CFAP 5

SUMMER 23 - WINTER 24
 Winter 24
Tax Planning and Practices Page 1 of 6

Q.1 For this question, assume that the date today is 30 September 2025.

Mazboot Tyres (Pvt) Limited (MTPL) is a manufacturer, dealer and supplier of radial tyres
for trucks and buses across Pakistan. It was incorporated on 15 May 2024, with a paid-up
capital of Rs. 90 million on a land located on the outskirts of Karachi. MTPL is 60% owned
by Osaka Rubber Technologies Limited (ORTL), a foreign company.

On 30 June 2024, MTPL received the status of greenfield industrial undertaking from the
FBR.

The following information has been extracted from MTPL’s records for the year ended
30 June 2025:
Rs. in million
Sales 600
Cost of sales (399)
Gross profit 201
Administrative and selling expenses (46)
Financial charges (25)
Other income 13
Profit before taxation 143

Additional information:
(i) Sales include:
 exports amounting to Rs. 60 million, with the associated cost of these items
totalling Rs. 58 million, which is already included in the cost of sales above. No
additional expenses were incurred in relation to the exports.
 sales of radial tyres amounting to Rs. 23.6 million (inclusive of an 18% sales tax).
These tyres were purchased locally at a wholesale price of Rs. 13 million from a
commercial importer in Karachi. They were sold to registered retailers in the same
condition as when purchased. These retailers are registered under the Sales Tax
Act, 1990. No tax was collected or deducted at the time of purchasing and selling
the tyres.
(ii) The cost of sales includes Rs. 38 million for accounting depreciation and Rs. 1 million
for the amortization of quality control software.
(iii) Administrative and selling expenses include Rs. 3.1 million incurred by MTPL for
providing meals and refreshments to customers during seminars held at a local hotel to
promote product awareness.
(iv) Financial charges include profit on debt on a loan of USD 0.6 million (equivalent to
PKR 180 million) obtained from ORTL on 1 July 2024 for the construction of a factory
building. The profit on debt, at a rate of 5% per annum, is due monthly in arrears. The
factory building, with a total cost of Rs. 187 million, was completed and became
operational on 1 January 2025. Repayment of the principal loan amount is scheduled
to commence in July 2026.
(v) Other income comprises of:
 a dividend of Rs. 1.6 million received from Particle Energy Limited (PEL), an
independent power producer. MTPL acquired 80,000 shares in PEL on
15 January 2025.
 a gain of Rs. 11.4 million resulting from the sale of 260,000 shares in Good
Transport Limited (GTL), a listed company, at Rs. 90 per share on 15 June 2025.
MTPL initially purchased 200,000 shares of GTL at Rs. 60 per share on
1 November 2024. Additionally, MTPL received 100,000 bonus shares issued by
GTL on 30 April 2025. The market price of each share on the date of entitlement
to the bonus shares and the date when bonus shares were credited to MTPL’s
account was Rs. 65 and Rs. 75 respectively.
 Tax Planning and Practices Page 2 of 6

Further information:
 The following assets were acquired/installed by MTPL during the tax year 2025:
Rs. in million
Plant and machinery imported from Japan 105
Used machinery 15
Furniture and fixtures 6
Computer hardware 8
Quality control software (Note) 5
Office vehicles 18
Note: The software, developed in-house, with a useful life of 5 years, was ready for use
from 1 October 2024.
 During the year, the tax withheld under section 153 amounted to Rs. 20 million.
Required:
Under the provisions of the Income Tax Ordinance, 2001, and the Rules made thereunder,
compute under the correct head of income, the total income, taxable income and net tax
payable by or refundable to MTPL for the tax year 2025. (20)
Notes:  Ignore WWF, WPPF, minimum tax u/s 113, alternative corporate tax, super tax and
default surcharge, if any.
 Show all relevant exemptions, exclusions and disallowances.
 Round off all figures to two decimal places.

Q.2 (a) For this question, assume that the date today is 30 September 2025.
Falah-e-Atfaal Foundation (FAF), established in the tax year 2023 and registered as a
not-for-profit company under the Companies Act, 2017, is committed to delivering basic
education and healthcare facilities to underprivileged children in rural Sindh. The
following information has been extracted from FAF’s records for the year ended
30 June 2025:
Rs. in million
Income:
Grants, donations and subscriptions 95
Rent from house property 3
Profit from government securities 2
Business income (net of all business related expenses) 20
Expenditures:
Administrative and management 32
Project 40
Additional information:
 FAF is in full compliance with all tax laws and regulations.
 From its business income, FAF spent 60% on education and health care activities
in Pakistan which is included in project expenses above.
Required:
Under the provisions of the Income Tax Ordinance, 2001, and the Rules made
thereunder, calculate the tax liability of FAF for the tax year 2025. (06)
Note: Ignore minimum tax u/s 113 and alternative corporate tax.
(b) Sun Solutions (Pvt) Limited (SPL) is engaged in the business of providing software
development and system integration services to its clients. SPL is registered with the
Pakistan Software Export Board (PSEB).
During the tax year 2025, SPL received a net amount of Rs. 15 million from a foreign
telemedicine company for providing software development services. The full amount of
the export proceeds were received in Pakistan in foreign exchange, equivalent to
USD 53,956, through the normal banking channel.
Withholding tax at a rate of 5% of the gross service charges was deducted by the foreign
company while making the payment to SPL.
 Tax Planning and Practices Page 3 of 6

Required:
Under the provisions of the Income Tax Ordinance, 2001, discuss the tax implications
of the above transaction. Also, discuss the consequences if SPL was not registered with
the PSEB. (07)

Q.3 For this question, assume that the date today is 30 September 2025.

Fun Factory Limited (FFL), an unlisted public company, is engaged in the business of
manufacturing toys designed for children’s entertainment. 50% of FFL’s shares are owned by
Kids Creations Limited (KCL), a company specializing in entertainment toys as well as
educational games for children.

The tax manager of FFL is currently preparing the tax return for the tax year 2025 (financial
year ended 30 June 2025) and has compiled the following data along with accompanying
notes and additional information for management’s review and approval:
Income from business: Note Rs. in million
Profit before tax 300.0
Adjustments:
Fee for technical services – FTR income (i) (4.8)
Deemed income (ii) 3.0
Donation (iii) (26.0)
Capital gains (net) – Separate block of income (iv) (9.0)
Tax depreciation on machinery (v) (6.5)

Capital gain:
Capital gains (net) – Separate block of income (iv) 9.0
Total income 265.7
Less: Business loss surrendered by KCL in favour of FFL, during
the tax year 2025 (Rs. 170 million × 50%) (85.0)
Taxable income 180.7

Notes to the computation:

(i) The amount received from KCL for providing technical expertise was net of a 4%
withholding tax, with an expenditure of Rs. 2 million incurred to generate this income.
(ii) This represents 1% of the fair market value of two plots. Both plots were purchased in
the last tax year for expansion to meet future business requirement. The fair market
values of the plots were Rs. 140 million and Rs. 160 million respectively, as on
30 June 2025. The work was scheduled to start this year but due to unforeseen
circumstances, no work has yet commenced.
(iii) Donations reflect the educational games worth Rs. 26 million, provided to government
schools. These games were initially purchased by FFL from KCL.
(iv) The capital gain is the net amount derived from the disposal of the following investments:
Fair
Sale Gain/ Holding
market Cost
Description proceeds (loss) period in
value
years
------------- Rs. in million -------------
Shares of a company, listed on the
44 44 32 12 3
London Stock Exchange
Shares of a private limited
24 20 17 3 6
company, based in Pakistan
Shares of a company, listed on the
58 58 64 (6) 2
Pakistan Stock Exchange
9
 Tax Planning and Practices Page 4 of 6

(v) The depreciation relates to a machine that was sold and leased back by FFL on
1 July 2024, for five years. Under the sale and leaseback arrangement, the annual lease
rental of Rs. 10 million is payable in arrears.
At the time of the sale and leaseback, the machine had a book value of Rs. 50 million
and a fair market value of Rs. 75 million. FFL sold the machine at its fair market value
and recorded a gain of Rs. 14.6 million. During the year, it recorded depreciation of
right of use asset and interest expense of Rs. 2.6 million and Rs. 5.6 million respectively.
The tax written down value of the machine on 1 July 2024, was Rs. 43 million.

Additional information:
Profit before tax includes a payment of Rs. 8.4 million made to an advertising agency for
promoting its entertainment toys through digital marketing and social media management.
Moreover, a royalty of Rs. 12 million was paid to KCL by FFL in the last tax year for the use
of design patents for some entertainment toys.

