THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Taxation Final Examination – Summer 2013

General comments:

The examination consisted of six questions. Approximately 59 percent of the marks were
awarded for computational skill and the remaining 41 percent of the marks were awarded
for essay based questions. In general, candidates performed satisfactorily on
computational questions. However, answers to discursive questions viz. Question Nos.
1(a), 4 and 5 were particularly disappointing and remained far below the expectations.
Apparently, the main reason for poor performance in these questions was the failure to
carefully read and understand the contents of the question together with incomplete
answers mostly based on general perceptions. Candidates are advised to give more
thought to the layout and organisation of their answers and write only relevant, focused
and precise answers to match the allocated marks.

Specific comments are as under:

Question 1

This question with a potential 21 marks was divided into two parts: the first part was
related to the definition of ‘Securities’ and ‘Holding Period’ as provided in section 37A
(3) of the Income Tax ordinance, 2001 and Rule 13C of the Income Tax Rules, 2002
respectively. This part carried 5 marks; the second part required candidates to calculate
capital gain or loss and the amount of tax thereon. This part carried 16 marks.

(a) Surprisingly, most of the candidates were unable to correctly express all the five
elements identified as securities. Similarly, only few candidates were able to rightly
describe the holding period both in relation to short position and future contracts.
Majority of the candidates explained holding period as provided in section 37A (2)
of the Income Tax Ordinance, 2001 that is ‘holding period of a security is
calculated from the date of acquisition to the date of disposal of such security’
whereas the requirement of the question was to mention the definition as is given in
rule 13C of the Income Tax Rules, 2002.

(b) The performance on this part of the question was comparatively better. However, a
number of common mistakes were observed in many answers. Almost all the
candidates omitted to adjust the incidental expenses being 0.5% of the sale
proceeds in order to arrive at the amount of net gain or loss from the sale of
securities. Further, contrary to the provisions of Rule 13P of the Income Tax Rules,
2002, the selling price of 1,400 shares sold on 31 May 2013 were taken at Rs. 25
per share for 400 shares and Rs. 27 per share for 1,000 shares instead of an average
price of Rs. 26 per share for all the 1,400 shares. Many candidates also failed to

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 Examiners’ Comments on Advanced Taxation Final Examination Summer 2013
appreciate that capital losses on securities held for a period of more than one year
are not eligible to be set-off against the capital gain on securities held for a period
of less than one year.

Question 2

This question with a potential 17 marks was divided into two parts. Part (a) tested
candidates’ ability to determine whether various persons in the given scenario were
required to be registered with the Inland Revenue Department and to compute the amount
of sales tax payable by each under the given circumstances. Part (b) invited candidates to
explain the time frame within which a credit note can be issued by a registered person
under Rule 22(4) of the Sales Tax Rules, 2006.

(a) Candidates performed reasonably well on this part of the question. However, in
sub-part (i) many candidates failed to identify that in the given circumstances, the
manufacturer would be classified as a cottage industry. Few candidates also stated
that manufacturers are required to be registered irrespective of their turnover.

(b) Majority of the candidates were able to satisfactorily narrate the time frame for the
issuance of credit note. However, many candidates did not know that the time limit
of 180 days is to be counted from the date of relevant supply instead of the date of
invoice. They also failed to appreciate that Commissioner / Collector has a power
to further extend the time period by 180 days.

Question 3

This question with a potential 25 marks required candidates to determine the taxable
income and net tax payable by the company Pills (Pvt.) Limited (PPL). Candidates were
tested on their ability to identify the taxability of income from different sources, the
deductibility of expenses and the claim for capital allowances on fixed assets. They were
also required to demonstrate the extent and depth of their understanding in explaining the
tax treatment of certain expenses. Only few candidates were able to pick up marks in the
narrative part. Most of the marks gained in this question were in respect of the
computational part. Candidates displayed sufficient capability in dealing with issues on
taxability of income and deductibility of expenses. However, in case of claim for capital
allowances on machinery purchased under finance lease agreement, candidates were not
able to determine the correct amount at which the leased machinery was to be transferred
to PPL at the end of lease term. Majority of the candidates wrongly treated the market
value of Rs. 760,000 as the tax written down value of the machinery for the purpose of
calculating tax depreciation allowance instead of the residual value of Rs. 640,000 which
in fact was paid by PPL. Some of the other common errors observed were as follows:

• An expenditure of Rs. 800,000 on professional books was treated as an inadmissible

expenditure on the ground that no tax was withheld from such payment, completely
ignoring the fact that no withholding is required on a foreign source income of a
foreign company. This amount, as a matter of fact, was to be treated as a capital
expenditure and initial and normal depreciation allowance was required to be
calculated on Rs. 800,000.

