General:

The paper was a blend of theoretical and practical questions and was easy as compared to previous attempts’ papers. Surprisingly, the performance was not satisfactory especially in the area of Sales Tax.

It was noted in majority of the scripts that students lacked knowledge and practice on the subject. Furthermore, effective presentation which is essential for attempting an advanced stage paper was also lacking in most of the scripts. Question wise comments are given below.

Q.1

(a)

The performance at large in this part was average. Candidates were aware of the main conditions under which gain or loss on transfer of assets between group companies is not recognized.  However, some of the candidates were confused and explained the conditions related to availing losses of subsidiaries.

(b)

Those students, who knew the conditions for exemptions as given in section 46 of the ITO-2001, secured good marks. However, it was noted that many candidates:

(i)

unnecessarily mentioned the conditions of approval from State Bank of Pakistan and from Securities and Exchange Commission of Pakistan as one of the requirement for exemption. 

(ii)

failed to mention that exemption shall be available only when the recipient and the payer are not associates.

Q.2

(a)

The performance of the candidates was below average. It seemed that very few had studied rule 10 of the Income Tax Rules 2002.

(b)

The performance of candidates was very poor in this part of the question. The question required an advice to the client based on clause 45 of Part IV of Second Schedule attached to the Income Tax Ordinance 2001, but majority of the students could not give a proper answer.

(c)

Some of the candidates got confused and tried to discuss the tax exemption on contribution to superannuation and gratuity funds. The limits imposed on employers’ contribution are given in rule 110 & 117 of Income Tax Rules 2002.  Very few examinees could give correct answers.

Q.3

(a)

Most of the candidates mentioned the time limit of filing the revised return which is five years from the date of submission of original return correctly but could not address the second part of the question which should have been explained in the light of section 122(3) of the Income Tax Ordinance 2001.

(b)

The performance at large in this question was quite satisfactory. However, many candidates failed to correctly describe that the taxpayer has an option either to continue appeal before the ITAT just as if no such order had been made or to make payment of tax in accordance with the order of the CBR.

(c)

Overall the performance in this part was good, However, majority was not able to correctly attempt sub part (iv). They were unable to clarify that profit on debt, paid to a branch of non-resident bank will not be subject to tax withholding; if the Commissioner of income tax certifies that the said amount is taxable in the hands of such branch in Pakistan.

Q.4

It was a practical and scoring question and required students to compute the taxable income and tax payable thereon alongwith proper comments where any given information has not been utilized in the computation. An Important step in the answer was to bifurcate the taxable income between income attributable to locally manufactured goods and the rest of the income. Very few students were able to deal with all the issues correctly.

Some of the other common mistakes were as under :

(i)

full year’s amortization of software (intangible) was charged to taxable income instead of calculating it  on the basis of number of days the software was actually used during the tax year;

(ii)

Donations to institutions mentioned in the Second Schedule are allowable expenses subject to certain ceilings. Many students added these to taxable income and then computed tax credits thereon.

(iii)

Contributions to unrecognized provident fund are allowable if effective tax deduction arrangements are in place. Most of the students included them in add backs.

(iv)

The amount of tax deducted in USA against export of computer software which was an exempt income, was incorrectly claimed and adjusted against tax liability.

(v)

In calculating tax gain on sale of building, sales consideration should have been restricted to cost. Very few candidates knew about this rule.

(vi)

Freight changes paid in cash were incorrectly added back.

Q.5

(a)

A very poor performance was observed in this part and most of the candidates failed to identify the types of registered persons who are required to file their sales tax returns electronically or to describe the manner in which sales tax may be paid as given in rule 18 of the Sales Tax Rules 2006.

(b)

Very disappointing response was observed in this part of the question also. Very few students were able to describe the conditions under which delay in payment of sales tax is condoned for the purpose of allowing adjustment of input tax, as explained in Sales Tax General Order No. 1/2004 dated 20 April 2004.

Q.6

(a)

The performance of the candidates in this part was again very poor. They were required to explain how minimum tax liability is determined as has been explained in Sales Tax General Order No. 3/2004 dated 12 June 2004. Many examinees confused minimum tax with retail tax or tax charged to different categories for getting out from normal sales tax regime. With the exception of few examinees no body could secure good marks in this question.

(b)

It was evident that the concept of ‘draw back’ was not clear to most of the candidates. The condition for refund of sales tax as draw back are given in  section  62 of the Sales Tax Act, 1990.

Q.7

(a)

This question was well attempted by majority of the candidates. However in part (c) many candidates mentioned the invoicing requirements as are applicable in the case of sales tax. In fact invoices are not required to be issued by banking companies under the Federal Excise Act 2006. Instead of invoices a reconciliation statement is required to be filled.

(b)

Students answered this part well confirming that no excise duty is leviable in case a pay order is issued by one branch of a banking company in favour of another branch.