You may assume that:

 all transactions between FFL and KCL are based on arm’s length pricing.
 tax and accounting depreciation for the year are the same, except for the machine stated
in note (v) above.

Required:
Under the provisions of the Income Tax Ordinance, 2001 and the Rules made thereunder,
comment on each element of the above computation of total and taxable income, prepared by
the tax manager for the tax year 2025. Provide suggestions where necessary. (22)
Notes:  Revised computation is not required.
 Ignore WWF, WPPF, minimum tax u/s 113 and alternative corporate tax.
 Ignore the discussion on tax liability.

Q.4 Consider the following independent situations:

Value of assessment
Date of receipt of
Entity Order passed by of tax / (refund)
order
(Rs. in million)
A Deputy Commissioner 5 November 2024 25
B Additional Commissioner 10 November 2024 (19)
C Commissioner (Appeals) 21 November 2024 18
D* Deputy Commissioner 25 November 2024 22
E Appellate Tribunal Inland Revenue 30 November 2024 14
*State-owned enterprise

Required:
Under the provisions of the Income Tax Ordinance, 2001 and the Rules made thereunder, for
each of the abovementioned independent situations, identify the available immediate appeal
forum along with the deadlines for submission of appeal. (05)

Q.5 Masoom Textile (Pvt) Limited (MTL) is an audit client of Farhan & Co (FNC), Chartered
Accountants. Mustafa, the tax partner at FNC, has been responsible for preparing MTL’s
income tax returns for several years. In line with the amendment introduced through the
Finance Act, 2024, MTL is now required to file its return under normal tax regime instead of
final tax regime. Considering the complexities of preparing accounting entries for current and
deferred tax for the first time, the CFO of MTL approached Mustafa to provide additional
services related to these accounting entries.

Required:
In light of ICAP’s Code of Ethics for Chartered Accountants, advise whether the firm should
accept to provide the additional services as requested by the CFO. (06)
 Tax Planning and Practices Page 5 of 6

Q.6 Hayaat Pharma Limited (HPL) is engaged in the business of manufacturing and supplying
pharmaceutical products, skin care products and prostheses, with its principal place of
business located in Lahore. HPL is registered with the Sales Tax Authorities as an importer,
manufacturer and distributor. The following information has been extracted from HPL’s
records for November 2024:

(i) Purchases from registered persons:

 Rs. 30 million paid for the purchase of raw materials. 70% of these materials have
been certified by the Drug Regulatory Authority of Pakistan (DRAP) for the
manufacture of medicines.
 Rs. 2.5 million paid to a wholesaler in the area of PATA for the purchase of ginger
in bulk packaging, and Rs. 3 million for turmeric under a brand name. Both ginger
and turmeric are used in the production of beta blockers and anti-inflammatory
medicines, respectively.
 Rs. 1.62 million paid for the purchase of 3600 insulin cartridges in retail packaging
from a distributor in Quetta. The retail price of each cartridge is Rs. 500.
 Rs. 1.4 million paid to a legal consultant in Lahore for defending HPL’s patent
rights against infringement by a competitor.
 Rs. 0.48 million paid to an insurance agent in Faisalabad for arranging fire
insurance for one of HPL’s warehouses.
 Rs. 3.2 million paid for purchasing 4 business class air tickets for staff members to
attend training sessions in Germany.
(ii) Rs. 8 million paid to unregistered wholesalers for the purchase of 2000 non-medicated
tubes of face and skin creams in retail packaging. The retail price of each tube in the
market is Rs. 5,000. These items are not registered under the Drugs Act, 1976.

(iii) Imports:
 Raw materials worth Rs. 7 million for the basic manufacture of active
pharmaceutical ingredients (APIs). The customs duty was charged at the rate of
twenty per cent ad valorem under the Customs Act, 1969. DRAP certified HPL’s
item-wise requirement for these materials for the manufacture of APIs and provided
all relevant information to the Pakistan Customs Computerized System.
 Artificial limbs worth Rs. 6 million for supplying to private hospitals.
 Non-medicated health supplements, not registered under the Drugs Act, 1976,
worth Rs. 4 million. HPL sells these supplements in the same condition as they are
imported.

(iv) Supplies to registered persons:

 Rs. 9.55 million worth of APIs supplied to a pharmaceutical company that
manufactures pain relief medicines.
 Rs. 0.95 million received from a distributor in the Gwadar Special Economic Zone
for the sale of 2000 insulin cartridges. HPL met all the conditions imposed by the
FBR.
 Rs. 4.95 million received from pharmacies operating in large malls for the sale of
1100 tubes of face and skin creams.
 Rs. 26 million worth of medicines supplied to various hospitals and clinics in
Karachi, Lahore and Rawalpindi.
 Rs. 3.55 million worth of artificial limbs supplied to various hospitals and surgical
stores in Punjab.

(v) Supplies to unregistered persons:

 Rs. 0.8 million for the supply of 1600 insulin cartridges to small pharmacies in
Hyderabad.
 Rs. 4.5 million for the supply of 900 tubes of face and skin creams to private beauty
clinics in Islamabad.
 Rs. 5.7 million for the supply of health supplements to various retail pharmacy
stores in the Bahawalpur region.
 Tax Planning and Practices Page 6 of 6

All payments were made by cross cheque or pay order. Unless otherwise specified, the figures
mentioned above are exclusive of sales tax and excise duty.

All medicines and drugs purchased and supplied by HPL, unless specified otherwise, are
registered under the Drugs Act, 1976.

Required:
In light of the provisions of the Sales Tax Act, 1990, Federal Excise Act, 2005 and the Rules
made thereunder, compute the amount of sales tax payable by or refundable to HPL and the
amount of input tax to be carried forward, if any, for the tax period November 2024. Also
compute withholding tax, wherever applicable. (22)
Notes:  Show all relevant exemptions, exclusions and disallowances.
 All figures should be rounded off to two decimal places.

Q.7 (a) Golden Crust Bakers (GCB) operates a bakery business with retail outlets in Karachi,
Lahore, and Islamabad. GCB is registered as an importer, manufacturer, and distributor
with the Sales Tax Authorities.

The following transactions have been extracted from GCB’s records for the month of
November 2024:
(i) GCB imported 2000 loaves of Turkish bread, ‘Ekmek Loaf’, from Istanbul at
Rs. 3,100 per loaf. Fifty per cent of the Ekmek loaves were sold in Karachi for
Rs. 3,600 per loaf, and the remainder were sold in Islamabad for Rs. 3,800 per loaf.
The loaves were sold in the same condition as they were imported. The retail price
of an Ekmek loaf is Rs. 3,900.

(ii) GCB purchased 1500 packets of vermicelli from the Border Sustenance Market,
established in cooperation with Iran, at Rs. 400 per packet. GCB sold 800 packets
directly to grocery stores in Karachi for Rs. 600 per packet, while 700 packets were
sold through its air-conditioned mall outlet in Lahore for Rs. 650 per packet.

Required:
Under the Sales Tax Act, 1990, and the Rules made thereunder, discuss the
chargeability of sales tax on the above transactions. (07)

(b) Parwaz Engineering Limited (PEL) is engaged in the manufacture and local supply of
mechanical tools. In October 2024, PEL filed refunds claim for excess input tax, which
has not been approved to date. The Officer Inland Revenue issued a show cause notice
to PEL to verify the invoices issued by its suppliers during the refund period. The Chief
Accountant of PEL believes that since refund applications are filed and processed
electronically, the notice has been issued merely to delay the refunds. The Chief
Accountant has engaged you as a tax adviser to look into the matter and expedite the
refunds processing.