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 Examiners’ Comments on Advanced Taxation Final Examination Summer 2013

• Many candidates failed to appreciate that donations paid to hospitals not run by the
Federal or Provincial or a Local Government cannot be claimed as admissible
deduction and no tax credit is allowed against such donations.
• Rent of Rs. 600,000 was treated as an inadmissible expense on account of non-
deduction of tax not knowing that tax is withheld only at the time of payment and not
on accrual basis.
• Majority of the candidates failed to treat the interest free loan as dividend and
consequently did not compute withholding tax of Rs. 50,000 on it.
• Many candidates were unable to calculate the correct amount of taxable gain on the
sale of delivery van. Few candidates also calculated initial allowance on the delivery
van omitting the fact that initial allowance is allowed on eligible depreciable assets
only in the first year.

Question 4

This question with a potential 12 marks was divided into two parts. Part (a) tested
candidate’s knowledge about the payment of default surcharge and the period of default
under the Federal Excise Act, 2005. Part (b) invited the candidates to explain ‘special
excise duty’ and ‘KIBOR’ as defined in the Federal Excise Act, 2005.

(a) This part, carrying 6 marks, demonstrated extremely poor performances. Most of the
answers were incomplete and based on general perceptions. Majority of the
candidates were unaware of the fact that in case of non-payment of duty within the
prescribed time, period of default shall be exclusive of both the day on which the
duty became due and the day on which it was actually paid and in case of refund of
duty or drawback, the period of default shall be considered from the date on which
refund of duty or drawback is received and not from the day when it was claimed.

(b) A large number of candidates were able to explain the concept of special excise
duty. Majority of the candidates correctly defined what KIBOR stands for but
completely failed to state that it is the rate which prevails on the first day of each
quarter of the financial year.

Question 5

This 7 mark question was divided into two parts. Part (a) required candidates to describe
the method(s) under which a person accounting for business income may compute the cost
of stock-in-trade. Part (b) invited candidates to narrate the circumstances under which
salary received by an employee of a foreign government shall be exempt from tax.

(a) Surprisingly, the performance on this part of the question was exceptionally poor.
Candidates deliberated on everything ranging from determination of ‘cost of goods
sold’ to methods of stock valuation like LIFO, FIFO, Weighted average etc. except
for describing the correct method(s) of computing cost of stock-in-trade i.e. prime
cost method or absorption cost method in case of use of cash basis of accounting
and absorption cost method in case of accrual basis of accounting.

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 Examiners’ Comments on Advanced Taxation Final Examination Summer 2013

(b) The performance on this part was relatively satisfactory. However, many
candidates mixed up the provisions of section 50 of the Income Tax Ordinance,
2001 relating to ‘foreign source income of short term resident individuals’ with that
of the provisions of section 43 relating to ‘foreign government officials’.

Question 6

This 18 marks question focused on the determination of monthly sales tax liability. The
performance was exceptionally well for most candidates. However, the common mistakes
noted, were as follows:

• Most of the candidates computed input tax on items governed under third schedule on
the basis of its purchase price of Rs. 150 per item instead of the correct method of
computing it on the basis of its retail price of Rs. 200 per item.

• Many candidates omitted to compute and deduct un-adjustable input tax relating to
zero-rated supplies from the total monthly input tax.

• Supplies against international tender were wrongly considered as ‘exempt’ instead of

‘zero-rated’.

• While determining the amount of residual input tax many candidates also included
input tax on local third schedule items in their computation.

• Few candidates also calculated input tax on the amount of sales tax paid on electricity.

(THE END)

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