THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS COMMENTS

SUBJECT SESSION
Taxation Intermediate Examination - Spring 2014

General

The paper was set from core topics of the subject. Overall performance of the candidates
was average though many candidates achieved very high marks also. Successful
candidates demonstrated their higher skills and used their allowed time effectively so as
to be able to cover all key aspects of each question. They approached the tasks
methodically and produced well balanced, relevant answers addressing the principal and
core components of each requirement.

Those who could not do well, mainly suffered on account of the following:

Selective study;
Lack of understanding of the requirements of the question;
Producing irrelevant material thereby creating time constraint; and
Lack of communication and presentation skills.

Question-wise comments are as follows:

Question 1

In this question, tax computation of an individual was given and the candidates were
required to compute the revised taxable income and tax payable or refundable for the tax
year 2014 after correction of errors in the given computation and to comment on the
treatment meted out to various expenses. The overall performance was good as most of
the candidates seemed familiar with the tax treatment of various expenses, losses and
other income. The mistakes that were generally observed were as follows:
Many candidates added the inadmissible expenses to the cost of sales and
administrative expenses.

Salary paid to the brother of the individual was considered inadmissible.

Interest income received from a commercial bank was considered taxable under the
normal tax regime instead of final tax regime. Some students treated the income
under FTR but also claimed the amount of tax deducted against the income under
NTR.

Almost no one was able to comment that minimum tax was not applicable because
the turnover for the year was less than Rs. 50 million.

Few candidates treated donation as straight deduction from tax liability instead of
calculating tax credit thereon. Many among those who calculated the rebate correctly
did not offer any comment, as was required in part (b) of the question.
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 Examiners Comments on Taxation Spring 2014

In the formula for calculating average rate of tax for tax credit on donation, a number
of students used total tax liability instead of gross amount of tax.

Travelling and hotel expenses for attending the trade fair were incorrectly considered
as for personal purposes.

Damages paid to distributors were considered inadmissible. Such damages are not in
the nature of fine or penalty for violation of law and are an admissible expense.
Majority of the students were unaware that brought forward business loss should be
adjusted before adjustment of depreciation.

Question 2(a)

This was an easy and straightforward question which required a list of persons who could
act as an authorized representative and also of those who are not allowed to act as the
authorized representative of a taxpayer. Most of the candidates were able to answer
correctly in the light of Section 223 of the Income Tax Ordinance, 2001. However, many
candidates mentioned the provisions of Section 172 regarding representation of a person,
which is quite different from an authorized representative. Other commonly observed
errors/omissions were as follows:

An employee has to be a current full-time employee to represent a taxpayer;

Many candidates used the term legal representative rather than legal practitioner
entitled to practice in any Civil Court of Pakistan to be an authorised representative;
Many candidates stated that a person guilty of misconduct cannot be an authorized
representative. The correct position is that the restriction applies to a person convicted
of an offence in relation to any income tax proceedings.
Very few students included a banker in the list of persons authorized to act as an
authorized representative.

Question 2(b)

This part required the candidates to explain the term Associates and state the
circumstances under which a shareholder in a company and the company may be
regarded as associates. Majority of the candidates responded well. However, many of
them did not appreciate the specific requirement of the question and wasted their precious
time in narrating the entire provisions of section 85 of the Income Tax Ordinance, which
was not required.

Question 2(c)

This part of the question required conditions to be fulfilled by a person on discontinuing a

business. Although majority of the students seemed to be familiar with the relevant
provisions, they lost some marks because of the following errors:

Instead of mentioning that a notice is required to be given within 15 days of

discontinuation of business, many students stated that the notice should be given 15
days before the discontinuance.

Some students mentioned that the notice should be given to the FBR.
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 Examiners Comments on Taxation Spring 2014
Question 3

This was a scenario based question requiring the students to narrate the conditions that a
company would need to comply with, in order to be eligible to claim tax credit equal to
100% of the tax payable on profits attributable to the new plant, as provided under
section 65E of the Ordinance. The overall response to this question was quite poor. It
seemed that the students had not studied this area on account of selective studies since it
is rarely tested in the examinations. Most of them gave irrelevant answers and could not
secure any marks.

Question 4

The requirement of this question was to compute the taxable income of two individuals
jointly owning a house which was let out on rent. Annual rental value of the house
included amount for provision of utilities, cleaning and security. The overall response to
this question was satisfactory. The mistakes observed were as follows:
Some candidates considered the joint ownership of the property as an AOP.

A number of students did not know that amount included in rent for the provision of
amenities and utilities should be taxed under the head Income from other sources.

Many students were unaware that allowance equal to one-fifth of the amount of rent
chargeable to tax was to be deducted in respect of repair and maintenance expenses
instead of the actual expenses amounting to Rs. 810,000.

Many students deducted 6% collection charges whereas the deduction was to be

allowed at actual or 6% of the chargeable rent, whichever is lower.

Expenditure incurred in relation to utilities, cleanliness and security, amounting to Rs.

650,000 should have been claimed against amount received on account of utilities,
cleanliness and security. Instead, it was deducted from income from property.

Question 5(a)

This part of the question required the students to define the term turnover as per Section
113 for the purpose of minimum tax. Many students tried to define the term merely on
the basis of their general knowledge, which was entirely different from the specific
definition given in the Income Tax Ordinance. For instance, some defined turnover
merely as sales made by a taxpayer during a tax period or as the total income earned by
a person from sale of goods to the public. Many students did not include commission in
the definition of turnover. Considerable number of students failed to explain that turnover
for the purposes of minimum tax liability did not include any amount covered by final
discharge of tax liability for which tax was separately paid or payable.