Required:
Under the Sales Tax Act, 1990, and the Rules made thereunder, guide the Chief
Accountant on the provisions relating to refunds. (05)

(THE END)
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.1 Mazboot Tyres (Pvt) Limited (MTPL)

Computation of total income, taxable income and net tax payable/refundable
For the tax year 2025
Income from Business: Rs. in million
Profit before taxation 143.00
Add/(Less): Inadmissible expenses / (income)
Profit from exports – subject to MTR (60–58) (2.00)
Sale tax on the sale of radial tyres to retailers [23.6 × 18/118] (3.60)
Cost of tyres – 20% disallowed – [13 × 20%] 2.60
Accounting depreciation 38.00
Accounting amortization of the quality control software 1.00
Entertainment expense – Inadmissible 3.10
Profit on debt - loan from ORTL [9(180×5%) – 8.10(W-1)] 0.90
Dividend income - Separate block (1.6)
Gain on sale of shares (including bonus shares) – Separate block (11.4)
Total business income before depreciation 170.00
Less: Tax depreciation – current year (W-2) (65.01)
Amortization – quality control software [5 ÷ 5 × 273 ÷ 365] (0.75)
(65.76)
Total business income for the year 104.24

Capital Gain:
Gain on sale of listed shares – SBI (W-3) 13.00

Income from other source:

Deemed income - bonus shares [Rs. 65 × 100,000] 6.50

FTR income:
Dividend from PEL 1.60
Total income for the year 125.34
Dividend from PEL (1.60)
Deemed income - bonus shares – FTR (6.50)
Gain on sale of listed shares (13.00)
Taxable income for the year 104.24
Tax liability:
Tax on taxable income – NTR [104.24 @ 29%] 30.23
Tax on export income – subject to MTR
At a tax rate of 29% (2 × 29%) 0.58
Tax withheld at 1% 0.60 0.60
(Since tax withheld on the export stage is more than tax under the normal tax regime,
withholding tax would be payable as minimum tax)
Tax on dividend income – FTR [1.6 × 7.5%] 0.12
Tax on income from bonus shares – FTR [65 × 100,000 × 10%] 0.65
Tax on gain on sale of listed shares – SBI [13.00 × 15%] 1.95
Total tax liability 33.55
Less: Tax credit @ 25% of eligible investment [300(105+8+187) × 25%] (75.00)
Tax credit carried forward for a period not exceeding two years (41.45)

Page 1 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

Tax deduction / collection at source:

Tax withheld @ 1% u/s 154 (0.60)
Advance tax on exports @ 1% u/s 147(6C) (0.60)
Tax on dividend income (0.12)
Tax on income from bonus shares (0.65)
Tax on gain on disposal of listed shares (1.95)
Tax withheld u/s 153 (20.00)
Deductible u/s 153(1)(a) on tyres @ 5% – not deducted by the retailers. -
Collection u/s 236G by commercial importer of tyres @ 0.1% – not collected -
Tax refundable (23.92)

W-1: Thin capitalisation Rs. in million

Foreign equity at the beginning of the year [90 × 60%] 54.00
Foreign debt 180.00
Profit on debt @ 5% per annum [180 × 5%] 9.00
Profit on debt admissible for tax purposes [9 × 0.9{162(54×3) ÷ Rs. 180}] 8.10
The provision of section 106A is not applicable as profit on debt is < Rs. 10 million.

W-2: Tax depreciation

Depreciation
Cost
Asset Initial Normal Total
-------------------- Rs. in million --------------------
Building (@ 10%) 187.00 - 18.70 18.70
Plant and machinery (@ 25% & 15%) 105.00 26.25 11.81 38.06
Used machinery (@ 15%) 15.00 2.25 2.25
Furniture and fixture (@ 15%) 6.00 - 0.90 0.90
Computer hardware (@ 30%) 8.00 - 2.40 2.40
Office vehicles (@ 15%) 18.00 - 2.70 2.70
Total 339.00 26.25 38.76 65.01

W-3: Computation of gain/(loss) on sale of listed shares:

Cost of original shares (200,000 × Rs. 60 each) 12,000,000
Total number of original shares 200,000
Bonus issue 100,000
Total number of shares (including bonus shares) 300,000
Cost per share (12,000,000 ÷ 300,000) 40

Rs. in million
Consideration received for shares (260,000 × Rs. 90 each) 23.40
Cost of shares sold (260,000 × Rs. 40 each) (10.40)
Taxable gain on disposal of shares 13.00

Page 2 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.2 (a) Falah-e-Atfal Foundation (FAF)

Computation of tax liability
For the tax year 2025
Rs. in million
Grants, donations, and subscriptions 95.0
Income from property 3×(4÷5) 2.4
Profit from government securities 2.0
Income from business 20.0
119.4
Less: Administrative and management (32.0)
Project expenses (40.0)
47.4

Tax liability @ 20% (being a small company) 9.5

Less: 100% tax credit on eligible income 35.8(W-1)×20% (7.2)
2.3
Tax on surplus funds being more than 25% of total receipts i.e.
40%(47.4÷119.4) (47.4×10%) 4.7
Total tax liability 7.0

W-1: Income eligible for tax credit Rs. in million

Eligible income for 100% tax credit 95+2.4+2+8.4[20×42.2%(20÷47.4)] 107.8
Less: Administrative and management expense (32.0)
Project expenses (40.0)
35.8

(b) Export of Services:

Software Development Services fall within the definition of IT services and are subject
to withholding tax (WHT) at the rate of 0.25% of the export proceeds, as SPL is
registered with and certified by the Pakistan Software Export Board (PSEB). Therefore,
WHT of Rs. 0.04 million (Rs. 15m ÷ 99.75% × 0.25%) will be deducted at the time of
realization of export proceeds totalling Rs. 15.04 million by the authorized dealer in
foreign exchange.
The tax treatment can be analysed under the following two options:
(i) If SPL’s income is subject to tax under the Final Tax Regime (FTR):
To be eligible for taxation under the FTR, SPL must fulfil the following conditions:
(a) The income tax return has been filed.
(b) Withholding tax statements for the relevant tax year have been filed, if
required, under the Income Tax Ordinance, 2001.
(c) No credit will be allowed for tax of Rs. 0.79 million (Rs. 15.04m ÷ 95% × 5%)
paid in the foreign country.

(ii) If SPL does not fulfil any of the conditions specified above or opts to be taxed under
NTR:
Under this option, its income will be taxed under the head ‘Business income’.
Additionally, SPL will be allowed to claim a foreign tax credit, which will be the
lesser of the following:
 The foreign income tax paid, amounting to Rs. 0.79 million; or
 The Pakistan tax of Rs. 4.59 million (Rs. 15.83m × 29%) is payable on the
income.
Page 3 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

Consequences if SPL is not registered with the PSEB:

If SPL is not registered with the PSEB, the WHT deducted by the authorized dealer in
foreign exchange at the time of realization of export proceeds will be at a rate of 1%
instead of 0.25%. In this case, this deduction will amount to Rs. 0.15 million
(Rs. 15 million ÷ 99% × 1%).
Moreover, if SPL opts to be taxed under the FTR regime, it must fulfil an additional
condition beyond those specified for PSEB-registered entities; that is, it must file sales
tax returns as required under Federal or Provincial law.

A.3 Comments on the computation and the notes thereto are as follows:
(i) Fee for technical services received from KCL:
The fee for technical services (FTS) of Rs. 5 million (4.8/0.96) received from KCL, is
chargeable to tax under the minimum tax regime instead of the Final Tax Regime. In
calculating the income chargeable to tax, a specific expense of Rs. 2 million should
have been allocated to FTS. Further, the withholding tax rate for this service is 9%
instead of 4%, so the Commissioner may recover the remaining 5% from FFL.
(ii) Deemed Income:
The plots owned by FFL are classified as capital assets to calculate deemed income.
FFL, being a resident person, will therefore be treated as having derived income
chargeable to a tax under section 7E equal to 5% of the fair market value (FMV) of
capital assets, on the last day of the tax year 2025 i.e., 30 June 2025.
The deemed income of Rs. 3 million was incorrectly calculated at 1% of the FMV of
both plots without considering that one capital asset i.e., the plot with a higher value
of Rs. 160 million, is excluded from the ambit of tax on deemed income. Since the
value of the other plot is above Rs. 25 million and tax under section 236K was paid at
the time of purchase last year, it shall be subjected to tax for the current tax year.
Therefore, 5% of its value [i.e. Rs. 7 million (140 million × 5%)] shall be included as
deemed income, but not under the head of ‘income from business’.
(iii) Donation:
Donations to Government schools are eligible for tax credit rather than a deduction
from profit before tax. However, in the given scenario, the Commissioner may
recharacterise the donation as part of a tax avoidance scheme based on the following
two grounds:
 FFL does not deal in donation items i.e., educational games rather these items
were purchased from KCL which is an associate of it.
 KCL incurred the loss for tax year 2025 so it can not avail the tax credit on
donations.
(iv) Capital Gains on the disposal of investment:
The calculation and treatment of capital gains (net) as a separate block of income
contains errors, which are detailed below:
 Shares of a company, listed in LSE
The capital gain arising from the disposal of these securities is a foreign
source capital gain. However, this foreign source capital gain is taxable under the
normal tax regime rather than as a separate block of income (SBI).
 Shares of a private limited company, based in Pakistan
This gain is chargeable to tax under the normal tax regime instead of SBI. Further,
the gain shall be computed by taking the higher of fair market value and the sale
proceeds as consideration, resulting in a revised gain amount of Rs. 7 million
(24–17).
Page 4 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

 Shares of a company, listed on the Pakistan Stock Exchange

The capital loss on the sale of these securities shall not be set off against capital
gains that are subject to tax under the normal tax regime. Instead, it shall be carried
forward for the next three years.

