TAXATION

Q.1

The candidates who were well versed with the amendments introduced through Finance Act were able to attempt this question satisfactorily with regard to the definition of ‘small company’. It was surprising that many candidates were unable to give a precise definition of ‘association of persons’ and instead proceeded to define the term ‘associates’ which is altogether a different concept. Another common mistake was that public company was defined according to Companies Ordinance, 1984 instead of Income Tax Ordinance 2001.

Q.2

The candidates’ performance in this computational question was unexpectedly poor. A large number of candidates were unable to consider the following important aspects:

(a)

Mr. Imran earned salary from Pakistan subsidiary for the period of nine months; therefore, his entire emoluments therefrom were to be computed for the nine months not for the entire year.

(b)

Failure to consider that if a citizen of Pakistan leaves Pakistan during a tax year and remains abroad, his salary income earned abroad is exempt.

(c)

The exemption limits on cash allowance of house rent are not applicable to any other perquisite relating to rent-free accommodation.

(d)

Gain on disposal of stock options is chargeable under the head ‘salary’ and not ‘capital gains’.

(e)

Where in a tax year, an employee is issued shares under an employees’ share scheme the fair market value (Rs 580 per share in the instant case) of the shares, as reduced by any consideration given by the employee for the options (Rs 171 equivalent to US $ 8 per share in the instant case) are chargeable to tax under the head ‘salary’.

(f)

The notional interest on house loans charged to tax as salary income is an  admissible expense against income from property.

Q.3

Overall, the candidates were able to attempt this question satisfactorily except for some candidates who wasted their time in explaining procedure for payment of quarterly advance tax or tried to define it by using common sense. There were very few candidates who were able to mention the period for which the additional tax is to be computed in the case of shortfall of advance tax by 80% of the actual tax liability.

Q.4

This was an easy question and was well-attempted by a large number of candidates, however, there were very few who mentioned that recovery proceedings are to be initiated notwithstanding anything in the Companies Ordinance, 1984. Many students wrote irrelevant procedure of realization of company’s assets.

Q.5

The question was on residential status of person which includes individual, company and association of person. Some students confined their discussion to residential status of individual only.

Q.6

The most common mistake committed by the candidates in attempting this question was a wrong inference that as a result of amendments introduced through Finance Act, 2005 the donations are now allowed as an admissible deduction. No such amendment has been made in section 61 and thus, the taxpayers are still only allowed a tax credit for donations to specified institutions. Furthermore, many candidates failed to specify that for computing the tax credit, the amount of tax assessed for a particular tax year has to be taken before allowance of any other tax credit. Although, the question specifically dealt with the case of an individual, few examinees unnecessarily specified the limit of credit for companies as well.

Q.7

The way this question was attempted again showed that the examinees did not take into account various amendments introduced through Finance Act 2005 by specifying those conditions which are already deleted thereunder.

Q.8

This question was attempted satisfactorily. However, very few candidates were able to specify that the option of being taxed at average rate of last three years is only available, if exercised by the due date of furnishing the employee’s return of income or employer certificate, as the case may be, for the tax year in which the amount was received.

Q.9

Majority of the students have attempted it well but few lost some marks for not mentioning that where the association of persons has paid tax the amount received by a member out of the income of the association shall be exempt.

Q.10

(a)

There were many students who were well aware of the fact that unclaimed input tax in prior period can be claimed in current tax period but failed to mention the conditions attached thereto.

(b)

In second part majority of the students did not know about the latest amendment for treatment of excess input tax despite the fact that this has been a prominent issue in recent past. Many students replied that excess input tax can either be refunded or carried forward in next tax period, whereas it is only refundable and cannot be carried forward.

(c)

The most common mistake was that many students treated the inadvertent mistake as tax fraud and suggested penalties thereon.

Q.11

(a)

It appears that most of the examinees were not well aware of the procedure to be followed in the case of voluntary deregistration. They also failed to distinguish between voluntary deregistration and deregistration by the department.

(b)

This part of the question was attempted satisfactorily by most candidates.

Q.12

This question was fairly attempted. However, majority of the students did not know that allowable input sales tax on purchases from registered persons cannot be claimed fully and had to be apportioned on the basis of ratio of exempt supplies to taxable supplies.  Treatment of input tax related to a liability outstanding for more than 180 days was also not known to many students.