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Q.1 Rainbow Limited (RL) is incorporated under the Companies Ordinance, 1984 and is engaged in the manufacturing of solar powered equipments. RL is 60% owned by a Dubai based company Burj P.l.c (BP), 10% by a German company ATX Gmbh and 30% by a Pakistani company Muqami Limited (ML).
BP in turn is 70% controlled by ATX Gmbh whereas the Pakistani company ML is 90% owned by a French company FRS Limited.
On August 10, 20X1 RL received a loan of US$ 4.2 million from BP to partly finance a major industrial investment project at an interest rate of 12% per annum. Interest is to be paid quarterly in arrears by the 6 th^ day of the next quarter.
On September 15, 20X1 RL received another loan of US$ 1.0 million from FRS Limited for the same project at an interest rate of 10% per annum. Interest is to be paid monthly in arrears by the 3 rd^ day of each following month.
On May 15, 20X2 RL received a third loan of US$ 3.8 million from ATX Gmbh at an interest rate of 8% per annum. Interest is to be paid quarterly in arrears by the 4th^ day of the next quarter.
The above loans are duly registered with the State Bank of Pakistan and the principal repayment in each case would commence from the year 20X3.
The following information is available in respect of RL at June 30, 20X2.
Rs. in million Assets 2, Liabilities 2, Net profit after taxation for the year 150 Interim dividend paid during the year 100
Assume that the dollar rupee parity during the year ended June 30, 20X2 remained constant at US$1=Rs. 85.
Required: (a) State, with reasons, which of the above lenders can be classified as “Foreign controller” in relation to the thin capitalisation rules under the Income Tax Ordinance, 2001. (04 marks) (b) Calculate the deductible profit on debt for the tax year ended June 30, 20X2. (15 marks)
Q.2 Hip Hop (Private) Ltd (HHPL), a registered tax payer, has received a notice from the department of Inland Revenue requiring it to show cause in respect of discrepancies in the quarterly sales tax return.
The management wants to appoint a representative to persuade their case before the adjudicating authority. Under the provisions of Sales Tax Rules, 2006 advise the management about the qualification and disqualifications of the person to act as the authorized representative of HHPL. (09 marks)
Q.3 Herbal Trading (HT) is a sole proprietorship business owned by Mr. Adnan. The business is engaged in the manufacturing and supply of Herbal Medicines for the past many years. On May 01, 2010 Mr. Adnan decided to transfer his proprietary business, including all the assets and liabilities, to a private limited company Medicare (Pvt.) Limited (MPL). Following is an extract from the balance sheet of HT immediately before the disposal of business to MPL.
Herbal Trading Balance Sheet as at April 30, 2010
Capital and Liabilities Rupees Assets Rupees Owner’s Capital 9,000,000 Fixed Assets (WDV) 5,400, Accumulated Profit 1,500,000 Patents (WDV) 2,000, 10,500,000 Stock in Trade 4,600, Short Term Loan 500,000 Debtors 3,000, Trade Creditors 7,000,000 Cash and Bank Balances 3,000, 18,000,000 18,000,
Following information is available relating to the proposed scheme of transfer and the status of MPL:
(i) 50% of the purchase consideration would be paid to Mr. Adnan in terms of fully paid shares of MPL whereas the remaining 50% would be paid in cash. (ii) The break-up value of each share of MPL as at April 30, 2010 is Rs. 15. (iii) MPL has a share capital of Rs. 30 million consisting of equity shares of Rs. 10 each. Mr. Adnan owns 70% of the paid up share capital of MPL whereas the remaining 30% is equally owned by his spouse Razia, whose income is clubbed with Mr. Adnan, and his elder brother Rais. Due to financial constraints, Rais is considering to dispose off his ownership interest in the company. (iv) MPL would assume all the liabilities of HT with the exception of Rs. 2 million, which is payable to Barkat Enterprises. (v) The net realizable value of stock in trade as at April 30, 2010 is Rs. 4 million. (vi) Rs. 1.0 million receivable against sale of medicines to Parker & Sons last year is not recoverable due to insolvency of the customer. All possible efforts have already been made by HT for the recovery of debt. (vii) Following is the tax written down value (WDV) and fair market value (FMV) of HT’s patents and fixed assets as at April 30, 2010:
Rupees Cost Tax WDV FMV Fixed assets 7,000,000 3,000,000 5,200, Patents 5,000,000 2,500,000 2,300,
Required: (a) Any transaction that is related to disposal of assets becomes the subject matter of gain or loss. Advise Mr. Adnan about the conditions, which are required to be fulfilled under the Income Tax Ordinance, 2001 if he wishes to avoid recording any gain or loss on the disposal of his business to MPL. (07 marks)
(b) Advise the necessary changes, if any, required to be made by Mr. Adnan in his proposed scheme of transfer in order for it to be in compliance with the conditions identified in part (a) above. (03 marks)
(c) Calculate the following, assuming the conditions in (a) above have been fully complied with. (i) Number and the value of shares to be received by Mr. Adnan from MPL. (06 marks) (ii) MPL’s cost of acquisition of assets. (03 marks) (iii) Mr. Adnan’s cost in respect of the shares received by him as consideration. (02 marks)
Q.8 Kamyab Engineering Limited (KEL) is registered under the Sales Tax Act, 1990. The company is engaged in the manufacture and supply of appliances. Following information has been extracted from the records of KEL for the month of November 2010.
Rs. in ‘ Purchases: Local: components from registered suppliers 70, components from un-registered suppliers 15, Import of finished goods (inclusive of custom duty and FED) 10,
Supplies: Manufactured goods: local taxable supplies to registered persons 40, local taxable supplies to un-registered persons 24, exempt goods 11, export to Malaysia 13, Commercial imports 12,
Following additional information is also available:
(i) Supplies from commercial imports include appliances of Rs. 2,040,000 which were sold on instalment basis to an industrial consumer at a mark-up of 2%. (ii) Imported appliances worth Rs. 100,000 were provided to the company’s managing director for use at his residence. (iii) Sales tax of Rs. 60,000, Rs. 21,000 and Rs. 26,000 was paid in cash on account of electricity, gas and mobile phone bills respectively. (iv) Sales tax of Rs. 85,000 was paid by the company on purchase of uniforms for its line staff. (v) An amount of Rs. 200,000 on account of purchases made from a registered supplier is outstanding since March 2010. The related input tax was accounted for in the relevant tax period. (vi) A penalty of Rs. 50,000 and additional tax of Rs. 25,000 was levied on KEL under the Income Tax Ordinance, 2001 which was unpaid as of November 30, 2010.
Sales tax is payable at the rate of 17%. All the above figures are exclusive of sales tax, wherever applicable.
Required: (a) Sales tax payable / refundable. (b) Input tax credit to be carried forward, if any. (15 marks)
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