(v) Sale and leaseback of asset:

The machine was sold and leased back by FFL, so the gain on disposal of the
machinery should be calculated instead of claiming tax depreciation thereon.
Accordingly, Rs. 32 million (75–43) should be added and accounting gain on disposal
of Rs. 14.6 million should be deducted from profit before tax.

Moreover, lease rentals of Rs. 10 million should be deducted, whereas depreciation on

right of use and interest expense of Rs. 2.6 million and Rs. 5.6 million, respectively,
should be added to profit before tax.

(vi) Adjustment of losses of KCL:

Since FFL only holds 50% shares in KCL, it cannot avail the benefit of group
relief.

(vii) (Advertisement expense:

Advertisement expense was rightly considered as an admissible expense; however, it
should be on a gross basis as Rs. 8.75 million (8.4÷0.96) instead of Rs. 8.4 million.
Moreover, as royalty amount was claimed as deduction in previous year, the
advertisement expense for the year shall be disallowed by 25% and allocated to the said
associate, if FFL fails to provide evidence/explanation on a notice issued by the
Commissioner that no benefit has been conferred to KCL by virtue of advertisement
expense. In the given case, Rs. 2.19 million (8.75×25%) may be added back to profit
before tax due to the aforementioned reason.

Page 5 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.4 Deadline to contest

Entity Order passed by Immediate appeal forum
A Deputy Appellate Tribunal 5 December 2024 OR Within
Commissioner Inland Revenue 30 days of receipt of the order
B Additional Commissioner 10 December 2024 OR Within
Commissioner (Appeals) 30 days of receipt of the order
C Commissioner High Court 21 December 2024 OR Within
(Appeals) 30 days of receipt of the order
D Deputy Alternate Dispute The timing for application to
Commissioner Resolution Committee ADRC is not provided
E Appellate Tribunal High Court 30 December 2024 OR Within
Inland Revenue 30 days of receipt of ATIR’s Order

A.5 MTL is a non-public interest entity and audit client of FNC. The provision of services by a
tax partner related to the preparation of accounting entries for financial statements that will
be subsequently audited by FNC will create a self-review threat.

Mustafa should evaluate the level of this threat before agreeing to provide these services based
on the following factors:
 Whether the preparation of accounting entries has a material effect on the financial
statements
 the particular characteristics of the engagement
 the level of tax expertise of the client's employees
 the complexity of the relevant tax regime; and
 the degree of judgment necessary in applying it

Based on the evaluation of this threat following safeguards should be applied to minimize the
threat to an acceptable level in order to provide the proposed services.
 In providing these services, using professionals who are not part of the audit team
 Having an appropriate reviewer who was not involved in providing the service reviews
the audit work or service performed.

Page 6 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.6 Hayaat Pharma Limited (HPL)

Computation of Net Sales Tax Liability
For the tax period November 2024
Amount of
Value of supply Sales Tax
SALES TAX CREDIT (INPUT TAX) Sales Tax
(Rs. in million) Rate
(Rs. in million)
Raw material - DRAP certified 21.00 Inadmissible -
(Rs. 30 × 70%)

Raw material - DRAP uncertified 9.00 18% 1.62

(Rs. 30 × 30%)
Ginger from PATA - bulk packaging 2.50 Exempt -
Turmeric-PATA-brand name 3.00 16% 0.48
Insulin from a distributor 1.62 Inadmissible -
Legal fee 1.40 16% 0.22
Fee paid to an insurance agent 0.48 Inadmissible -
FED on air tickets (not in sales tax mode) 3.40 Inadmissible -
Face and skin cream tubes from unregistered wholesalers 10.00 Inadmissible -
(5,000×2,000)
Import of raw materials for APIs 7.00 18% 1.26
Value addition - Not applicable -
Import of artificial limbs etc. 6.00 Exempt -
Import of non-medicated health supplements 4.00 18% 0.72
Value addition 4.00 3% 0.12
Input Tax for the month 4.42

SALES TAX DEBIT (OUTPUT TAX)

APIs supplied to registered persons 9.55 1% 0.10
Insulin cartridges to GSEZ 0.95 0% -
Face and skin creams tubes to registered persons 5.50 18% 0.99
(1,100×5,000)
Medicines 26.00 1% 0.26
Artificial limbs 3.55 Exempt -
Insulin cartridges to unregistered persons in Hyderabad 0.80 - -
Face and skin creams tubes to unregistered persons 4.50 18% 0.81
Non-medicated health supplements to unregistered retail
5.70 18% 1.03
pharmacies
Output tax for the month 3.19
Calculation of sales tax liability
Output tax on drugs registered – 1% as final discharge with no input adjustment (0.10m+0.26m) 0.36
Output tax excluding drugs (3.19 – 0.36) 2.83
Admissible credit (lower of 4.42 or 90% of 2.83 = 2.55) (2.55)
0.28
Balance payable (0.36+0.28) 0.64
Further tax on the supply of 1,600 cartridges to unregistered persons in Hyderabad -
Further tax on the supply of 900 face and skin cream tubes - not applicable -
Further tax on the supply of non-medicated health supplements to retailers - liable to be
0.23
registered (5.7 × 4%)
Sales tax withheld from face & skin cream tubes - not applicable -
Sales tax payable 0.87
Sales tax c/f (4.42–2.55) 1.87

Page 7 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2024

A.7 (a) Chargeability of sales tax:

(i) The import of bread will be charged to sales tax at the rate of 18% of the import value
i.e. Rs. 3,100 per loaf, and since GCB sold the bread in the same condition as imported
and bread is not covered under the Third Schedule, a value addition tax at the rate of
3% will also be charged at the import stage.

However, the local supply of all types of bread is exempt from the levy of sales tax.
Therefore, no sales tax will be collected by GCB upon its sale from Karachi and
Islamabad outlets irrespective of its price.

GCB shall not be entitled to adjust the input tax paid on Ekmek loaf at the import stage
as its sale in the local market is exempt from sales tax.

(ii) Vermicelli supplied exclusively within the limits of the Border Sustenance Markets,
established in cooperation with Iran, is exempt from sales tax. However, since it was
brought outside the limits of these markets for sale in Karachi and Lahore, sales tax is
charged at 10% on Rs. 400 per packet (i.e. Rs. 40 per packet).

Since GCB sold 800 packets directly to grocery stores in Karachi at Rs. 600 per packet,
sales tax will be collected at the rate of 10% on Rs. 600 per packet.

However, 700 packets were sold by GCB through its bakery in Lahore at Rs. 650 per
packet. Therefore, as a Tier-1 retailer, GCB will collect sales tax at the rate of 18% on
Rs. 650 (i.e. Rs. 117 per packet).

(b) The refund applications submitted electronically are processed by the Risk Management
System (RMS) of the FBR’s Computerized System. The system categorizes claims based on
risk parameters and, where necessary, routes cases like PEL for detailed audit. The tax
officer, therefore, issued a notice based on some data for further verification; however,
presuming that this notice is intended to delay refunds is not appropriate.

FBR may initiate audit or inquiry proceedings if there is "reason to believe" that a refund
claim is not admissible. These proceedings must be completed within 60 days, extendable to
120 days, with further extension up to 9 months possible upon approval from higher
authorities.

If the refund is verified but delayed, PEL will be entitled to an additional sum based on
KIBOR. However, this interest is applicable only after the claim has been validated through
audit and approved. Therefore, PEL would not qualify for interest until the audit is
completed and the claim is confirmed.

Considering the above, PEL should ensure the completion of FBR's audit by providing all
requested information regarding vendor inputs and also ensure that all tax records and
purchase invoices are promptly available to facilitate verification.

(The End)

Page 8 of 8
 Summer 24
Tax Planning and Practices Page 1 of 6

Q.1 For this question, assume today’s date is 31 December 2024.

