.50
Income taxable at normal slab rates 5,438,750 0.50
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable to
attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 5 of 7
BUSINESS TAXATION [S3] – STRATEGIC LEVEL-1
Marks
Rupees
Tax Liability
Tax on taxable income (Rs.597,000 + (27.5% x Rs.1,438,750)) 992,656 1.50

Tax on property income (Rs.20,000 + 10% x Rs.360,000) 56,000 1.50

Total tax labiality 1,048,656 0.50
Less: Tax credit on life insurance premium [1,048,656 ÷ 6,398,750 x 01
500,000] [N-1] 81,942
Tax credit on approved pension fund [1,048,656 ÷ 6,398,750 x
900,000)] [N-2] 147,496 229,438 01
Tax liability 819,218 0.50
Less: Tax deducted from salary 600,000 0.50
Tax payable 219,218 0.50

Notes:
N-1: One of the two, investment in shares, or premium on life insurance policy, is eligible for rebate.
Rebate is, therefore, calculated on premium on life insurance policy being the higher amount. 0.50
Shares in Abrar Limited:
i. Total cost of acquiring shares or the total amount of
contribution or premium on life insurance policy 0.50
(amount of Rs.500,000 or Rs.200,000) Rs.500,000
ii. 20% of taxable income of the taxpayer for the year 0.50
(Rs.6,398,750 x 20%) Rs.1,279,750 0.50
iii. Rs.1,500,000 Rs.500,000 0.25
N-2: Investment in approved pension fund is subject to lower of:
i. Actual premium Rs.1,600,000 0.50
ii. 30% of current year’s taxable income (Rs.6,398,750 x Rs.1,919,625 0.50
30%) Rs.900,000 0.50
iii. 30% of taxable income of preceding tax year
(Rs.3,000,000 x 30%) Rs.900,000 0.25

Question No. 5
Sales Tax Liability:
Rupees
Output tax 17% of 11,500,000 1,955,000 0.50
Input tax against local taxable supplies (W-2) 1,166,747 0.50
788,253 0.50
Input tax on fixed assets 610,938 0.50
177,315 0.50
Add: Further tax 2% of Rs. 1,000,000 20,000 0.50
Liability 197,315 0.50
Refund of input tax against zero rate supplies (405,825 + 212,500) on fixed
assets 618,325 0.50

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable to
attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 6 of 7
BUSINESS TAXATION [S3] – STRATEGIC LEVEL-1
Marks
W-1: Input Tax:
Rupees
Imports (2,000,000 x 1.12 x 17%) 380,800 0.50
Local purchases from registered suppliers (Rs.5,000,000 x 17%) 850,000 0.50
Advance paid to supplier (2,000,000 x 17%) 340,000 0.50
Fixed assets for factory (5,000,000 x 17% = 850,000) to be considered
separately – 0.50
Electric bills 52,500 0.50
1,623,300 0.50

W-2: Apportionment of Input Tax:

Rupees
Input Tax Input Tax on
Turnover
[W-1] Fixed Assets
Local taxable sales to registered persons 7,500,000 0.25
Local taxable sales to unregistered persons 1,000,000 0.25
Local Supply under international tender 1,500,000 0.25
Advance received from customers 1,000,000 0.25
Sales to employees 500,000 0.25
Total taxable local supplies 11,500,000 1,166,747 610,938 01
Zero rated: supply to EPZ 4,000,000 405,825 212,500 01
Exempt supplies 500,000 50,728 26,562 01
16,000,000 1,623,300 850,000 0.75

Question No. 6
(a) Features of Distinguishing the Concept of ‘Zero Rating’ from ‘Exempt Supply’: 05
Distinction
Zero Rated Supply Exempt Supply
Points
“Zero rated supply” means a taxable “Exempt Supply” means a supply
Definition supply which is charged to tax at the which is exempt from tax.
rate of zero per cent.
Goods exported as notified by FBR Goods specified by Federal
Products or listed in the Fifth Schedule are Government and FBR and goods
covered charged to sales tax at the rate of listed in Sixth Schedule are exempt
zero per cent. supplies.
Invoice shall be raised for the goods No sales tax invoice shall be raised.
Invoicing
supplied but sales tax shall be
Requirements
charged at the rate of zero per cent
A person engaged in zero rated A person engaged exclusively in the
Registration supplies has to be registered with the exempt supplies is not liable to be
Sales tax department. registered.
Input tax paid related to zero rated Input tax paid related to exempt
Input tax credit supplies is refundable. supplies is inadmissible, therefore,
neither adjustable nor refundable.
DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable to
attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 7 of 7
BUSINESS TAXATION [S3] – STRATEGIC LEVEL-1
Marks
(b) Procedure to be adopted to Adjust the Excess Amount of Sales Tax: 05
Any modification in the already issued tax invoice shall be made through debit or credit note. In
the current case the accountant of AKJ Limited has wrongly charged the higher sale price to
goods supplied to another registered person, Mr. Sarwar. In order to modify the value of supply
and corresponding sale tax amount, AKJ Limited shall issue a credit note to Mr. Sarwar. As
monthly sale tax returns have already been filed by the both persons, there will be adjustment in
tax liabilities of both registered persons. While filing sales tax return for the month of June AKJ
Limited will reduce its output tax and Mr. Sarwar will increase his tax with the excess amount of
sales tax charged in May.

THE END

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or tre ated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable to
attend or receive any comments, observations or critiques related to the suggested answers.