TAX PLANNING AND PRACTICES

Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.1 Mazboot Tyres (Pvt) Limited (MTPL)

Computation of total income, taxable income and net tax payable/refundable
For the tax year 2025
Income from Business: Rs. in million
Profit before taxation 143.00
Add/(Less): Inadmissible expenses / (income)
Profit from exports – subject to MTR (60–58) (2.00)
Sale tax on the sale of radial tyres to retailers [23.6 × 18/118] (3.60)
Cost of tyres – 20% disallowed – [13 × 20%] 2.60
Accounting depreciation 38.00
Accounting amortization of the quality control software 1.00
Entertainment expense – Inadmissible 3.10
Profit on debt - loan from ORTL [9(180×5%) – 8.10(W-1)] 0.90
Dividend income - Separate block (1.6)
Gain on sale of shares (including bonus shares) – Separate block (11.4)
Total business income before depreciation 170.00
Less: Tax depreciation – current year (W-2) (65.01)
Amortization – quality control software [5 ÷ 5 × 273 ÷ 365] (0.75)
(65.76)
Total business income for the year 104.24

Capital Gain:
Gain on sale of listed shares – SBI (W-3) 13.00

Income from other source:

Deemed income - bonus shares [Rs. 65 × 100,000] 6.50

FTR income:
Dividend from PEL 1.60
Total income for the year 125.34
Dividend from PEL (1.60)
Deemed income - bonus shares – FTR (6.50)
Gain on sale of listed shares (13.00)
Taxable income for the year 104.24
Tax liability:
Tax on taxable income – NTR [104.24 @ 29%] 30.23
Tax on export income – subject to MTR
At a tax rate of 29% (2 × 29%) 0.58
Tax withheld at 1% 0.60 0.60
(Since tax withheld on the export stage is more than tax under the normal tax regime,
withholding tax would be payable as minimum tax)
Tax on dividend income – FTR [1.6 × 7.5%] 0.12
Tax on income from bonus shares – FTR [65 × 100,000 × 10%] 0.65
Tax on gain on sale of listed shares – SBI [13.00 × 15%] 1.95
Total tax liability 33.55
Less: Tax credit @ 25% of eligible investment [300(105+8+187) × 25%] (75.00)
Tax credit carried forward for a period not exceeding two years (41.45)

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 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

Tax deduction / collection at source:

Tax withheld @ 1% u/s 154 (0.60)
Advance tax on exports @ 1% u/s 147(6C) (0.60)
Tax on dividend income (0.12)
Tax on income from bonus shares (0.65)
Tax on gain on disposal of listed shares (1.95)
Tax withheld u/s 153 (20.00)
Deductible u/s 153(1)(a) on tyres @ 5% – not deducted by the retailers. -
Collection u/s 236G by commercial importer of tyres @ 0.1% – not collected -
Tax refundable (23.92)

W-1: Thin capitalisation Rs. in million

Foreign equity at the beginning of the year [90 × 60%] 54.00
Foreign debt 180.00
Profit on debt @ 5% per annum [180 × 5%] 9.00
Profit on debt admissible for tax purposes [9 × 0.9{162(54×3) ÷ Rs. 180}] 8.10
The provision of section 106A is not applicable as profit on debt is < Rs. 10 million.

W-2: Tax depreciation

Depreciation
Cost
Asset Initial Normal Total
-------------------- Rs. in million --------------------
Building (@ 10%) 187.00 - 18.70 18.70
Plant and machinery (@ 25% & 15%) 105.00 26.25 11.81 38.06
Used machinery (@ 15%) 15.00 2.25 2.25
Furniture and fixture (@ 15%) 6.00 - 0.90 0.90
Computer hardware (@ 30%) 8.00 - 2.40 2.40
Office vehicles (@ 15%) 18.00 - 2.70 2.70
Total 339.00 26.25 38.76 65.01

W-3: Computation of gain/(loss) on sale of listed shares:

Cost of original shares (200,000 × Rs. 60 each) 12,000,000
Total number of original shares 200,000
Bonus issue 100,000
Total number of shares (including bonus shares) 300,000
Cost per share (12,000,000 ÷ 300,000) 40

Rs. in million
Consideration received for shares (260,000 × Rs. 90 each) 23.40
Cost of shares sold (260,000 × Rs. 40 each) (10.40)
Taxable gain on disposal of shares 13.00