Terabyte (Pvt) Limited (TBPL) specializes in the production and supply of plastic and allied
products. On 1 July 2023, Megabyte Holding Limited (MBHL) acquired 80% shareholding
in TBPL. Additionally, MBHL holds 100% ownership of Gigabyte (Pvt) Limited (GBPL) for
many years. The following information has been extracted from TBPL’s records for the year
ended 30 June 2024:

Rs. in million
Sales 275
Cost of sales (205)
Gross profit 70
Administrative and selling expenses (47)
Financial charges (15)
Other income 10
Profit before taxation 18

Additional information:
(i) Sales include:
 a sum of Rs. 20.9 million received (net of withholding tax) from the sale of plastic
chairs, water bottles and food containers to large departmental stores in Karachi,
Lahore and Islamabad.
 5,000 plastic tables sold to GBPL at Rs. 3,000 each, without any warranty, for
onward sale to its dealers in Lahore. Normally, TBPL sells similar tables to its
dealers at Rs. 4,000 each, including a one-year warranty. The warranty alone is
valued at Rs. 400 per table.
(ii) Cost of sales include Rs. 30 million and Rs. 20 million on account of contributions to
an approved gratuity fund and a recognised provident fund respectively.
(iii) Administrative and selling expenses include:
 a commission of Rs. 0.5 million paid to Bari Associates for supplying tubes, listed
in the Third Schedule of the Sales Tax Act, 1990, worth Rs. 15 million to bicycle
dealers in Multan. The name of Bari Associates is not appearing in the active
taxpayer list.
 accounting depreciation of Rs. 13 million.

(iv) Financial charges include a payment of Rs. 4 million made to a commodity exchange
dealer to settle a transaction undertaken as a hedge against fluctuations in the prices of
one of the raw materials used by TBPL.
(v) Other income includes a loss of Rs. 1.2 million incurred from the sale of a passenger
transport vehicle used to commute managerial staff to and from the factory. The
vehicle, acquired for Rs. 11 million during the year ended 30 June 2022, was sold to
one of TBPL’s staff members for Rs. 6.75 million, reflecting a 25% discount from the
market value.

Other information: (not included above)

(i) Total tax depreciation is Rs. 16 million.
(ii) TBPL’s brought forward business losses from tax years 2022 and 2023 amount to
Rs. 9.5 million and Rs. 5.2 million, respectively. Additionally, unabsorbed tax
depreciation for the tax year 2023 totals Rs. 17.2 million. TBPL has also filed an appeal
against the Appellate Tribunal’s order decision concerning the assessment of its income
from business for the tax year 2023. The appeal is currently pending in the High Court.
(iii) On 30 June 2024, MBHL surrendered its assessed losses totalling Rs. 18.5 million to
TBPL. These losses consist of brought forward business loss of Rs. 5.5 million for tax
year 2023, business loss of Rs. 8.5 million for tax year 2024, and capital loss of
Rs. 4.5 million for tax year 2024.
 Tax Planning and Practices Page 2 of 6

Required:
Under the provisions of the Income Tax Ordinance, 2001 and the Rules made thereunder,
compute under the correct head of income, the total income, taxable income and tax liability
of TBPL for the tax year 2024. (17)
Notes:  Ignore WWF, WPPF, minimum tax u/s 113, alternative corporate tax and default
surcharge, if any.
 Show all relevant exemptions, exclusions and disallowances.
 All figures should be rounded to two decimal places.

Q.2 Consider each of the following independent situations:

(i) Faraz is a resident individual who owns an apartment in Sri Lanka. His neighbour,
Iqbal moved to Sri Lanka with his family to settle there at the beginning of the year,
and Faraz rented his apartment to him. During the year, he received rent amounting to
Rs. 2 million from Iqbal’s bank account in Pakistan. (04)

(ii) Aslam Khan is a Pakistani citizen who has been working for a multinational group,
A&Z, in its foreign office for many years. A&Z does not have any legal and business
presence in Pakistan.

Due to personal commitment in Pakistan, Aslam was allowed by his employer to work
from home in Pakistan from 1 January 2024 to 30 April 2024. He stayed in Pakistan for
these four months only and departed from Pakistan on 1 May 2024. Salary of Aslam
during his stay in Pakistan was regularly credited to his foreign bank account. (04)

(iii) Qalandar Limited (QL) paid a profit on debt equivalent to Rs. 6 million to a bank in
the UAE in connection with a short-term loan obtained to meet the operational funding
requirements of its branch in the UAE. (03)

Required:
In the light of the provisions of the Income Tax Ordinance, 2001 and the Rules made
thereunder, discuss the geographical source of income and the related tax consequences for
each situation. Also, discuss the implications of withholding tax for the payers in each
situation.

Q.3 In March 2024, the Officer Inland Revenue initiated amendment proceedings against Delta
Foods (Private) Limited (DFL) for the tax year 2022. In April 2024, DFL submitted all
required details and was granted an opportunity for a hearing.

Nadeem at DFL is responsible for checking the IRIS portal for notices issued by the Federal
Board of Revenue (FBR). Due to his illness, he was unable to attend office during the entire
month of May 2024. Upon resuming office on 3 June 2024, he checked the IRIS portal and
found an assessment order along with a demand notice of Rs. 15 million. The order and
demand notice had been passed and uploaded on the IRIS portal on 2 May 2024. Nadeem
confirmed with DFL’s dispatch department that the order had not been physically served on
DFL. Furthermore, Nadeem did not receive any email correspondence from the FBR
regarding the order on the email address registered with the income tax authorities.

Required:
Under the provisions of the Income Tax Ordinance, 2001 and the Rules made thereunder,
advise on the validity of the order served to DFL, and the course of action available to DFL
if it does not agree with the passed order. (07)
 Tax Planning and Practices Page 3 of 6

Q.4 For this question, assume today’s date is 31 December 2024.

Silai Limited (SL) is an unlisted public company engaged in the business of manufacturing,
supply, import and export of sewing machines.

SL’s tax manager is currently preparing the tax return for the tax year 2024 and has compiled
the following data, along with accompanying notes, for the year ended 30 June 2024, for your
review:

Income from business: Note Rs. in million

Profit before tax (i), (ii) 185.0
Add/(less): Inadmissible expenses / (income)
Salaries paid in cash (included in the cost of sales) (iii) 15.0
Share of income from AOP (iv) 12.0
Cash dividend – FTR income (ii) (4.0)
Tax depreciation exceeding accounting depreciation (3.0)
A 205.0
Income from other sources:
Cash dividend – FTR B (ii) 4.0
Total / taxable income for the year (A+B) 209.0

Computation of tax liability:

Tax on taxable income – NTR [209 @ 29%] (a) 60.6

Minimum tax u/s 113 [500 × 1.25%] 6.3

Minimum tax u/s 148 (imported sewing machines) 4.7
Total of minimum tax (b) 11.0

Alternative corporate tax [209 × 17%] (c) 35.5

The tax charged would be higher of (a), (b) or (c) above 60.6
Tax on dividend – FTR @ 15% 0.6
Gross tax payable 61.2

Notes to the computation:

(i) The breakup of SL’s sales is as under:
 Exports of locally manufactured specialized sewing machines amounting to
Rs. 200 million to Sri Lanka. A tax of 1% was deducted by the authorised foreign
exchange dealer from export proceeds.
 Local sales of manufactured household sewing machines amounting to
Rs. 220 million.
 Local sales of imported household sewing machines amounting to Rs. 80 million.
These machines, imported from Germany for Rs. 60 million, are included in the
cost of sales. Additionally, an advance tax of Rs. 4.7 million was paid under section
148 on the import value of Rs. 85 million. This advance tax was accounted for as
an operating expense.
(ii) Other income comprised:
 a net profit of Rs. 30 million from an associate, Qaim Limited (QL), an agriculture
enterprise. SL records its earnings from associate using the equity method of
accounting. During the year, SL received a cash dividend of Rs. 4 million from QL.
No tax was withheld at the time of payment by QL.
 a loss of Rs. 2.5 million sustained by SL due to an unfavourable change in market
conditions on a speculative derivative contract entered into to capitalize on
potential price movements related to its export/import contracts.
 Tax Planning and Practices Page 4 of 6

(iii) The cash payment of salaries comprised Rs. 5 million paid to daily wage workers, each
earning Rs. 900 per day, and Rs. 10 million paid to contractual employees, each
receiving a monthly salary of Rs. 33,000.
(iv) On 30 June 2024, SL received Rs. 12 million as its share of income from an AOP, which
had a gross turnover of Rs. 108 million. SL holds a 25% interest in the AOP. The share
from AOP is not included in the profit before tax figure of Rs. 185 million.

