THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS COMMENTS

SUBJECT SESSION
Advanced Taxation Final Examination Winter 2015

General:

The examination consisted of six questions. Approximately 60 percent of the marks were
awarded for computational skills whereas the remaining 40 percent marks were awarded
for essay based questions. The overall performance on the paper was below average.
Except for question 1, where the performance was comparatively better, answers to rest of
the questions were quite disappointing, especially question 5 on which the performance
remained very poor as only 37% of the candidates attempted to answer the question.
Again, in two practical questions. i.e. question 1 and question 4, candidates seemed to
struggle with the presentation. Answers not only lacked completeness but also exhibited
poor technical knowledge and skills.

In computational questions, it has been observed that many candidates write descriptive
notes explaining the treatment of each and every item in their computation. They are
strongly advised to refrain from writing descriptive notes unless otherwise asked by the
question.

Question-wise comments are as under:

Question 1

This question related to company taxation and required candidates to compute taxable
income and net tax payable by or refundable to the company along with the amount of tax,
if any, to be carried forward. Candidates were also required to compute the amount of
default surcharge under section 205(1B) of the Income Tax Ordinance, 2001, which was
levied due to short payment of advance tax. The performance in this question was below
average. Following errors were generally noted in most of the answer scripts:

(i) In spite of the clear instructions that the assessee company has opted out of the
final tax regime, many candidates wasted time in determining whether the
company was eligible to opt out of the final tax regime. Further, many candidates
considering that export sales fall under FTR, apportioned expenses between FTR
and NTR income.

(ii) Many candidates, in contravention of the questions requirement to commence the

computation with profit before tax figure of Rs. 46,500,000, used direct method
for the computation of taxable income;

(iii) Discount of Rs. 1,200,000 allowed to one of the NGOs was considered as
inadmissible expense.

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 Examiners Comments on Advanced Taxation Final Examination Winter 2015

(iv) Majority of the candidates failed to appreciate that tax deducted on the plot of
land was required to be deducted on the market value of plot instead of its
purchase cost. Consequently, the shortage was required to be paid by the assesse
company along with their final tax liability which the candidates completely
ignored.

(v) Majority of the candidates failed to appreciate that cost of each ramp would be
restricted to Rs. 250,000 and 100% depreciation would be allowed on it. Many
candidates computed depreciation at the rate of either 30% or 15% considering it
as an addition to building.

(vi) Some candidates wrongly classified share of profit from AOP as Income from
Business instead of Income from Other Sources.

(vii) Majority of the candidates failed to appreciate that advance tax paid during the
year together with taxes deducted at source were less than 90 per cent of the gross
tax payable. As a result in default surcharge was required to be paid on the
amount of shortfall for the year. On the other hand, those who computed the
default surcharge failed to adjust advance taxes paid under section 147, 148, 153
and 154 from 90% of the tax liability to arrive at the amount of shortfall for the
year.

(viii) Many candidates failed to compute minimum tax and alternative corporate tax.
Some candidates computed the amounts of minimum tax and alternative corporate
tax without adjusting the turnover and accounting profit respectively for tax
purposes.

Question 2(a)

This part of the question required the candidates to explain the meaning of the term non-
active taxpayers and also state the consequences which a registered person may face on
removal of his name from active taxpayers list.

The performance in this part was satisfactory. However, while stating the consequences,
majority of the candidates failed to clarify that no person, including government
departments, autonomous bodies and public sector organizations, shall make any
purchases from a non-active tax payer and that in case of entry of an invoice issued by a
non-active taxpayer by any registered buyer in Annexure-A of his return, a message shall
appear to the effect that the supplier is a non-active taxpayer and no input tax credit shall
be admissible against such invoice.

Question 2(b)

This part of the question was based on the requirements of Rule 5A of the Sales Tax
Rules, 2006. Candidates were required to explain the circumstances in which a temporary
registration may be allowed to a person.

The performance in this part remained average. Majority of the candidates instead of
adhering to the requirements of the question also explained the procedure of temporary
registration.

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 Examiners Comments on Advanced Taxation Final Examination Winter 2015

Candidates also failed to comprehend that the requirement to furnish GPS-tagged

photographs of machinery can only be fulfilled once the machinery has been imported,
whereas, under temporary registration, machinery is yet to be imported. Further, under
temporary registration, the requirement to furnish complete list of machinery to be
imported along with Bill of Lading or Goods Declaration is in lieu of the requirements
prescribed in Clause (h) of rule 1A and sub-rule 1B of Rule 5.

