The Institute of Chartered Accountants of Pakistan

                                   


 

ADVANCED TAXATION

General:

It was noted that the students suffer from lack of practice and presentation skills. Moreover, a large number of candidates fail to comprehend the exact requirement of the question and do not know how to approach the questions logically.

Question-wise comments are given hereunder:
     
Q.1
(a)
(i)
 Most candidates were well versed with the relevant provision of the law and were able to attempt this part of the question satisfactorily. However, the question required only the pre-requisite of claiming losses of subsidiary but most of the students discussed the whole theory of group relief and therefore wasted their precious time, which affected their performance in the other questions.
 
(ii)
 Most of the students could not differentiate between losses of subsidiaries engaged in carrying out services as against industrial undertakings. The losses incurred by subsidiaries engaged in providing services have become claimable by virtue of an amendment introduced through Finance Act 2005 and the adjustment is allowable w.e.f. 30.06.2006.
 
   
 
(b)
 Dividends are generally taxed under the head "income from other sources" and the only exception is dividends distributed out of profit on debt by mutual fund. In this case it is taxed as business income in the hands of a banking company or financial institution. Only few examinees could answer correctly.
 
   
Q.2
(a)
 Overall performance of the candidates was average. The first part relating to computation of exchange loss and making it part of cost/WDV of asset for depreciation purpose was conceptually attempted well. However, many students made arithmetical errors in computing exchange gain/loss.
 
   
 
(b)
 Majority of the candidates did not know that distribution of reserve in a buy back transaction is classified as dividend and the company will be required to deduct tax accordingly. Surprisingly many students mixed it up with employee share scheme as defined under Section 14 of the Income Tax ordinance 2001.
 
   
 
(a)
 As a whole the performance of the candidates was satisfactory in this part. However, the following common mistakes were observed:
       
   
-
 Most students answered part (iii) incorrectly. They were of the view that only 50% of the amount which was received after the exemption was withdrawn, was chargeable to tax. However according to Section 2 (44) para (b), the whole amount was chargeable to tax.
   
-
 Surprisingly many students could not even answer part (i) correctly although there was no complication involved.
   
-
 Many students, despite reproducing correct definitions of "time of supply", interpreted the practical position incorrectly in all cases.
       
 
(b)
 Most of the examinees were not able to attempt this question correctly. Many students mentioned that input tax should be claimed on consumption basis which is not in accordance with the provisions of the law.

Both views as regards input tax on destroyed stock were acceptable, however the students were expected to give the reasons which formed the basis of their decision. Most students did not give any reason.

       
Q.4 This was an easy question and only required knowledge of the relevant provision of the law as it did not involve any practical aspect. The overall performance of the candidates was satisfactory and students were able to secure good marks. However, part (c) was poorly attempted as very few students knew about the due date of filing of return under the Federal Excise Act. 2005.
       
Q5
(a)
 The following issues were observed in most of the scripts:
 
   
 
-
 It was stated in the first situation that it is 'fee for technical services' and 15 percent withholding tax is applicable. It is important to note that all payments to non-resident are not liable to tax withholding. Only 'Pakistan source income' of non-resident is taxable. Repairs of special purpose hardware can hardly be stretched as falling under technical service. It is a usual and ordinary service as far as a non-resident is concerned.
 
-
 An important point contained in section 152 is the requirement to inform the Commissioner in advance, in case a payment is to be made to a non-resident without deducting tax. This point was mentioned by very few candidates.
 
   
 
(b)
 Majority of the examinees were unaware of the fact that business losses sustained during the exempted period are adjustable against income of post exemption period. The same were not adjustable previously, however after deletion of section 53(2) in the year 2003, they are now adjustable. However, limitation period of six years for carry forward of business loss continues to apply.
 
   
 
(c)
 This question was well attempted by most of the candidates.
       
Q.6
(a)
 It was a practical question judging all facts of the theory of 'employees' stock option'. Four stages were involved in the solution. First three stages were for taxability of stock option under the head salary viz. (i) taxability at the time when option is granted, (ii) calculation of gains realized when option is sold (iii) calculation of gain when option is exercised and the fourth stage pertained to calculation of capital gains on sale of shares.

Although many candidates were able to secure good marks, a large number of candidates were not clear about:
 
-
 head of income in which the amount would be taxed
 
-
 year of taxability.
       
 
(b)
 Most of the students restricted their answer saying that additional product offered free of charge is subject to sales tax. They failed to give any reason. They did not discuss the possibility of selling the three cans in a distinct pack and treating it as a single unit or charging the full price with deduction of discount being equal to the cost of one can.
       
Q.7 This was the most poorly attempted question of this paper and most of the candidates were not able to secure even reasonable marks. It seemed that the candidates were not prepared for such type of question and had no practice of solving it either. They committed one or many of the following mistakes:
       
 
(i)
 cost of goods which were imported and then exported was not ascertained correctly.
 
(ii)
 sales tax paid on imports was treated as cost.
 
(iii)
 most students were unable to break up the cost of sale between material and labor for the purpose of allocations.
 
(iv)
 depreciation adjustment on the delivery van arising as a result of difference between cost of acquisition and the fair value was not worked out correctly.
 
(v)
 trial run expenses were incorrectly treated as pre-commencement expenditure and allocated over a period of five years.
 
(vi)
 lease rentals, financial charges included therein and accounting depreciation on leased assets were not adjusted appropriately.
 
(vii)
 proper apportionment/allocation of expenses between FTR and Normal Tax Regime was not made.
     
  Overall the candidates did not approach the question logically in light of the relevant provisions of the ITO 2001 and were unable to calculate the correct taxable income.
     
Q.8 Taxable goods are treated as taxable supply at the time of termination of taxable activity or in case of sale or transfer of membership to unregistered person. In case of sale to a registered person, the sales tax is payable by the person to whom the ownership has been transferred.
       
  Most of the students were able to perform well in this question.