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 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.2 (a) Falah-e-Atfal Foundation (FAF)

Computation of tax liability
For the tax year 2025
Rs. in million
Grants, donations, and subscriptions 95.0
Income from property 3×(4÷5) 2.4
Profit from government securities 2.0
Income from business 20.0
119.4
Less: Administrative and management (32.0)
Project expenses (40.0)
47.4

Tax liability @ 20% (being a small company) 9.5

Less: 100% tax credit on eligible income 35.8(W-1)×20% (7.2)
2.3
Tax on surplus funds being more than 25% of total receipts i.e.
40%(47.4÷119.4) (47.4×10%) 4.7
Total tax liability 7.0

W-1: Income eligible for tax credit Rs. in million

Eligible income for 100% tax credit 95+2.4+2+8.4[20×42.2%(20÷47.4)] 107.8
Less: Administrative and management expense (32.0)
Project expenses (40.0)
35.8

(b) Export of Services:

Software Development Services fall within the definition of IT services and are subject
to withholding tax (WHT) at the rate of 0.25% of the export proceeds, as SPL is
registered with and certified by the Pakistan Software Export Board (PSEB). Therefore,
WHT of Rs. 0.04 million (Rs. 15m ÷ 99.75% × 0.25%) will be deducted at the time of
realization of export proceeds totalling Rs. 15.04 million by the authorized dealer in
foreign exchange.
The tax treatment can be analysed under the following two options:
(i) If SPL’s income is subject to tax under the Final Tax Regime (FTR):
To be eligible for taxation under the FTR, SPL must fulfil the following conditions:
(a) The income tax return has been filed.
(b) Withholding tax statements for the relevant tax year have been filed, if
required, under the Income Tax Ordinance, 2001.
(c) No credit will be allowed for tax of Rs. 0.79 million (Rs. 15.04m ÷ 95% × 5%)
paid in the foreign country.

(ii) If SPL does not fulfil any of the conditions specified above or opts to be taxed under
NTR:
Under this option, its income will be taxed under the head ‘Business income’.
Additionally, SPL will be allowed to claim a foreign tax credit, which will be the
lesser of the following:
 The foreign income tax paid, amounting to Rs. 0.79 million; or
 The Pakistan tax of Rs. 4.59 million (Rs. 15.83m × 29%) is payable on the
income.
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 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

Consequences if SPL is not registered with the PSEB:

If SPL is not registered with the PSEB, the WHT deducted by the authorized dealer in
foreign exchange at the time of realization of export proceeds will be at a rate of 1%
instead of 0.25%. In this case, this deduction will amount to Rs. 0.15 million
(Rs. 15 million ÷ 99% × 1%).
Moreover, if SPL opts to be taxed under the FTR regime, it must fulfil an additional
condition beyond those specified for PSEB-registered entities; that is, it must file sales
tax returns as required under Federal or Provincial law.

A.3 Comments on the computation and the notes thereto are as follows:
(i) Fee for technical services received from KCL:
The fee for technical services (FTS) of Rs. 5 million (4.8/0.96) received from KCL, is
chargeable to tax under the minimum tax regime instead of the Final Tax Regime. In
calculating the income chargeable to tax, a specific expense of Rs. 2 million should
have been allocated to FTS. Further, the withholding tax rate for this service is 9%
instead of 4%, so the Commissioner may recover the remaining 5% from FFL.
(ii) Deemed Income:
The plots owned by FFL are classified as capital assets to calculate deemed income.
FFL, being a resident person, will therefore be treated as having derived income
chargeable to a tax under section 7E equal to 5% of the fair market value (FMV) of
capital assets, on the last day of the tax year 2025 i.e., 30 June 2025.
The deemed income of Rs. 3 million was incorrectly calculated at 1% of the FMV of
both plots without considering that one capital asset i.e., the plot with a higher value
of Rs. 160 million, is excluded from the ambit of tax on deemed income. Since the
value of the other plot is above Rs. 25 million and tax under section 236K was paid at
the time of purchase last year, it shall be subjected to tax for the current tax year.
Therefore, 5% of its value [i.e. Rs. 7 million (140 million × 5%)] shall be included as
deemed income, but not under the head of ‘income from business’.
(iii) Donation:
Donations to Government schools are eligible for tax credit rather than a deduction
from profit before tax. However, in the given scenario, the Commissioner may
recharacterise the donation as part of a tax avoidance scheme based on the following
two grounds:
 FFL does not deal in donation items i.e., educational games rather these items
were purchased from KCL which is an associate of it.
 KCL incurred the loss for tax year 2025 so it can not avail the tax credit on
donations.
(iv) Capital Gains on the disposal of investment:
The calculation and treatment of capital gains (net) as a separate block of income
contains errors, which are detailed below:
 Shares of a company, listed in LSE
The capital gain arising from the disposal of these securities is a foreign
source capital gain. However, this foreign source capital gain is taxable under the
normal tax regime rather than as a separate block of income (SBI).
 Shares of a private limited company, based in Pakistan
This gain is chargeable to tax under the normal tax regime instead of SBI. Further,
the gain shall be computed by taking the higher of fair market value and the sale
proceeds as consideration, resulting in a revised gain amount of Rs. 7 million
(24–17).
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 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

