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ADVANCED TAXATION (MARKS 100)
Module F (3 hours)
Q.1 Mr. Jehangir Ahmad (JA) worked as Head of I.T. Division in Sutlej Pakistan Limited (SPL) for last ten years. From July to September 2007 he earned a basic salary of Rs. 900,000. He was also provided with rent free furnished accommodation, in respect of which SPL paid a rent of Rs. 35,000 per month. He resigned with effect from October 1, 2007.
In July 2004, JA was granted an option to acquire 1000 shares of SPL’s Parent Company, which is listed in a foreign country. The option was exercisable on completion of three years’ employment with the Company. He paid an amount equivalent of Rs. 100,000 to acquire the option whereas the fair market value of such option at that time was Rs. 150,000. On July 4, 2007 he paid a sum equivalent of Rs. 200,000 to acquire the said shares which were issued to him on July 21, 2007 when the market value of the shares was equivalent of Rs. 350 per share. JA disposed off the shares on October 1, 2007. The net sales proceeds received in Pakistan amounted to Rs. 344,000 i.e. after adjustment of income tax deducted by the foreign government amounting to Rs. 20,000, brokerage commission of Rs. 6,500 and bank charges of Rs. 2,500.
JA has also been carrying out a software business in the ground floor of a house owned by his wife, since many years. On March 31, 2008 he converted the business into a limited company. The company took over the assets of the business at their fair value of Rs. 2. million and in consideration thereof, 260,000 shares of Rs. 10 each were issued, in the name of JA. The book value of the assets taken over on the date of transfer was Rs. 2.2 million.
The company has entered into a large contract for supply of software to a renowned Japanese firm over a period of two years. In view of limited resources, the company is not considering offers from other clients.
The office in which the business was being carried out has been rented to the company at Rs. 50,000 per month whereas the prevailing market rate is Rs. 35,000 per month. The profit of the company up to June 30, 2008, excluding the rent, is expected to be Rs. 350,000.
JA has earned an income of Rs. 850,000 from the business, before the assets were transferred to the company. His wife has no other income except dividend income of Rs. 50,000 on which tax has been deducted at source.
Required: Compute the taxable income of Mr. Jehangir, his wife and the company, for the Tax Year
- Give reasons for the treatment made by you, wherever necessary. (^) (15)
Q.2. Crown Enterprises, a branch of a company incorporated in Singapore, intends to dispose off one of its business segment to Trend Setters Limited (TSL), a company listed on the Karachi Stock Exchange, for a lump sump consideration of Rs. 500 million. The net assets of the business segment are separately identifiable. The consideration was agreed keeping in view the fair market value of net assets, earning potential of the underlying assets and the brand name of the products. Under a separate agreement Crown Enterprises has agreed to refrain from competing in the same business for a period of five years and in consideration thereof TSL has agreed to pay an additional amount of Rs. 50 million.
The break-up of net assets related to the business segment is given below:
Net book value
Fair market value ------- Rs. in million ------- Plant and machinery 150 180 Land 60 80 Building (costing Rs. 50 million) 40 70 Inventory 90 90 Other current assets including receivables 85 85 425 505 Less: Current liabilities 125 125 300 380
The cost of building to the company is Rs. 50 million and tax WDV is equal to the accounting WDV of Rs. 40 million.
Required: (a) Compute the amount that will be included in the taxable income of Crown Enterprises, as a result of the above transaction. Give appropriate reasons under the Income Tax Ordinance, 2001, to support your calculations. (b) Describe the withholding tax obligations of TSL in respect of payments to be made to Crown Enterprises. (08)
Q.3 Holdings Limited, a public listed company is engaged in the manufacturing and supply of consumer products. Its profit and loss account for the year ended March 31, 2008 is given below:
Rs. in million Sales (local) 30, Cost of sales 21, Gross profit 9, Selling and administration expenses 3, 6, Finance cost 1, Other expenses 900 3, Other income 1, Net profit before taxation 5,
The following information is available in respect of the above.
(a) Sales are net of sales tax and the break-up is as under:
Manufactured products 70% Imported products 17% Locally purchased products 13%
20% of all sales are made to limited companies. Imported products are sold at a profit of 40% of sales whereas locally purchased goods are sold at a mark-up of 25% above cost.
(b) The cost of development of a new manufacturing process was capitalized as an intangible asset in 2003. The product has a life of approximately 15 years. The amortization thereon amounting to Rs. 4 million is included in the cost of sales. (c) Selling and administration expenses include bad debts of Rs. 6 million. Opening and closing balance of provision for bad debt account is Rs. 20.8 and 18.4 million respectively.
Q.7 Shahid Limited (SL) is engaged in the import, export and distribution of various consumer goods. SL has recently expanded its business by setting up a manufacturing unit for various consumer goods. The manufacturing unit will start production in June 2008.
Following transactions were carried out during May 2008: (i) SL purchased 5,000 bottles of locally manufactured shampoo at a cost of Rs. 100 per bottle. The retail price of each bottle is Rs. 110. During the month, SL sold all bottles to the retailers at Rs. 105 per bottle. (Shampoo is included in the items listed on third schedule to the Sales Tax Act, 1990). (ii) The company imported 10,000 bottles of hair oil at import value of Rs. 400 per bottle (exclusive of custom duty and sales tax). Custom duty was paid at the rate of Rs. 20 per bottle. 500 bottles were re-exported to Azerbaijan at Rs 3,000 per bottle whereas 6,000 bottles were sold in the local market at Rs 350 per bottle. (iii) New plant including ancillary equipment was acquired for the manufacturing unit at Rs. 200 million on which sales tax of Rs. 30 million was paid. (iv) SL paid sales tax of Rs 50,000 on foods and beverages used for the entertainment of the Company’s employees. (v) Sales tax of Rs 150,000 was paid under Provincial Sales Tax Ordinance on services provided by customs agents for clearance of imported goods.
Required: Compute the sales tax payable by Shahid Limited for the month of May 2008. Give proper comments where any given information has not been utilized in the computation. (13)
Q.8 Through Finance Act 2007, Government departments, autonomous bodies and public sector organizations have been notified as withholding agents for the purpose of collection of sales tax.
Briefly discuss responsibilities of a withholding agent as enumerated in the Sales Tax Special Procedure (Withholding) Rules, 2007. (04)
Q.9 Zohaib & Co., a partnership firm, plans to purchase raw material from Mr. Salman Ahmed (SA) who has the reputation of evading sales tax. Mr. Khalid, the managing partner of the firm, however is of the view that failure to deposit sales tax by SA would not have any bearing for his firm.
Required: Offer your comments on the views expressed by Mr. Khalid. (03)
Q.10 A consignment imported by ABC worth Rs. 10 million was damaged while in transit from the port. Due to a limiting clause in the Insurance policy, the claim received from the insurance company was restricted to an amount of Rs. 6.4 million.
Required: (a) Explain whether the sales tax paid on import can be claimed as input tax. (b) Explain whether the delivery of goods to the insurance company against insurance claim, constitute a taxable supply (05)
Q.11 The Federal Government is empowered to levy special excise duty (SED) on certain goods. The rate of SED is 1% of the value of such goods.
Required: Explain the provisions laid down in the Federal Excise Act, 2005 for determining the value of following goods: (i) Imported goods. (ii) Goods chargeable to SED on the basis of retail price.
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