Question 2(c)

This part of the question required candidates to describe the meaning of Taxable Service
as provided in the Provincial Sales Tax on Services Acts.

The overall performance in this part was very disappointing as hardly anyone was able to
correctly describe the meaning of taxable service. Majority of the candidates were of the
view that taxable services are those which are taxable under the Provincial Sales Tax
Acts.

Question 2(d)

This part of the question was based on the requirements of section 10 and section 67 of the
Sales Tax Act, 1990 and required candidates to compute the amount of refund under the
given circumstances.

The performance in this part was very poor. Majority of the candidates were of the
opinion that additional amount due on delayed refund was to be computed on the value of
penalty of Rs. 15,000 instead of the refund amount of Rs. 75,000. Candidates also failed
to compute the correct number of days for which the additional amount was due.

Question 3(a)

This part was based on section 12(4) of the Federal Excise Act, 2005 and tested
candidates knowledge with regard to the determination of the value and chargeability of
excise duty on the basis of retail price of goods.

The performance in this part was satisfactory. However, hardly any candidate was able to
highlight the fact that where, subject to indication by the Board, any goods or class of
goods which are liable to duty on local production as percentage of retail price, the
provisions applicable to such goods chargeable to duty on the basis of retail price shall
mutatis mutandis apply in case such goods are imported from abroad.

Question 3(b)

This part of the question required candidates to explain the circumstances in which a
person, who is also registered for sales tax purposes, may be de-registered. It was also
required to state the procedure of de-registration.

Although most of the candidates correctly identified the circumstances in which a person
may be de-registered, majority of them failed to explain the procedure of de-registration
resulting in below average performance. Most of the answers were incomplete and lacked
the requisite steps to be followed in case a person fails to file tax return for six consecutive
months.
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 Examiners Comments on Advanced Taxation Final Examination Winter 2015

Question 4

This question related to the computation of sales tax payable by or refundable to a

registered person in a given tax period and the amount of withholding tax, if any. Most of
the concepts tested in this question have been tested many times in the past and candidates
were expected to show a high degree of command in solving the question. However, the
performance was below average. Following common errors were noted:

(i) Many candidates did not adjust the value of goods returned by un-registered
customer from raw material purchased from local un-registered suppliers.

(ii) Candidates failed to deduct withholding tax on purchases from local un-registered
suppliers on the pretext of third schedule items. They failed to comprehend that
only purchase of third schedule items from registered persons is exempt from the
provision of withholding sales tax deductions, whereas withholding tax is required
to be deducted from un-registered suppliers.

(iii) Most of the candidates charged sales tax on the entire imports of Rs. 5,000,000
completely ignoring the fact that raw-material imported for the manufacture of
zero rated supplies is also charged to tax at the rate of 0%. Further, many
candidates who charged sales tax on raw-material imported for fat filled milk
considered it as refundable to the manufacturer.

(iv) Some of the candidates considered supplies to trust /non-profit organizations as

exempt and apportioned residual input tax to these supplies.

(v) Many candidates either did not charge extra tax on supply of confectionery,
chocolates and candies or considered it to be part of output tax.

(vi) Many candidates considered forward transaction on Pakistan Mercantile Exchange

Limited as supply and charged sales tax on it. Similarly Supply of Fertilizers under
Murabaha financing arrangement was also considered as supply and output sales
tax was charged on the basis of retail price.

(vii) Many candidates considered supply to cottage industry as exempt, and residual
input tax was allocated to these supplies as inadmissible input tax. They failed to
appreciate that supply by cottage industry is exempt but supply to cottage industry
is chargeable to tax.

(viii) Majority of the candidates charged sales tax instead of excise duty on supply of
sugar to TCP. Some candidates did not charge excise duty under sales tax mode on
supply of sugar to TCP on the presumption that under the Sales Tax Act, 1990 time
of supply is earlier of amount received or goods delivered and since payment
from TCP was received on September 25, 2015, excise duty would have been
charged in September. Whereas, in case of supply of sugar to TCP provisions of
Chapter V of the Sales Tax Special Procedure Rules 2007 are applicable according
to which excise duty is charged at the time of removal of sugar from suppliers
premises. Further, many candidates were unaware that only local supply of sugar is
chargeable to excise duty and not export.