Required:
Under the provisions of the Income Tax Ordinance, 2001 and the Rules made thereunder,
comment on each element of the above computation of taxable income, including
adjustments, along with the accompanying notes and the tax liability computed by the tax
manager for the tax year 2024. Provide suggestions where necessary. (25)
Notes:  Revised computation is not required.
 Ignore WWF, WPPF, default surcharge and super tax, if any.

Q.5 (a) Bin Tariq is operating a retail store in an air-conditioned shopping mall in Islamabad.
Due to unavoidable circumstances, Bin Tariq has not so far integrated his retail outlet
with the FBR’s computerized system for real-time reporting of its sales.

Required:
Under the provisions of the Sales Tax Act, 1990, briefly discuss the consequences which
Bin Tariq may face under the above situation. (04)

(b) Prism Cement Limited (PCL), with its registered office in Lahore, is involved in the
manufacturing and supply of cement, which is sold in local market and exported to
various countries. The following are the details of its activities during the month of
May 2024:
(i) Sold 100,000 bags of 50 kg each to a distributor in Multan at a rate of
Rs. 1,250 per bag. 80% of the payment was received on 21 May 2024, and the
remaining 20% was received on 5 June 2024.
(ii) Exported 50,000 bags of 50 kg each to Tanzania at a rate of Rs. 1,200 per bag.
(iii) Received 50% advance from a company in Karachi for the supply of 10,000 bags
of 50 kg each at a rate of Rs. 1,300 per bag.
(iv) Sold 40,000 bags of 50 kg each to an unregistered dealer in Rawalpindi at a rate
of Rs. 1,350 per bag.
(v) Paid marine insurance charges of Rs. 8 million for the exports to Tanzania.
(vi) Sold 25,000 bags of 50 kg each at the rate of Rs. 1,100 per bag to a company in
the Export Processing Zone for construction of factory building.

Additional information:
 In April 2024, PCL did not collect federal excise duty (FED) on the sale of
30,000 bags of 50 kg each, to HN Traders. During the month of May 2024, the
accountant has acknowledged his oversight on this matter.
 The retail price of a 50 kg bag is Rs. 1,400 in the market.
 PCL submits its FED return along with due payment on due date every month.

All the above figures are exclusive of FED, wherever applicable. Payments were
made/received through banking channels unless mentioned otherwise.

Required:
Under the provisions of the Federal Excise Act, 2005 and the Rules made thereunder,
compute the federal excise duty payable by or refundable to PCL for the month of
May 2024. (Show all relevant exemptions, exclusions and disallowances) (08)
 Tax Planning and Practices Page 5 of 6

Q.6 Kagaz Limited (KL) is engaged in the business of manufacturing and supplying paper and
allied products. KL is registered with the sales tax authorities as an importer, manufacturer
and distributor. The following information has been extracted from KL’s records for the
month of May 2024:

Rs. in million
Purchases
From registered suppliers 30
From unregistered suppliers 5
Imports 3
Supplies
To registered persons 28
To unregistered persons 4

Additional information:
(i) Purchases from registered suppliers comprise the following:
 Rs. 25.5 million paid for the purchase of raw materials used in the manufacture of
paper and various allied products.
 Rs. 1.5 million paid for the semi-finished wood pulp acquired for the production of
newsprint.
 Rs. 0.8 million paid for sanitary fittings. These fittings were purchased for the
renovation of bathrooms in KL’s waste paper recycling division.
 Rs. 1 million paid to B2B Associates, an Islamabad-based software consultant
registered with the Islamabad sales tax authority, for providing consultancy
regarding the linking of KL’s offices across Pakistan.
 Rs. 1.2 million paid for the tyres, lift cylinders and drive axles for the two fork lifters
used in KL’s board building division.

(ii) Purchases from unregistered suppliers comprise cane molasses used as an additive to
counteract deterioration in paper strength. These supplies were acquired from dealers
in Sanghar.

(iii) Imports comprise the following:

 Rs. 1.4 million against a testing equipment, which does not fall under chapters 84
and 85 of the First Schedule to the Customs Act, 1969, imported from Italy for
in-house business use in KL’s printing division.
 Rs. 1.6 million paid for 2,000 pieces of 4-ply toilet paper rolls imported from China.
The retail price of the toilet paper rolls is Rs. 1,150 per piece in the market.

(iv) Supplies to registered persons include:

 Rs. 2 million received from Nayab Brothers as franchise fee for operating a retail
store in Hyderabad for KL’s products.
 Rs. 3.4 million received for supplying virgin papers to a cup manufacturing unit
located in Karachi’s Export Processing Zone.
 Rs. 1.8 million received from an insurance company for the destruction of uncoated
kraft papers due to a fire in KL’s warehouse. These were purchased for
Rs. 2.4 million from a commercial importer in March 2024.

(v) Supplies to unregistered persons include Rs. 2.1 million for the supply of printer paper
to a cottage industry in Lahore. The rest of the supplies to unregistered persons,
consisting of paper bags and cups, were made to the end consumers in Lahore and
Multan.

Further information (not included above):

(i) KL purchased knives and cutting blades for paper board worth Rs. 1.3 million from
Auzar (Pvt) Limited (APL), a manufacturer located in the residential area of Karachi.
APL is using a commercial electricity meter and has an annual turnover of
Rs. 7.5 million.
 Tax Planning and Practices Page 6 of 6

(ii) In March 2024, KL made a sale of 20,000 rolls of its one of taxable products worth
Rs. 12 million to an unregistered dealer. Further tax, equivalent to 4% of the value of
supplies, was also collected. In May 2024, the tax manager noted that these goods fall
under the scope of the Third Schedule. At the time of the sale, the retail price for these
goods was Rs. 800 per roll.
(iii) KL received a notice from the Officer Inland Revenue, requesting a sales tax payment
on the distribution of tissue paper boxes of Rs. 0.5 million as promotional giveaways to
new departmental stores in January 2024. The tax department, however, acknowledged
KL’s explanation that the lack of sales tax payment resulted from an inadvertent error
on the company’s part.

All the payments were made through cross cheque / pay order. All the above figures are
exclusive of sales tax, unless specified otherwise.

Required:
In light of the provisions of the Sales Tax Act, 1990 and the Rules made thereunder, compute
the amount of sales tax payable by or refundable to KL and the amount of input tax to be
carried forward, if any, for the tax period May 2024. Also, compute withholding tax, wherever
applicable. (Show all relevant exemptions, exclusions and disallowances) (21)

Q.7 Saif Khan is the tax partner at BNS and Company, Chartered Accountants. BNS specializes
in providing taxation services to the banking industry and has many banking clients. Ahmed
Ali, a friend of Saif and the tax director at JPL Bank Limited, recently had a phone call with
Saif. The excerpt of their phone call is as follows:

(i) In the last week of May 2024, JPL received a notice under section 176 of the Income
Tax Ordinance, 2001 to provide information related to all payments made by JPL to
card network companies and payment gateways during the tax year 2023.
(ii) JPL is considering appointing BNS as its tax advisor.
(iii) Ahmed asked if Saif’s other banking clients had received similar notices and requested
that Saif share the responses BNS had submitted. Ahmed assured Saif that the
information would remain confidential.

