THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Taxation Final Examination Summer – 2016

General:

The paper consisted of six questions. Approximately 52 percent of the marks were
allocated for computational skills and remaining 48 percent for essay based questions. The
overall performance was quite poor. Answers to theoretical questions, namely questions
2, 3 and 5 were particularly disappointing although majority of the candidates performed
well in two out of the three practical questions i.e. 4 and 6. In many scripts, candidates
offered irrelevant answers in complete disregard to the requirements of the questions and
made assumptions which were in contradiction to the provided information.

Question-wise comments are as under:

Question 1

This 23 mark question required candidates to compute the total income, taxable income
and net tax payable by or refundable to an un-listed public company, engaged in
diversified business operations. The performance in this question remained below
average. Following errors were noted in most of the answer scripts:

(i) To arrive at the taxable income, gross receipts from the construction contract
amounting to Rs. 11,250,000 were deducted from total income instead of
deducting Rs. 2,812,000 being the income earned from the contract.

(ii) Profit from cold chain facility was incorrectly classified as income under final tax
regime.

(iii) In computing “Income from Business”, cash payment made to a restaurant for
providing food was erroneously considered as inadmissible.

(iv) Cost of intangible (right to use a scientific formula) was amortised over a period of
twelve years instead of limiting it to ten years.

(v) Value of bonus shares was included in “Income from Business” instead of final tax
regime. Further, instead of valuing the shares at the price prevalent on the date of
closure of share transfer books, i.e. Rs. 70 these were valued at the price prevailing
on the day before the book closure i.e. Rs. 75 or the price on the last date of book
closure i.e. Rs. 85.

(vi) Net amount of dividend in specie was charged to tax instead of the gross value
thereof.

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 Examiners’ Comments on Advanced Taxation – Final Examination Summer 2016

(vii) Cash dividend received from Mithas Farms Limited was treated as exempt since
the dividend was paid out of agricultural income. In fact, such exemption is
available only to dividend distributed by ‘corporate agricultural enterprise’ out of
its agricultural income.

(viii) Default surcharge payable because of short payment of advance tax was ignored.
Moreover, many students who computed default surcharge did not appreciate that
for the purpose of such calculation, gross tax payable should not include tax
payable under final tax regime.

(ix) Some candidates did not read the question carefully and spent time in computing
‘Minimum Tax’ and ‘Alternative Corporate Tax’, which was not required.

Question 2

This question containing 17 marks pertained to Sales Tax Act 1990 and Rules made
thereunder. It was divided into three parts with parts (a) and (b) further subdivided into
two parts (i) and (ii). The performance in each part/sub-part is discussed below:

Question 2(a)

(a)(i): The requirement was to describe the term ‘Reciprocity’. The performance remained
very poor as only few candidates were able to give correct answer. Most of the candidates
incorrectly considered that export of goods for the purpose of re-import as reciprocity or
confused it with double taxation treaties.

(a)(ii): The requirement was to list any five conditions which the Commissioner may
consider as basis to suspend the registration of a person through the system without prior
notice. The performance was average as majority of the candidates were able to correctly
write some such conditions but only few could mention correctly all the conditions.

Question 2(b)

(b)(i): This sub-part required the candidates to state the salient benefits which may accrue
to buyers who opt for ‘Duty and tax remission for exporters’ (DTRE) scheme. The
performance was very disappointing. Most of the candidates were unaware of DTRE
scheme and produced irrelevant answers and resorted to guess work. Most others could
only write that exports would be charged to sales tax at the rate of zero percent which is
the normal situation. Very few students could state the real benefit i.e. that such exporters
can purchase goods for use in manufacture of exportable goods without payment of sales
tax.

(b)(ii): This sub-part of the question required candidates to identify the authority who may
appoint special audit panels and also to state the composition of such panels. The overall
performance in this sub-part remained satisfactory. However, few candidates incorrectly
mentioned that special audit panel(s) may be appointed by the Commissioner Inland
Revenue. With regard to the composition of the audit panel, many students wrote
incorrectly that an advocate of High Court and two retired civil judges may be appointed
on the panel. Most of the candidates did not mention that special audit panel shall be
headed by the chairman who shall be an officer of Inland Revenue.

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Question 2(c)

This part of the question pertained to Provincial Sales Tax on Services Acts and required
candidates to provide two examples illustrating the provisions of law relating to services
provided over a period of time and where payment for such services were to be made on
periodic basis.

The performance in this part remained poor. Majority of the candidates either did not
attempt this part or were not able to give correct examples.

Question 3(a)

In this part, the candidates were required to explain how capital gain or loss is calculated
in case of the following types of derivatives:
i. Cash settled future contracts
ii. Options and
iii. Contracts of right shares.
Most of the candidates did not have any idea about cash settled future contracts and relied
on guesswork and mostly referred to the provisions of section 37A of the Income Tax
Ordinance, 2001.

The performance in the case of Options was also very poor. Most of the candidates
confused the derivative option with employee share option and framed their answers
accordingly. Candidates also failed to appreciate that disposal relates to the securities
underlying such option and not the option per se.

The performance in case of contract of right shares was good and most of the students
gave correct answers.

Question 3(b)

This part of the question required candidates to advise about the consequences of
non-disclosure or inaccurate disclosure of property in the wealth statement or in case of
failure to offer explanation about the nature and source of investment in such property.

The overall performance in this part remained below average. Most of the answers were
incomplete and were confined to the provisions of section 111 of the Income Tax
Ordinance, 2001. Hardly any candidate was able to write about the penalty, default
surcharge or punishment by way of conviction which may be awarded to the defaulters.