 Shares of a company, listed on the Pakistan Stock Exchange

The capital loss on the sale of these securities shall not be set off against capital
gains that are subject to tax under the normal tax regime. Instead, it shall be carried
forward for the next three years.

(v) Sale and leaseback of asset:

The machine was sold and leased back by FFL, so the gain on disposal of the
machinery should be calculated instead of claiming tax depreciation thereon.
Accordingly, Rs. 32 million (75–43) should be added and accounting gain on disposal
of Rs. 14.6 million should be deducted from profit before tax.

Moreover, lease rentals of Rs. 10 million should be deducted, whereas depreciation on

right of use and interest expense of Rs. 2.6 million and Rs. 5.6 million, respectively,
should be added to profit before tax.

(vi) Adjustment of losses of KCL:

Since FFL only holds 50% shares in KCL, it cannot avail the benefit of group
relief.

(vii) (Advertisement expense:

Advertisement expense was rightly considered as an admissible expense; however, it
should be on a gross basis as Rs. 8.75 million (8.4÷0.96) instead of Rs. 8.4 million.
Moreover, as royalty amount was claimed as deduction in previous year, the
advertisement expense for the year shall be disallowed by 25% and allocated to the said
associate, if FFL fails to provide evidence/explanation on a notice issued by the
Commissioner that no benefit has been conferred to KCL by virtue of advertisement
expense. In the given case, Rs. 2.19 million (8.75×25%) may be added back to profit
before tax due to the aforementioned reason.

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 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.4 Deadline to contest

Entity Order passed by Immediate appeal forum
A Deputy Appellate Tribunal 5 December 2024 OR Within
Commissioner Inland Revenue 30 days of receipt of the order
B Additional Commissioner 10 December 2024 OR Within
Commissioner (Appeals) 30 days of receipt of the order
C Commissioner High Court 21 December 2024 OR Within
(Appeals) 30 days of receipt of the order
D Deputy Alternate Dispute The timing for application to
Commissioner Resolution Committee ADRC is not provided
E Appellate Tribunal High Court 30 December 2024 OR Within
Inland Revenue 30 days of receipt of ATIR’s Order

A.5 MTL is a non-public interest entity and audit client of FNC. The provision of services by a
tax partner related to the preparation of accounting entries for financial statements that will
be subsequently audited by FNC will create a self-review threat.

Mustafa should evaluate the level of this threat before agreeing to provide these services based
on the following factors:
 Whether the preparation of accounting entries has a material effect on the financial
statements
 the particular characteristics of the engagement
 the level of tax expertise of the client's employees
 the complexity of the relevant tax regime; and
 the degree of judgment necessary in applying it

Based on the evaluation of this threat following safeguards should be applied to minimize the
threat to an acceptable level in order to provide the proposed services.
 In providing these services, using professionals who are not part of the audit team
 Having an appropriate reviewer who was not involved in providing the service reviews
the audit work or service performed.