Question 5(b)

This part of the question required identification of persons who are liable to pay
minimum tax. Some students mentioned that every company is required to pay minimum
tax, whereas, only a resident company is required to pay minimum tax.

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 Examiners Comments on Taxation Spring 2014

Question 5(c)

Students performance in this part was below average. The requirement was to discuss
the rules relating to carry forward of minimum tax to subsequent years. Many candidates
mentioned that minimum tax can be carried forward for six tax years instead of five.
Probably, they mixed it up with the rule related to carry forward of losses. Vast majority
of the students mentioned that minimum tax paid can not be adjusted against normal tax
liability or/and that it can not be carried forward. A number of students declared that
minimum tax can be adjusted against taxable income instead of mentioning that it is
adjusted against tax liability.

Question 6(a)

This was a straightforward question and majority of the students got above average marks
by correctly identifying the exemption criteria of foreign source salary of resident
individual, as has been specified in Section 102 of the Income Tax Ordinance, 2001.
However, a number of students confused it with foreign source income of returning
expatriate and short term resident individuals. Some candidates were of the opinion that
tax credit would be allowed on foreign source salary of resident individual instead of
exemption under the provisions of Section 102. Many students seemed blank and relied
on pure guesswork discussing issues such as double taxation treaties etc. which were
entirely irrelevant.

Question 6(b)

This part was based on Section 104 of Income Tax Ordinance, 2001 and required the
candidates to explain foreign loss and set off and carry forward of such losses. This part
was generally well attempted.

Question 7

This question required the candidates to explain the provisions whereby certain payments
by a private limited company to its shareholders can be treated as dividend and also the
exceptions to this rule.

Many candidates wasted time in reproducing the entire definition of dividend, which was
not required. Moreover, only few candidates could highlight the following aspects:
Any payment for the individual benefit of any shareholder may be treated as
dividend.

The amount to be treated as dividend shall be limited to the extent of accumulated

profits.

The exception in respect of loans and advances made in the ordinary course of a
business, where lending of money is a substantial part of the business of the company.

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 Examiners Comments on Taxation Spring 2014

Question 8

This was a practical question based on Section 147(4) of the Income Tax Ordinance,
requiring the candidates to calculate the advance tax payable by an association of persons
for the fourth quarter pertaining to tax year 20X4. The question was quite easy as only a
close look at the information given could have guided the students towards the right
answer since the options were quite limited. However, almost half the candidates left the
question unanswered probably because they had not studied the topic at all. Those who
attempted, did quite well. The mistakes observed were as follows:

Amount of tax withheld in the fourth quarter which pertained to final regime was not
excluded in arriving at the amount of tax withheld, for the purpose of adjustment
against guess amount of advance tax liability.
Amount of tax withheld for the fourth quarter was not deducted in computing the
advance tax liability.

Question 9

The requirement of this question was to calculate sales tax payable/refundable and input
tax to be carried forward, for an individual who was engaged in the manufacture and
supply of spare parts. This was a typical question which has been tested in every attempt
and almost all aspects tested in this attempt had also been tested in the previous two or
three attempts. However, overall performance did not show any improvement over the
last attempt. The common mistakes were as follows:

Some candidates did not seem to have any idea of apportionment of input tax and
adjusted the entire amount of input tax for the month against output tax, without
apportioning the input tax between taxable, exempt and export supplies.

Many candidates did not have clear understanding of the rule that limits the input tax
claim to 90% of output tax. They solved the question assuming that 10% of the output
tax has to be paid in all cases.

Input tax on export supplies is claimable as refund and has to be presented separately.
It is not adjusted against sales tax liability. Many students could not make this
distinction.

Some of the students gave explanatory notes in respect of various situations instead of
making the necessary computations.

Raw material purchased from registered suppliers against which 100% advance was
paid in the previous month was not deducted in arriving at the total purchases from
registered suppliers. In fact, in many scripts such amount was added over and above
the total purchases.

Many candidates did not calculate further tax on domestic supplies made to
unregistered persons.

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 Examiners Comments on Taxation Spring 2014

While comparing input tax with 90% of the value of supplies, it is necessary that
gross input tax should also include the input tax that has been brought forward from
the previous month. This point was generally missed.

Input tax credit brought forward from previous month was deducted at the end to
calculate sales tax payable whereas it should have been added to current months
input tax and then admissible input tax should have been computed.

Refund was claimed against exempted supplies.

Question 10(a)
This was an easy question based on Section 9 of the Sales Tax Act, 1990 and required the
candidates to identify the situations under which a debit or credit note may be issued by a
registered person. Overall performance was satisfactory yet a number of students instead
of identifying the situations, explained the procedure for the issuance of debit or credit
note, which was not required.

Question 10(b)
This was also a simple question regarding the conditions under which a registered person
may file a revised return under the Sales Tax Act, 1990. However, the overall
performance was below average. A significant number of candidates replied in haste and
mentioned the provisions of revised return under the Income Tax Ordinance, 2001. Other
common mistakes were as follows:

Many students did not mention that sales tax return may be revised within 120 days
of the filing of return.

Considerable number of students failed to understand the requirement of this part and
mentioned the reasons for revision rather than the conditions under which a revised
return may be filed.

Question 11

This question was based on section 2(35) of the Sales Tax Act, 1990. The requirement
was to specify the activities that are specifically included and excluded from the
definition of Taxable activity. The overall performance was good. Most of the
candidates secured passing marks whereas a large number of students were able to secure
full marks also. Those candidates who had not studied the relevant provision tried to
answer on the basis of their general understanding of the topic, with little success.

(THE END)

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