Required:
In the light of ICAP’s Code of Ethics for Chartered Accountants, discuss the potential
threat(s) and the fundamental principles of code of ethics that may be breached by Saif in the
above situation. Also, suggest corresponding safeguard(s) available to Saif to mitigate the
threat(s). (07)

(THE END)
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

Ans.1 Terabyte (Pvt) Limited

Computation of Taxable Income and Income Tax Liability
For the tax year 2024
Income from Business: Rs. in million
Profit before tax 18.00
Add/(Less): Inadmissible expenses / (income)
Withholding tax [22(20.9 ÷ 0.95) × 5%] 1.10
Sale of tables to GBPL – adjustment for arms-length price [5,000×600(W-1)] 3.00
Excess of 50% of contribution to an approved gratuity fund (30×50%) 15.00
Contribution to recognised provident fund (allowable) -
Commission paid to Bari Associates - [0.5–0.03(15×0.2%)] 0.47
Accounting depreciation 13.00
Amount paid to commodity exchange dealer - allowable expense -
Loss on sale of passenger vehicle recorded in books of accounts 1.20
Tax loss on sale of passenger vehicle (W-2) (0.82)
Total business income before depreciation 50.95
Less: Brought forward assessed business loss - Tax year 2022 (9.50)
Brought forward unassessed business loss from tax year 2023
(As TBPL is under appeal related to its business income for the year 2023 so it
cannot be set off for this year.) -
41.45
Less: Tax depreciation – current year (16.00)
25.45
Unabsorbed depreciation - Tax year 2023
(Depreciation is also the part of business income for which TBPL is under appeal so it
can also not be set off.) -
13.49
Less: Group relief scheme:
Assessed business loss of MBHL (8.5 × 80%) (6.8)
Total business income for the year 18.65

Tax liability @ 29% 5.41

W-1: Computation of arm’s length price

Amount in Rs.
Sale price charged to dealers of TBPL 4,000
Less: Cost of warranty included in the price (400)
Arm length price 3,600
Less: Price paid by GBPL 3,000
Difference in price per unit 600

W-2: Computation of tax gain/(loss) on sale of passenger transport vehicle

Rs. in million
Restricted cost of vehicle for tax purposes 7.50
Restricted sale proceeds in proportion of restricted cost [0.68(7.5 ÷ 11) × 6.75] 4.60
Less: Tax WDV on restricted cost [Rs. 7.5 × 0.852] (5.42)
Tax loss on sale of passenger transport vehicle (0.82)

Page 1 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

Ans.2 (i) The rental income received by Faraz is for the lease of immovable property outside
Pakistan. Therefore, this income will be considered foreign source income of Faraz
regardless of having received it in Pakistani bank account.

The rental income received by Faraz will be subject to tax under the head ‘income
from property’. He shall be allowed repair allowance equal to one fifth of the rent
amount.

Further, since he is a resident, he shall be allowed a foreign tax credit of an amount

equal to the lessor of:
 the foreign income tax paid; or
 the Pakistan tax payable in respect of its rental income.

Since Iqbal, Faraz's neighbour, is a non-resident, he will not be a withholding agent,

and there will not be any withholding tax implication.

(ii) Aslam is a non-resident Pakistani for tax year 2024 because of following:
 He is present in Pakistan for four months only which are less than 183 days; and
 He is present in UK for more than one hundred and eighty-two days during the
tax year 2024.

Despite being a non-resident, Aslam exercised his employment from Pakistan during
his stay there. This would be considered his Pakistan source income although he had
received his salary in his UK bank account for these months. Therefore, he will be
liable to pay tax on his Pakistan source of income earned during the tax year 2024.
No expense is allowed under the head ‘Salary’.

Since A&Z UK does not have any legal or business presence in Pakistan, it will not
be treated as a withholding tax agent for Pakistan tax purpose. Accordingly, it will
not be required to withhold any Pakistan taxes from salary payments to Aslam.

The foreign tax credit will not be applicable to Aslam for the tax year 2024 because
he is a non-resident. The credit under section 103 is only available for foreign source
income, not for Pakistan source income.

(iii) Profit on debt:

Profit on debt received by bank in UAE is its foreign source income as the interest
was related to loan obtained for operations carried out outside Pakistan.

QL is entitled to claim the profit on debt of Rs. 6 million as deductible expense against
its income for the UAE branch.

UAE bank is non-resident and foreign source income of non-resident is not

chargeable to tax in Pakistan. Therefore, QL was right not to deduct the withholding
tax at the time of payment to bank.

Page 2 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

A.3 (i) Validity of the servicing an order to DFL

Any notice, order or requisition required to be served shall be treated as properly
served on the person if –

 personally served on the representative of the person;

 sent by registered post or courier service to the person’s registered office or
address for service of notices under this Ordinance in Pakistan, or where the
person does not have such office or address, the notice is sent by registered post
to any office or place of business of the person in Pakistan;
 served on the person in the manner prescribed for service of a summons under
the Code of Civil Procedure, 1908 (V of 1908); or
 served on the individual electronically in the prescribed manner.

Since the order and demand notices were served through IRIS only, these are not to
be treated as properly served on DFL.

However, a document is considered sent to an electronic address through email, if

the sender receives confirmation from the server of the recipient that the message has
been received. Since Nadeem did not receive any email from FBR as to passing the
order, it can also be used as a reason in the condonation application filed with the
Commissioner Appeals.

(ii) Course of action available to DFL

 As per the provisions of the Income Tax Ordinance, 2001 a taxpayer is required
to file an appeal before the Commissioner Appeals, against an assessment order
within 30 days of service of the demand notice. Since the demand notice was
uploaded on IRIS portal on May 2, 2024, DFL was required to file an appeal
before the Commissioner Appeals by May 31, 2024
 Since Nadeem was only able to find order and demand notice on June 3, 2024,
the time period for filing of the appeal has already been passed.
 DFL can file an application in writing with the Commissioner Appeals
requesting to condone the delay and accept the appeal after expiry of the
prescribed deadline.
 DFL has option to file an application for stay of tax demand before the
Commissioner Appeals, who may allow stay for a period of 30 days.
 In the absence of decision of the main appeal within 30 days, DFL may file an
application for extending stay for further 30 days.
 Further, DFL has also an option to pay 10% of tax demand, after filing of the
appeal before the Commissioner Appeals to obtain automatic stay till the
decision of the main appeal by the Commissioner Appeals.

Page 3 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

Ans.4 Comments on tax computation are as follows:

(i)  Sales in context of tax regimes:
In the given computation, all sales have been classified under NTR, which is
incorrect.
SL’s sales shall be subject to the following taxation regimes:
Description Tax Regime
Export sales of locally manufactured specialized sewing
machines of Rs. 200 million. *FTR
Local sales of manufactured household sewing machines of
Rs. 220 million. NTR
Local sales of imported household sewing machines of
Rs. 80 million. MTR
*except where SL has opted not to be subject to final taxation

 Apportionment of expenses:
After deducting Rs. 60 million from the cost of sales, which was spent on the
import of sewing machines from Germany, the remaining balance of the cost of
sales will be apportioned between the NTR and FTR regimes on some suitable
basis, while Rs. 60 million will be allocated directly to the MTR regime.
Similarly, tax of Rs. 4.7 million, collected at the import stage, is incorrectly
included in the operating expenses. So, this amount will be subtracted from the
operating expenses, and the balance of common operating expenses will be
apportioned among all three regimes: NTR, MTR and FTR.
The Rs. 4.7 million will be available as a credit when computing the net tax
liability of SL.
For the FTR regime of taxation, the following provisions shall also be applicable:
 It shall not be chargeable to tax under any head of income while computing
taxable income of SL.
 No deduction shall be allowed for any expenditure incurred in deriving the
income.
(ii) Other income:
 Net profit from associate:
Net profit of Rs. 30 million from an associate, recorded using equity method
of accounting, will be deducted from profit before tax amount.
Furthermore, any income received by a taxpayer from a corporate agricultural
enterprise, distributed as dividend out of its income from agriculture is exempt
from tax, and not a FTR income.
Therefore, the dividend of Rs. 4 million received by SL from QL, an
agricultural enterprise is correctly deducted from business income.
Being an exempt income, it will remain part of SL’s total income. However,
it will not form part of SL’s taxable income.
As such the withholding tax was correctly not deducted by QL from the
payment of dividend to SL.

 Speculation business loss:

The loss of Rs. 2.5 million suffered by SL in the given circumstances is a loss from
speculation business.

Page 4 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

This speculation loss of Rs. 2.5 million can only be set off with other speculation
gain/income. As there is no other speculation gain during the tax year 2024, it
shall be carried forward to following six tax years for set off against the income of
speculation business of that respective tax year.

(iii) Cash salaries:

Any salary paid or payable exceeding Rs. 32,000 per month to an individual other
than by a crossed cheque or direct transfer of funds to the employee’s bank account
or through digital means is an inadmissible deduction.
Therefore, the entire amount of Rs. 15 million is incorrectly treated as inadmissible.
In fact, only the amount of Rs. 10 million paid to contractual employees will be
treated as inadmissible as it exceeds the basic threshold of Rs. 32,000 per month.
(iv) Share of profit from AOP:
The share of profit of Rs. 12 million is correctly added to the “Income from business”.

(v) Depreciation:
Excess of tax depreciation over accounting depreciation is correctly deducted from
SL’s business income.
(vi) Tax computation:
The entire income of Rs. 209 million is incorrectly treated as NTR income. After
assigning expenses to each regime, taxable income will be calculated separately for
each. Income subject to NTR and MTR will be taxed at 29% while export proceeds
are subject to tax at 1%.

