THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Taxation Final Examination – Winter 2010

The overall performance was below satisfactory and also dropped from Summer 2010
examinations. It has been observed that in many cases, students show haste in reading the
questions and thereby fail to comprehend the requirements of the question and lose easy
marks. It is suggested that they should read the questions very carefully, even when they
feel that the question is easy to attempt. Lack of knowledge, inability to deal with practical
situations and the tendency to rush to a conclusion were other main causes of failure.

Question-wise comments are as under:

Q.1 This question, with a potential 19 marks, was attempted by the majority of the
students. The question required technical knowledge with regard to thin
capitalization rules. The performance however, remained poor with following
errors generally noted in most of the answer scripts.

(i) The first step was to identify the foreign controller from among the related
companies. Most of the students failed to identify ATX Gmbh as one of the
foreign controller or wrongly classified FRS Limited as a foreign controller.

(ii) The second step was to calculate the controlling interest of non-residents,
holding 50% or more of the underlying ownership in Rainbow Limited, either
alone or together with associates, which the students failed to calculate
properly. For instance in case of ATX Gmbh majority of the students
calculated the holding at 70% instead of the correct effective holding of 52%.

(iii) In the next step, students were required to calculate the opening equity by
adjusting the effect of profit and dividend from the closing assets and
liabilities of the business. Many students failed to take into consideration the
effect of either the profit or the dividends. Few of them computed the opening
liability which was not required.

(iv) While calculating the foreign equity, majority of the students clubbed together
the share in foreign equity of all the foreign controllers resulting in wrong
calculation of allowable debt in relation to each of the foreign controller.

(v) Finally, many of the candidates failed to calculate the correct amount of profit
on debt, mixing together the concept of accruals and actual payments. Few
students did not calculate profit on debt obtained from FRS limited which was
also a deductible profit.

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 Examiners’ Comments on Advanced Taxation - Winter 2010 Examinations

Q.2 This question, with a potential 9 marks, depicted poor performances by majority of
the students. The students listed the general attributes as qualification and
disqualification of authorized representative. Many students miserably failed to
comprehend the requirements of the question and elaborated the qualification and
disqualification of authorized representative as prescribed under section 223 of the
Income Tax Ordinance 2001 instead of the Sales Tax Rules, 2006 which was the
requirement of the question.

Q.3 This question, with the potential of 21 marks, had three parts (a), (b) and (c). The
question based on the requirements of section 95 of the Income Tax Ordinance
2001, related to “Disposal of business by individual to wholly-owned Company”.
Part (a) was associated to the rules defined in Section 95(1) of the Ordinance,
where no gain or loss arises on the disposal of assets to a resident company, on the
fulfillment of certain conditions whereas, part (b) and (c) were related to the
practical application of those rules.

Part (a) of the question was generally attempted well by the students with the
exception of few who either could not answer it completely or answered the
question in the light of section 37(4A) i.e. Capital Gains which was not required.

The candidates who correctly answered part (a) were also able to correctly answer
part (b) of the question. On the contrary, the students poorly attempted part (c).
Some of the common mistakes were:

(i) The students were required to calculate the fair value of the net assets in order
to arrive at the number and value of shares to be issued by MPL using the
breakup value of the shares. Most of the students used either the accounting
WDV or tax WDV of the fixed assets and patents instead of their fair value for
calculating the net worth of the business.

(ii) Students deducted the amount payable to Barkat Enterprises from the total
liability of Herbal Trading which was not according to the requirements of
section 95(1) (c) of the Ordinance. According to the above section, the
company (i.e. MPL) must undertake to discharge any liability in respect of the
assets acquired by it.

(iii) Some of the students apportioned the purchase consideration between cash
and shares against the requirements of Section 95(1) (a) according to which
the purchase consideration received by the transferor, for the disposal, should
be in the form of share or shares in the company.

(iv) While determining the number of shares to be issued many students used face
value of PKR 10 per share instead of its breakup value.

(v) Many students also calculated number of shares to be issued on the basis of
the current holdings of Mr. Adnan, his wife and his bother without calculating
the cost of assets.

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 Examiners’ Comments on Advanced Taxation - Winter 2010 Examinations

Q.4 This question, with the potential of 12 marks, was based on Rule 220A (7) of the
Income Tax Rules, 2002 and was the worst attempted question. Around 25% of the
students did not attempt the question at all and those who attempted hardly scored
any marks, which indicates lack of study / selective study on the part of the
students.

Q.5 This question, with the potential of 06 marks, was a very simple and basic question
and majority of the students performed well on this question. However, few
students were either not aware of the total number of days required for qualifying as
a resident in a tax year or failed to make distinction between the two tax years
thereby losing valuable marks on the question.

Q.6 (a) It was based on a scenario and required the students to comment on the
chargeability of sales tax on supply of iron bars where the transaction was
settled by acquisition of land. The situation was to be discussed in the light of
section 2 (46) of the Sales Tax Act 1990. Many students got confused and
discussed issues such as sales tax on land, payment mode and implication of
allowable input tax, thereby, losing easy marks.

(b) It was based on the requirements of Rule 20 of the Sales Tax Rules, 2006.
Majority of the students performed well on this part of the question.

Q.7 (a) This question, with the potential of 09 marks, also had two parts (a) and (b).
Part (a) was based on section 17 of the Federal Excise Act, 2005. Students
generally performed well in answering the question. However, some of them
mingled the requirements of section 22 of Sales Tax Act, 1990 with that of
Section 17 of the Federal Excise Act, 2005.

(b) It consisted of two parts (i) and (ii). Part (i) was badly attempted as only few
could correctly define the term non-banking services. Part (ii) however, was
answered well by the students.

Q.8 This question, with a potential of 15 marks, was a straight forward question
requiring the students to calculate the sales tax payable / refundable with the
monthly sales tax return. Majority of students performed well on this question and
secured passing marks.

Some of the common mistakes observed were as follows:

(i) None of the students paid attention towards the proper presentation of the data
and therefore, the overall presentation of the answer was very poor.
(ii) Many students did not considered 2% additional sales tax while computing
input tax on commercial imports.
(iii) Residual input tax adjustment relating to exempt supplies was calculated
taking into account the commercial imports as well. Similarly, input tax
adjustment on export supplies, which was to be claimed as a refund, was
either wrongly calculated or totally ignored from the calculations.

(THE END)

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