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 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.6 Hayaat Pharma Limited (HPL)

Computation of Net Sales Tax Liability
For the tax period November 2024
Amount of
Value of supply Sales Tax
SALES TAX CREDIT (INPUT TAX) Sales Tax
(Rs. in million) Rate
(Rs. in million)
Raw material - DRAP certified 21.00 Inadmissible -
(Rs. 30 × 70%)

Raw material - DRAP uncertified 9.00 18% 1.62

(Rs. 30 × 30%)
Ginger from PATA - bulk packaging 2.50 Exempt -
Turmeric-PATA-brand name 3.00 16% 0.48
Insulin from a distributor 1.62 Inadmissible -
Legal fee 1.40 16% 0.22
Fee paid to an insurance agent 0.48 Inadmissible -
FED on air tickets (not in sales tax mode) 3.40 Inadmissible -
Face and skin cream tubes from unregistered wholesalers 10.00 Inadmissible -
(5,000×2,000)
Import of raw materials for APIs 7.00 18% 1.26
Value addition - Not applicable -
Import of artificial limbs etc. 6.00 Exempt -
Import of non-medicated health supplements 4.00 18% 0.72
Value addition 4.00 3% 0.12
Input Tax for the month 4.42

SALES TAX DEBIT (OUTPUT TAX)

APIs supplied to registered persons 9.55 1% 0.10
Insulin cartridges to GSEZ 0.95 0% -
Face and skin creams tubes to registered persons 5.50 18% 0.99
(1,100×5,000)
Medicines 26.00 1% 0.26
Artificial limbs 3.55 Exempt -
Insulin cartridges to unregistered persons in Hyderabad 0.80 - -
Face and skin creams tubes to unregistered persons 4.50 18% 0.81
Non-medicated health supplements to unregistered retail
5.70 18% 1.03
pharmacies
Output tax for the month 3.19
Calculation of sales tax liability
Output tax on drugs registered – 1% as final discharge with no input adjustment (0.10m+0.26m) 0.36
Output tax excluding drugs (3.19 – 0.36) 2.83
Admissible credit (lower of 4.42 or 90% of 2.83 = 2.55) (2.55)
0.28
Balance payable (0.36+0.28) 0.64
Further tax on the supply of 1,600 cartridges to unregistered persons in Hyderabad -
Further tax on the supply of 900 face and skin cream tubes - not applicable -
Further tax on the supply of non-medicated health supplements to retailers - liable to be
0.23
registered (5.7 × 4%)
Sales tax withheld from face & skin cream tubes - not applicable -
Sales tax payable 0.87
Sales tax c/f (4.42–2.55) 1.87

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 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.7 (a) Chargeability of sales tax:

(i) The import of bread will be charged to sales tax at the rate of 18% of the import value
i.e. Rs. 3,100 per loaf, and since GCB sold the bread in the same condition as imported
and bread is not covered under the Third Schedule, a value addition tax at the rate of
3% will also be charged at the import stage.

However, the local supply of all types of bread is exempt from the levy of sales tax.
Therefore, no sales tax will be collected by GCB upon its sale from Karachi and
Islamabad outlets irrespective of its price.

GCB shall not be entitled to adjust the input tax paid on Ekmek loaf at the import stage
as its sale in the local market is exempt from sales tax.

(ii) Vermicelli supplied exclusively within the limits of the Border Sustenance Markets,
established in cooperation with Iran, is exempt from sales tax. However, since it was
brought outside the limits of these markets for sale in Karachi and Lahore, sales tax is
charged at 10% on Rs. 400 per packet (i.e. Rs. 40 per packet).

Since GCB sold 800 packets directly to grocery stores in Karachi at Rs. 600 per packet,
sales tax will be collected at the rate of 10% on Rs. 600 per packet.

However, 700 packets were sold by GCB through its bakery in Lahore at Rs. 650 per
packet. Therefore, as a Tier-1 retailer, GCB will collect sales tax at the rate of 18% on
Rs. 650 (i.e. Rs. 117 per packet).

(b) The refund applications submitted electronically are processed by the Risk Management
System (RMS) of the FBR’s Computerized System. The system categorizes claims based on
risk parameters and, where necessary, routes cases like PEL for detailed audit. The tax
officer, therefore, issued a notice based on some data for further verification; however,
presuming that this notice is intended to delay refunds is not appropriate.

FBR may initiate audit or inquiry proceedings if there is "reason to believe" that a refund
claim is not admissible. These proceedings must be completed within 60 days, extendable to
120 days, with further extension up to 9 months possible upon approval from higher
authorities.

If the refund is verified but delayed, PEL will be entitled to an additional sum based on
KIBOR. However, this interest is applicable only after the claim has been validated through
audit and approved. Therefore, PEL would not qualify for interest until the audit is
completed and the claim is confirmed.

Considering the above, PEL should ensure the completion of FBR's audit by providing all
requested information regarding vendor inputs and also ensure that all tax records and
purchase invoices are promptly available to facilitate verification.

(The End)

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