THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Winter 2006

December 7, 2006

ADVANCED TAXATION (MARKS 100)

Module F (3 hours)

Q.1 (a) GPM Textiles Limited and GAK Pakistan (Pvt) Limited are wholly owned
subsidiaries of GYK Pakistan Limited. As a part of Corporate restructuring, it is
being considered to transfer the plant and machinery from GPM to GAK at
accounting written down value.

In the Board meeting, it was pointed out by one of the directors that under the
provisions of the Income Tax Ordinance, 2001 the tax gain / loss will have to be
worked out by taking into account the fair market value of the assets being
transferred. The Director Finance has, however, contended that there is a provision in
the Ordinance whereby no gain or loss is recognised in case of disposal of assets
between subsidiary companies.

Required:
Explain to the management of the company about the conditions to be satisfied for
non-recognition of gain / loss on disposal of assets between subsidiary companies of
the same group. (05)

(b) GM Limited is considering an option to issue Term Finance Certificates (TFC)

outside Pakistan for the purpose of raising funds for use in its business activities in
Pakistan. To induce the investors for acquiring TFCs of the Company, it intends to
advertise that the income on the same will not be taxable in Pakistan.

Required:
List down the conditions to be fulfilled for claiming exemption on profit on debt
payable on TFCs being issued by the Company. (05)

Q.2 (a) Under the Income Tax Ordinance, 2001, entertainment expenditure shall be limited to
the expenses incurred by a person that satisfy certain conditions.

Required:
Specify the conditions as explained in the Income Tax Rules, 2002 for the
allowability of entertainment expenditure. (05)

(b) ZAB Manufacturing (Pvt.) Ltd., one of your clients, has been involved in the
manufacturing of leather products. With effect from January 1, 2006 they have also
started exporting approximately 30% of its manufactured goods. Consistent with their
past practice, they are deducting tax from the payments against purchase of goods.

One of their suppliers has raised an objection on their practice by contending that by
virtue of becoming manufacturer-cum-exporter, they are no more required to
withhold tax from payments against purchase of goods.

Required:
Advise your client whether it should withhold tax from payment for purchase of
goods. (04)
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(c) An employer having established approved superannuation and approved gratuity fund
is required to contribute annually to the funds on a reasonable basis. There are,
however, limits set in the Income Tax Rules, 2002 on the initial and annual
contributions to the aforesaid funds.

Required:
Specify those limits and the procedure for payment of contribution beyond the
specified limits. (04)

Q.3 (a) As a tax consultant of Mirza Textile Mill Limited, you filed its return of income for
tax year 2007 on November 30, 2006. Subsequently, you were informed by the Chief
Financial Officer that he forgot to claim credit for certain taxes deducted and paid by
the company’s customers.

Required:
Explain the requirements for filing of revised return under the given circumstances.
What would be the impact of filing a revised return on the assessment treated to have
been made on filing the original return of income? (04)

(b) An appeal filed by FAL (Pvt) Limited against the order passed by the Commissioner
of Income Tax – Appeals is pending before the Income Tax Appellate Tribunal
(ITAT). Meanwhile, on the application filed by the Company, Central Board of
Revenue (CBR) has appointed a committee for the resolution of dispute. On the
recommendations of the Committee, the CBR has passed an order whereby the
Company’s tax liability has been reduced by 50%.

Required:
Explain to the management of the Company that in case they decide to make payment
of tax in accordance with the CBR’s order, what would be the affect on:

(i) existing orders, decisions, etc. and

(ii) appeal proceedings pending before the ITAT. (04)

(c) The Commissioner of Income Tax selected GZH Pakistan (Pvt.) Limited to verify its
compliance with withholding tax regime. For this purpose, the transactions
undertaken after July 1, 2006 were selected and on the basis of the audit, following
transactions were identified where no tax was withheld by the Company:

(i) As part of company’s scheme launched for promotion of sale, a car was given
as a prize to Mr. C.F. Elahi.
(ii) Rent includes payment on account of furniture and fixtures provided by the
landlord.
(iii) Purchase of goods from an importer.
(iv) Profit on debt paid to Pakistan branch of a non-resident bank under a loan
agreement.

Required:
Explain with reasons as to whether or not the Company was required to withhold tax
from payments mentioned in (i) to (iv) above. Also explain, what action can be taken
by the tax authorities if it is established that the Company has failed to deduct tax
from any of the above payments. (09)

Q.4 GIK Pakistan Limited is a Public limited company, whose shares are listed on all the stock
exchanges of Pakistan. GIK Inc. USA holds 55% of the shares of the company. The
Company is engaged in the trading of a wide range of electrical appliances, which
comprise of the following:
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(i) Import in finished form.

(ii) Manufactured in Pakistan from components imported mainly from GIK Inc. USA.

With effect from July 1, 2006, the Company has also established a software house at
Lahore which is involved in export of computer software to GIK Inc., USA under a
separate agreement entered in this behalf.

Following information has been extracted from the profit and loss account of the company
for the year ended December 31, 2006:

Rs in ‘000’
Revenue 500,000
Direct costs 302,000
Administrative & marketing expenses 100,000
Other revenues 50,000
Financial charges 10,000

Notes to the accounts revealed the following additional information:

(i) The revenue consists of sale of locally manufactured goods amounting to Rs.
300,000 and sale of imported finished goods amounting to Rs. 200,000.

