THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Taxation Final Examination – Summer 2012

General:

The overall performance this time was far below the levels seen in the past many attempts.
Three out of six questions carrying 52 marks required tax computation and were mostly
focused on concepts which had previously been tested several times. Even then, the
performance on these questions was much below expectations. Performance in the other
questions was not much different either. Where questions were left unanswered by the
students, this appeared to be because of lack of knowledge and selective studies rather
than time pressure.

Question-wise comments are as under:

Q.1 (a) The question was about “Pakistan resident company” with foreign source
income and foreign tax credit. Although the question did not contain any
complexity, most of the students could not answer it correctly. Some common
mistakes found included:

• A number of candidates did not appreciate the fact that profit on debt paid
to finance foreign branch operations has been adjusted against local
operations and should be added back to the income from local operations
and allowed against foreign branch’s income.

• Majority of the students were totally confused while calculating foreign

tax credit. They did not understand the basic principle whereby credit for
tax paid in foreign countries is restricted to the lower of Pakistan tax
applicable on the same amount of income or foreign tax paid.
Consequently, no credit was to be allowed for foreign tax paid against
China Branch’s income whereas credit for the entire amount of foreign
tax paid against Korean Branch was to be allowed. Many students also did
not know that the credit is to be claimed separately for each branch. They
applied the rule on the combined income of the two branches clubbing
together the tax paid thereon.

• Some of the candidates altogether ignored the export sales and the related
tax implication.

(b) This was a straightforward theoretical question based on Section 177 and
Section 214 of the Income Tax Ordinance, 2001. However, most of the
students had limited knowledge of the subject and barely secured 1 or 2
marks only.

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 Examiners’ Comments on Advanced Taxation - Final Examination Summer 2012

Q.2 This question appeared to be very challenging for the candidates although it covered
the very basic concepts relating to the appointment and responsibilities of an e-
intermediary as stated in the Sales Tax Rules, 2006. It was comparatively a new
topic, but practically most pertinent to the present day requirements. Most of the
candidates did not attempt the question probably on account of selective studies. As
a result, the performance on this question remained very poor and students could
hardly secure 2 to 3 marks on this 13 marks question. Only few candidates covered
the following:

• e-intermediary should have sufficient information technology infrastructure and

experience in the field of taxation.

• Application should be made to e-declaration administrator.

• Issuance of Unique User Identifier.

• Responsibility for retention of record for a period of 5 years.

Q.3 This question required candidates to identify the persons who are liable to pay
Federal Excise Duty in case of (a) discontinued business enterprise and (b) transfer
of ownership of a business to another person as an ongoing concern.

Most of the candidates secured good marks in part (a) as the answer was too obvious.
However, in part (b) majority of the candidates did not seem to know the exact
answer and relied on guesswork. Many candidates discussed the requirements of
Sales Tax Act, 1990 instead of the Federal Excise Act, 2005 thereby losing easy
marks.

Q.4 This was a comprehensive question on group taxation requiring adjustment of

different types of losses. Overall performance was average. In addition to carrying
out the required computations many candidates wasted their time in explaining as to
how and when group relief can be availed.

For group taxation, individual computation of each company was required to be

made and thereafter the amount of loss was to be surrendered. Instead, many
candidates computed taxable income on a consolidated basis.

The tax credits were required to be claimed by each company against its taxable
income and no tax credit was required to be surrendered in favour of group
companies.

The following points were also to be considered while solving the question:

(i) Scientific research expenditure was not allowable because these were
incurred outside Pakistan;

(ii) Employee loan written off was not allowable because it was not a trade debt
i.e. the amount had never been booked as income;

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 Examiners’ Comments on Advanced Taxation - Final Examination Summer 2012

(iii) Sales promotion cost was to be spread over three years;

(iv) Capital gain or loss had to be computed under separate head of income.
Capital gain is to be reduced by 25% if the capital asset is sold after one year
of purchase. Many candidates were either not aware of the rule or applied it
to capital loss as well.

(v) Profit on debt is chargeable to tax as a normal income under the head
“income from other source”. Moreover, in case of companies, normal rate of
tax is to be applied to it. Many candidates subjected it to tax at 10% and
treated it as a final tax.

(vi) Transport income is subject to final taxation regime. Many candidates

correctly deducted it from normal business income but failed to charge any
tax thereon.

(vii) Gain on sale of machinery by Sun Limited to Venus Limited was to be

eliminated in view of the application of non-recognition rule (Section 97).

(viii) For calculating tax depreciation, written down value at the time of inter-
company sale/purchase was to be adjusted to the written down values of the
respective companies. Many candidates did not know the correct treatment.

(ix) Business losses are adjusted before adjustment of unabsorbed depreciation

while computing taxable income. However, vast majority of the candidates
were not aware of the correct treatment.

(x) Brought forward business loss cannot be surrendered.

Q.5 Most of the concepts tested in this question were tested many times in the past. The
candidates were therefore expected to show a high degree of command in solving
such questions. Yet the overall performance was just average and only half of the
candidates who attempted the question were able to secure 50% marks on this 18
marks question. The common mistakes were as follows:

• Some candidates did not seem to have any idea of residual input tax. They
adjusted the entire amount of input tax for the month against output tax without
apportioning it among taxable, exempt and zero rated 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. It clearly shows that they do not give
due attention to earlier examiners’ reports and are making same mistakes every
time.

• Input tax on export and zero rated supplies are claimable as refund and can not
be adjusted against sales tax liability. Many students did not appreciate this
requirement of law.

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 Examiners’ Comments on Advanced Taxation - Final Examination Summer 2012
• A number of candidates either did not know or ignored the fact that the input tax
cannot be claimed on goods for which invoice was issued in the name of the
director.

• Input tax on raw material purchased more than 180 days ago was claimed in the
normal manner. Such amount can only be adjusted with the permission of the
Federal Government or the FBR.
• Most of the students failed to appreciate that insurance claim received does not
constitute a supply. Therefore, input tax previously claimed on such goods
should have been added back to sales tax payable.

• Sales tax of Rs. 64,000 which was wrongly collected should be returned to the
customer except for that portion the effect of which has been passed on to the
consumer. Therefore, in the given situation 70% of the amount should have been
returned.

• Many candidates could not comprehend that supplies to AB Limited which was
registered as an exporter with Large Tax Payers Unit and supplies for
maintenance of aircraft were zero-rated supplies.

• Some of the students gave explanatory notes in respect of various situations

instead of carrying out the computations.

Q.6 In this question the candidates were required to discuss the income tax implications
in respect of four independent situations. Candidates’ performance in each situation
was as under:

(a) Majority of the students were not able to identify that government grant is a
capital receipt. It is not exempt from tax and should be deducted from the cost
of the asset.

(b) Very few students concluded correctly that no tax was deductible from the
payment made to the hospital in USA because it was not attributable to any
business activity in Pakistan.

(c) The candidates were required to comment on taxation of dividend received

from a company whose entire income was generated from agriculture. Majority
of the students correctly quoted the relevant provisions based on Section 55 of
the Income Tax Ordinance, 2001 that exemption to original recipient cannot be
extended to the person receiving share of such income by way of dividend.
However, while drawing the conclusion they wrongly stated that dividend paid
from agricultural income is exempt from tax.

(d) Majority of the candidates though correctly concluded that tax should be
deducted from the payments made to Indian artist, failed to identify the reasons
for the deduction of tax.

(THE END)

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