The paper was a blend of straight forward theoretical questions and practical problems. Knowing a provision of law is very important but at the same time application of that law to practical situation is far more important for a professional who is supposed to deal them independently. Weakness in application of knowledge reflects that candidates at even final level are relying on rote learning.

Like in previous attempts examiners noted that in many cases students replied without understanding the requirement, wrote irrelevant details and failed to express and present their answers properly.

Question wise comments are as under:

Q.1

(a)

Most candidates were well versed with the amendments introduced through the Finance Act 2005 and were able to attempt the question satisfactorily. However the points which most students failed to mention were as follows (a) Any company which is formed by splitting up or reconstruction of a company already in existence cannot be included in the definition of a small company. (b) The provisions relating to minimum tax are not applicable to them.

(b)

The definition of consumer loan was given in a very general manner. Various types of incorrect definitions were given such as “loan for home appliances”; “small loans for general items” etc. Examinees were able to write that three percent provision is allowable, but many of them did not have any idea of the amount on which this percentage was to be applied.

Q.2

A number of students mixed up the provisions of withholding tax related to ‘royalty’ with ‘fee for technical services’. Treatment of cost of software and ancillary services as intangible asset was generally known to the candidates but many students failed to mention that amortization will be allowed over a period of ten years.

Q.3

It was an easy question and many candidates knew that the exchange fluctuation are to be adjusted to the cost of the assets and the effect on taxable income is allowed through tax depreciation. It is to be noted that in an advisory letter the format and the presentation is quite important. The logical components could be preamble, reference to the relevant law and your opinion or advice. Without a proper format, full marks cannot be expected.

Q.4

(a)

The question contained a situation where capital gain was earned by a non resident outside Pakistan on disposal of shares of an off-shore company whose assets were principally situated in Pakistan. A sizeable number of students had no knowledge of taxability of such income being treated as Pakistan source of income under section 101 of the Income Tax Ordinance, 2001. Some treated such income as exempt capital gain as available on listed securities.

(b)

Most candidates were not familiar with the restrictions on carry forward of assessed tax losses of an entity in case of a change of 50% or more in the underlying ownership of the entity in section 98 of the Income Tax Ordinance 2001.

Q.5

Students were mostly aware of the concept of amalgamation. However, many of them did not have complete knowledge of the special dispensation given in the Income Tax Ordinance 2001 to encourage the process of amalgamation. These include (subject to specified conditions).

• Allowability of expenditure on amalgamation

• Adjustment of tax losses of the company which have been merged

• Reduced rate of tax

Q.6

A disappointing performance shown by the candidates of final stage on whom clients or employers would be relying in preparation of annual returns and computing tax liability. Even after serving for quite some period in professional firms, examinees were found seriously deficient in presenting computation of taxable income and tax liability. Ability to identify normal income, income falling under FTR, separate block of income, directly attributable expenses to various income and computing allowable expenses was clearly lacking. Apportionment of expenses among different classes of income was in many cases not done at all and in cases where it was done, the basis adopted in many cases was incorrect.

Besides the above the following mistakes were seen in most scripts:

·        Whereas the cost of computer charged off was added back, the effect of depreciation on such add back was ignored.

·        Rate of tax on dividend was taken as 10% instead of 5%.

·        The fact that net capital loss shall be carried forward and available for adjustment against future capital gain was not mentioned.

·        Most students did not know that 75% of the capital gains arising out of the sale of shares of AC Private Limited, is taxable. Similarly the fact that such taxable capital gain is adjustable against Tax loss on sale of shares of AD Private Limited was also not known to most of the students.

Q.7

This was a simple and easy question for final level and well taken by the examinees. Particularly those who could write to-the-point and precise answer gained good marks with minimum efforts. Some, however (as usual), ignored the relevant points like recourse available against recovery of demand and instead wrote irrelevant details like remedy available after Tribunal’s order, recovery procedures that department can take etc. Some had the misunderstanding that only 15% of tax liability is payable in case of filing appeal before the Tribunal and the tax is fully recoverable unless stayed by the Tribunal.

Q.8

The question required discussion on allowability of input sales tax on supplies made to unregistered persons and to registered persons making payment through online transfer and credit card. The students ignored the word ‘discussion’ as required by the question and just confirmed the allowability of such input tax without mentioning the conditions applicable under the law in each case. Very few students could mention the relevant provisions of Section 73 and how they had to be complied with.

Q.9

The question contained short cases related to sales tax like excess sales tax rate applied on sales, service and supplies provided to PNSC ship and sale of business to registered and unregistered persons. The quality of answer showed that a reasonable number of students have studied the topics asked, however, explanation as to why an advice or comment is being offered was largely missing. The students should remember that in such type of questions the examiner is  more interested in the arguments raised by the candidates and the logical interpretation of the law instead of the final decisions.

Q.10

In this question sales tax liability was required to be calculated. The main issue as regards imports was that whether the value addition on import is more than 10% or not. More than 50% of the students did not have any idea about this. Majority of those who did know, calculated the value addition percentage on import value of Rs.45 million instead of cost of sales of 44 million. A large number of students added import duty to arrive at import value, whereas from the figures given in the question it was evident that the import of 45 million are inclusive of import duty.

While calculating sales tax liability on local trading, the students generally made the following mistakes:

·        Ignored the fact that 40% of supplies are of exempt goods

·        Calculated sales tax on sales instead of advances

·        While calculating the amount of advance received, most of the students failed to deduct the opening balance of advance while calculating the net amount of advance received.

Q.11

The performance was satisfactory. Most students were able to explain the valuation rules and the requirements of registration under the Federal Excise Act, 2005.

The only point that was missed by most students was that the CBR is authorized to fix a minimum price for valuation purposes for any goods or class of goods.