(ii) Break-up of direct costs is as under:

Rs in ‘000’
Raw materials consumed 50,000
Work in progress 25,000
Finished goods – Imported (note ii(a)) 106,000
Labour cost (note ii(b)) 80,000
Freight charges (note ii(c)) 20,000
Accounting depreciation 21,000
302,000

(a) This includes tax collected by the Customs Authorities on import of finished
goods amounting to Rs. 6,000,000.

(b) Labour is provided by Messrs. RT & Co. under a contract. All the payments
are made in cash and no tax is withheld therefrom as the management feels
that cash payments are outside the scope of withholding tax provisions.

(c) Payment for freight charges has been made in cash.

(iii) Administrative and marketing expenses include the following items:

Rs in ‘000’
Accounting depreciation 20,000
Salaries (note iii(a)) 15,000
Advertising expenses 40,000
Trade mark fee (note iii(b)) 5,000
Donations (note iii(c)) 1,000
Rent, rate & taxes (note iii(d)) 4,000
Accounting amortisation (note iii(e)) 5,000
Miscellaneous expenses 10,000
100,000

(a) It includes contributions of Rs 1,000,000 to unrecognised provident fund.

However, effective arrangements are in place to ensure deduction of tax from
payments made by the fund to employees.
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(b) Under an agreement with GIK Inc., USA, a quarterly fee is paid by the
company for use of trade marks and logos owned by GIK Inc. The company
has not deducted any tax from the payments on the understanding that such
fee is not taxable in Pakistan in the absence of GIK Inc.’s Permanent
Establishment in Pakistan. Assume that there is no double tax treaty between
Pakistan and USA.

(c) All donations were made to approved institutions mentioned in the Second
Schedule of the Income Tax Ordinance, 2001.

(d) This includes an amount of Rs 500,000 being the taxes withheld in USA on
payments received for export of computer software to GIK Inc., USA. The
company intends to claim foreign tax credit, against the tax payable in
Pakistan.

(e) On September 1, 2006, the company has acquired accounting software

costing Rs 15,000,000, which has a useful life of three years. It is the
company’s accounting policy to take full amount of amortisation in the first
year and no amortisation in the year of disposal.

(iv) Other revenues comprise the following:

Rs in ‘000’
Gross dividend received from listed companies 5,000
Accounting profit on disposal of building (note iv(a)) 17,000
Net income from export of computer software (note iv(b)) 20,000
Profit on bank deposits 8,000
50,000

(a) Calculation of accounting profit is based on the following information.

Sale considerations 57,000

Costs of building 50,000
Accounting depreciation 10,000
Accounting profit on disposal of building 17,000

(b) This represents net income after taking into account all direct and indirect
expenses incurred by the Company in relation to export of computer software,
except the financial charges.

(v) Financial charges include profit on debt amounting to Rs 2,000,000 paid on a loan
exclusively utilised by the software house. Rest of the financial charges exclusively
relate to the loan obtained for trading business.

(vi) The details of taxes deducted and paid during the year are as under:
Rs in ‘000’
Advance tax paid under section 147 20,000
Tax paid on import of raw material 2,000
Tax deductions from dividends received 250
Tax deducted by customers on purchase of locally
manufactured goods 10,500
32,750

(vii) Accounting depreciation is the same as tax depreciation.

(viii) The normal rate of tax applicable on listed companies is 35%.

Required:
Compute the taxable income of the company and tax payable thereon for the Tax Year
2007. Give proper comments where any given information has not been utilised in the
computation. (25)
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Q.5 (a) (i) Identify the types of registered tax payers who are required to file their sales
tax return electronically? (03)
(ii) Describe the manner of payment of sales tax in case of electronic filing of
sales tax returns? (03)

(b) Under the Sales Tax Act, 1990, adjustment for input tax on credit purchases is
allowable only if payment is made within 180 days of issuance of tax invoice.
However, the Central Board of Revenue has prescribed certain conditions for
condonation of delay in meeting the time frame of 180 days.

Required:
Describe the conditions under which the delay has been condoned. (06)

Q.6 (a) S. A. Enterprises, a registered person, failed to file a return with the Sales Tax
Department for last twelve months. They have now received an order from Assistant
Collector requiring them to pay the minimum tax liability determined by the Sales
Tax Department. The management of the company has never heard about this
minimum tax liability. They have approached you and raised the following
questions:

(i) How is this minimum tax liability determined?

(ii) What would be the company’s position if:
- they opt to pay the determined amount; or
- they do not pay the demand raised by the Sales Tax Department

Required:
Draft a memorandum, as a Sales Tax Consultant, explaining the question raised by
the management. (10)

(b) Explain the conditions under which sales tax is allowed to be refunded as draw back? (04)

Q.7 (a) The Finance Act, 2006 has brought certain financial services provided by banking
companies into the Federal Excise Regime.

Required:
Describe the following in respect of the above:
(i) Types of services on which excise duty has been levied;
(ii) Due date for payment of duties and filing of returns; and
(iii) Invoicing requirements. (07)

(b) One of the instruments which are now subject to Federal Excise Duty is the pay
order. You are required to explain the applicability of Federal Excise Duty if pay
order is issued by one branch of banking company in favour of another branch of the
same banking company. (02)

(THE END)