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 Examiners Comments on Advanced Taxation Final Examination Winter 2015

(ix) Majority of the candidates either failed to compute the amount of withholding tax
deducted by withholding agents (withholding tax on supplies to registered persons)
or deducted it from output tax for the month.

(x) Surprisingly, many candidates seemed to be unaware of the provisions of Section

8B of the Sales Tax Act, 1990. As a result, they failed to restrict the total input tax
to 90 percent of output tax.

(xi) Few candidates also calculated further tax on supplies to un-registered end
consumers. Similarly, many candidates in ignorance of the requirements of section
7(1) of the Sales Tax Act, 1990 included the amount of further tax with output tax.

Question 5(a)

This part of the question was based on the requirements of section 206A and Rule 231A
respectively of the Income Tax Ordinance, 2001 and Rules made thereunder. It tested
candidates knowledge regarding the concept of Advance ruling, who may issue such
ruling and within what time it is required to be issued.

The overall performance in this part was very poor. As stated earlier, approximately 63%
of the candidates did not attempt the question. Those who attempted, failed to properly
explain the term Advance ruling. Majority of the candidates mentioned that advance
ruling is issued to foreign investors instead of a non-resident person.

Question 5(b)

This part of the question required candidates to explain the circumstances in which an
advance ruling may be binding on the Commissioner and when such ruling ceases to be
binding.

Again the performance in this part was very poor. Except for a handful of candidates,
almost everyone failed to explain the conditions as specified in sub-section 2 of section
206A and sub-rule 5 and 7 of Rule 231A respectively, of the Income Tax Ordinance, 2001
and Rules made thereunder.

Question 6(a)

This question related to the provisions of thin capitalization and required the candidates to
compute the amount of interest on debt that shall be allowed as expense for tax purposes.
Candidates performance remained below average.

Some of the common mistakes observed were as follows:

(i) Majority of the candidates failed to appreciate that the concept of thin capitalization
applies only when interest on debt is either exempt from tax or is chargeable at a
rate lower than the corporate tax rate. As a result, they subjected both the loans to
thin capitalization, whereas, thin capitalization was applicable only on loan
obtained on 15 March 2015.

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 Examiners Comments on Advanced Taxation Final Examination Winter 2015

(ii) Some candidates, without comprehending the requirements of the question, treated
the whole equity as foreign equity and concluded that interests on both the loans
were falling within the prescribed limits for thin capitalization. Consequently the
entire amount of interest was treated as admissible.

(iii) Many students erred in computing the foreign equity; they either did not adjust the
amount of debt owed by a non-resident foreign associate and/or did not deduct the
amount of asset revaluation reserve.

(iv) Majority of the candidates also failed to compute the correct amount of interest on
both the loans which is quite unusual for candidates at this level.

Question 6(b)

This part of the question was divided into two sub parts (i) and (ii). Part (i) required
candidates to state the circumstances under which a person may automatically be selected
for audit of its income tax affairs. Part (ii) tested candidates knowledge with regard to the
conditions in which a claim for reward by the whistleblower may be rejected.

The performance in part (i) remained average. Many candidates were of the opinion that a
person may be selected by the Commissioner by random balloting. Few candidates
thought that when a person has abnormal tax profile or he overstates the deductions or
concessions he is automatically selected for audit. However, in part (ii) the performance
was satisfactory as majority of the candidates managed to secure at least passing marks.

Question 6(c)

This part of the question was also divided into two sub parts, (i) and (ii). Part (i) asked
candidates to state the meaning of the term imputable income whereas part (ii) required
to state the meaning of PMEX.

The overall performance in this part was very poor. Majority of the candidates seemed to
be unaware of the above terms.

The answers in response to imputable income were varied in nature; some candidates
wrote that imputable income is the income determined by the commissioner in cases
where the tax payer fails to submit the return of income for the current as well as previous
tax years. Others were of the opinion that it is a grossed up amount of income under FTR
against which no deductions are allowed.

In respect of PMEX, majority of the candidates were only able to state the abbreviation
which PMEX stands for.

(THE END)

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