Question 4

This question required computation of sales tax payable by or refundable to a registered

person in a given tax period. Traditionally, in such questions the candidates are asked to
compute the amount of input tax and output tax on goods for arriving at the amount of net
sales tax liability or refund, as the case may be. However, the pattern of this question was
somewhat different as it required candidates to compute the corrected amount of net sales
tax liability or the amount of refund by making suitable adjustments based on information
provided in the question which included the given amount of sales tax refund of Rs.
250,000.
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The overall performance was satisfactory. The errors observed were as follows:

(i) Many candidates disregarded the instruction given in the question to commence
their computation with the refund amount of Rs. 250,000 and started computing
input tax and output tax on each item to arrive at final sales tax liability.

(ii) Many candidates did not appreciate that further tax is not payable on finished
articles and on sale of goods to end consumers.

(iii) Most of the candidates were not aware of the fact that sales tax on smart phones
being an item of ninth schedule is only payable by the importers or local
manufacturers and is not payable at the time of sale.

(iv) Many candidates were of the view that Morabaha transactions do not fall within
the definition of supply and therefore are not taxable. They did not appreciate that
such transactions are not taxable only when the contracting party is a bank or
NBFC and the transaction is approved by SBP or SECP.

(v) Some candidates were of the opinion that sales tax and not excise duty would be
payable in respect of royalty.

(vi) Many students failed to appreciate that excise duty on domestic air tickets is not
available for adjustment in VAT mode.

(vii) Most of the candidates failed to compute sales tax on toll manufacturing of
chemicals.

(viii) Majority of the candidates computed extra tax on tiles ignoring the fact that extra
tax is payable only at the time of supply and not at the import stage.

Question 5

This question carrying 12 marks was divided into three parts (a), (b) and (c) and was
related to the provisions of Federal Excise Act, 2005 and Rules made thereunder. Part (a)
was further divided into two sub-parts (i) and (ii).

(a)(i): This sub-part of the question required the candidates to briefly state the provisions
relating to the recovery of duty by the Inland Revenue Department in case a registered
person fails to levy and pay excise duty.

The overall performance remained very poor. Majority of the candidates failed to
understand the question and consequently their answers were mostly founded on
guesswork. Most of the answers deliberated on the mode of recovery of duty as provided
in Rule 60 of the Federal Excise Rules, 2005 instead of the procedure of recovery of duty
under section 14 of the Federal Excise Act, 2005. Many candidates wrote that unpaid duty
could be recovered from shareholders holding more than ten percent of shares in the
company or from the directors of the company. In part (a)(ii), the performance was
comparatively better. However, majority of the candidates barely managed to state that an
order shall be made within one hundred and twenty days.

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(a)(ii): In this sub-part of the question the candidates were required to state the time frame
within which an order may be made by the Inland Revenue Department, after issuance of
show cause notice, under the given circumstances.
The performance in this sub-part was average. Majority of the candidates barely managed
to state that an order shall be made within one hundred and twenty days and ignored other
details.

Question 5(b)

In this part the candidates were required to describe the term ‘Curing’ which has been
defined in Rule 2(j) of the Federal Excise Rules, 2005. This part of the question exhibited
worst performance. Majority of the candidates failed to attempt this question. Those who
attempted relied mostly on guess work.

Question 5(c)

In this part the candidates were required to list the matters in relation to registration for
which the procedures prescribed under the Sales Tax law applies mutatis mutandis to
persons who are registered under both the Federal Excise and Sales Tax Laws.

The performance in this part remained very poor. Majority of the candidates produced
irrelevant answers. Most of them stated that a person registered under the Sales Tax Act,
1990 does not require separate registration under the Excise Act, 2005. Some of the
candidates described the registration procedure under the Sales Tax Laws, which was
totally irrelevant.

Question 6(a)

This part of the question required candidates to compute the taxable income of an
individual taxpayer. Majority of the candidates secured good marks in this part of the
question. The mistakes observed were as follows:

(i) Entire amount of medical allowance was considered as taxable.

(ii) Many candidates considered perquisites representing car and traveling allowance
as taxable whereas these were exempt because of being incurred in relation to
official duties.

(iii) Taxable value of accommodation was taken as 45% of basic salary whereas the
fair market rent being higher was taxable.

(iv) For computing property income, fair market value of rent was considered as
taxable whereas actual rent received i.e. Rs 1,092,000 was taxable in accordance
with Section 15(5) of the Ordinance. In some scripts, property income was
wrongly classified as “Income from Other Sources”.

(v) Some candidates considered the gift of coal mining rights to a non-resident sister
as non-taxable event under the non-recognition rules whereas provisions of
Section 79 (non-recognition rule) does not apply in case of a non-resident person.

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 Examiners’ Comments on Advanced Taxation – Final Examination Summer 2016

(vi) Many candidates did not appreciate that only 75% of the gain on transfer of coal
mining rights would be taxable as the holding period thereof was more than one
year.

Question 6(b)

According to the situation given in this part of the question, the Commissioner of Income
Tax had issued a notice to an individual requiring him to pay the tax due from a private
limited company which has gone into liquidation as he held 35% shares in the company.
The performance on this part remained average. Many candidates were of the view that
the person is only liable to the extent of his shareholdings in the company. Some
candidates also wrote that only the directors are jointly and severally liable to pay the
outstanding taxes. The candidates are advised to refer to section 139 of the Ordinance or
ICAP’s suggested answer to seek guidance on this part of the question.

(THE END)

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