(vii) Minimum tax:

The minimum tax is incorrectly computed based on the turnover of Rs. 500 million.
The turnover of Rs. 500 million will be adjusted by excluding the export sales of
Rs. 200 million, charged under FTR, and including SL’s share in AOP’s turnover,
which is Rs. 27 million (computed as Rs. 108 million × 25%). Therefore, the
minimum tax will be computed on the adjusted turnover of Rs. 327 million at the
rate of 1.25%.
(viii) Alternative corporate tax:
Alternative corporate tax (ACT) is incorrectly computed based on a taxable income
of Rs. 209 million. ACT will be assessed at 17% of the accounting income. To
determine accounting income, advance tax of Rs. 4.7 million collected at import
stage and income from AOP of Rs. 12 million will be included whereas income from
associate of Rs. 30 million, exempt dividend income of Rs. 4 million and net income
from export sales (under FTR) will be excluded from profit before tax of
Rs. 185 million.
The tax charged will be the higher of tax computed under NTR, minimum tax and ACT.

Page 5 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

Ans.5 (a) Consequences of non-integration of retail outlet for real time reporting:
Bin Tariq is operating a retail store in air conditioned shopping mall so he is classified as a
Tier-1 retailer. He may face the following consequences on non-integration of his retail outlet
with FBR’s computerized system:

(i) The adjustable input tax, for whole of the tax period or part thereof, during which Bin
Tariq has not integrated its system for real time reporting, shall be reduced by 60%.
(ii) The Board has the power through Sales Tax General Order to direct the gas and
electricity distribution companies for discontinuing the gas and electricity connections
of Bin Tariq until it is integrated with FBR’s system.
(iii) Bin Tariq may also be liable to pay the following penalties:
I. penalty of five hundred thousand rupees for first default;
II. penalty of one million rupees for second default after fifteen days of order for
first default;
III. penalty of two million rupees for third default after fifteen days of order for
second default;
IV. penalty of three million rupees for fourth default after fifteen days of order for
third default.

Notwithstanding above, the business premises of Bin Tariq shall be liable to be sealed
by an officer of Inland Revenue in the prescribed manner.

Provided that if Bin Tariq integrates his business with the Board’s Computerized
System before imposition of penalty for second default, penalty for first default shall
be waived by the Commissioner.

(b) Prism Cement Limited

Computation of Federal Excise Duty payable / refundable
For the month of May 2024
Duty Amount of
INPUT DUTY Value / Kg
Rate Duty (Rs.)
Marine Insurance Charges for Export 8,000,000 Exempt -

OUTPUT DUTY
Sales to a distributor in Multan 5,000,000 Rs. 2 per Kg 10,000,000
(100,000 × 50 kg)
Exports to Tanzania – Zero rated 2,500,000 0% -
(50,000 bags × 50 kg)
Advance from a company in Karachi 6,500,000 - -
(10,000×1,300×50%)
Sales to an unregistered dealer in 2,000,000 Rs. 2 per Kg 4,000,000
Rawalpindi (40,000 bags × 50 kg)
Sale to a company in Export Processing 1,250,000 kgs Rs. 2 per Kg 2,500,000
Zone for construction of factory (25,000 bags × 50 kg)
building.
Further duty @2% on supply of cement
to unregistered dealer – liable to be 56,000,000 2% *1
1,120,000
(40,000×1,400)
registered
Duty not collected on sale of cement in 1,500,000 Rs. 2 per Kg 3,000,000
April 2024 (30,000 bags × 50)
Default surcharge on duty not collected
and paid in April 2024 @12% pa.
360,000(3,000,000 × 12%) × (30 ÷ 365) 29,589
*2

Excise Duty Payable 20,649,589

*1
As per a plain reading of the law, a further duty of 2% may be applicable. However, in practice,
this duty is not being charged currently.
*2
In addition to default surcharge, many examinees correctly computed the penalty amount;
however, since this is not part of the syllabus, it was not included in the answer.
Page 6 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

Ans.6 Kagaz Limited (KL)

Computation of net sales tax liability
For the tax period May 2024
Taxable Amount of
Sales Tax
value Sales Tax
Rate
(Rs. in million) (Rs. in million)
Input Tax
Raw material from registered suppliers 25.5 18% 4.59
Semi-finished wood pulp for the production of newsprint 1.5 Inadmissible -
Sanitary fittings for the bathrooms 0.8 Inadmissible -
Consultancy fees to B2B 1.0 *5% 0.05
Tyres, lift cylinders and drive axels for the fork lifters 1.2 18% 0.22
Inadmissible/
Cane molasses from unregistered dealers 5.0 Not charged
-
Import of testing equipment for printing division 1.4 18% 0.25
Value addition [Procedures and Conditions:- 2(x) of 12th Schedule] 3% 0.04
(As this equipment doesn’t fall in Chapters 84 and 85 of Customs Act,
1969 Value addition is chargeable)
Import of toilet paper rolls from China 2.3 25% 0.58
(2,000×1,150)
No value addition being third schedule item -
Input tax on goods destroyed by fire (2.4) 18% (0.43)
Knives and cutting blades from APL (cottage industries) 1.3 exempt -
(-) un-adjustable input [4.59 × 3.4 ÷(20.8+3.4+2.1+1.9)] (0.55)
Total input tax for the month 4.75

Output Tax
Inadmissible/
Sindh sales tax - franchise fee 2.0 Not Applicable
-
Supply of virgin paper to a unit in EPZ 3.4 0% -
Claim against fire 1.8 - -
Taxable supplies to registered persons remaining 20.8 18% 3.74
(28–2–3.4–1.8)
Supply of printer paper to a cottage industry - unregistered 2.1 18% 0.38
Supply of goods to end consumers in Lahore and Multan 1.9 18% 0.34
(4–2.1)
Third Schedule products to unregistered dealers 4.0 18% 0.72
(16–12)
Promotional give-away 0.5 18/118 0.08
Total output tax for the month 5.26
Admissible credit [lower of 4.24(4.75–0.22–0.25–0.04) or 90% of 5.26 = 4.73] (4.24)
1.02
Input tax on fixed assets / capital goods (0.22+0.25+0.04) (0.51)
0.51
Sales tax withheld from cottage industries - Rules not applicable - exempt supplies -
Sales tax withheld from unregistered dealers - cane molasses - liable to be registered (5×18/118) 0.76
Further tax on supplies to cottage industry - Rules not applicable - not liable to be registered -
Further tax on supplies to un-registered person in March 2024 [further tax cannot be reversed] -
Further tax on supplies of goods to unregistered persons - end consumers -
Sales tax payable 1.27
Sales tax c/f -
Sales tax refundable on zero rated supplies 0.55
*15% is also considered correct.

Page 7 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2024

Ans.7 Under given scenario, Saif may face self-interest and familiarity threats which may
jeopardize compliance with the fundamental principles of integrity, objectivity, and
confidentiality. The discussion is provided below:

Self-interest threat
 Saif might be influenced by the potential of JPL Bank Limited becoming a client,
which could impair his objectivity and professional judgment.

Familiarity threat
 The close relationship might lead Saif to prioritize Ahmed's requests over
professional and ethical obligations, such as maintaining client confidentiality and
integrity.

Integrity
 Saif must be straightforward and honest in all professional and business relationships.
Sharing confidential information from other clients would compromise his integrity.

Objectivity
 Saif must not allow bias, conflict of interest, or undue influence to override
professional or business judgments. The promise of a new client (JPL) should not
influence his professional behavior or decisions.

Confidentiality
 Saif must respect the confidentiality of information acquired as a result of professional
and business relationships and not disclose any such information to third parties
without proper authority unless there is a legal or professional right or duty to
disclose.

Safeguards
In order to reduce the threat to an acceptable level, one or more of the following safeguards
should be applied:

 Saif should strictly follow BNS's policies and procedures designed to prevent
familiarity threats. This includes adhering to guidelines on client confidentiality,
conflict of interest, and ethical conduct.
 Saif should be transparent with JPL Bank Limited about his inability to share
confidential information from other clients. This approach not only upholds ethical
standards but also sets the tone for a trustworthy relationship with JPL from the start.
 Saif should explain to Ahmed that he cannot share information related to other clients
due to confidentiality obligations. He should emphasize the importance of
maintaining professional ethics and the trust of all clients. If unsure, Saif should
consult with a legal advisor or an ethics officer within BNS to get guidance on how
to handle the situation without breaching any ethical principles.
 Saif should maintain a healthy level of professional skepticism, ensuring that his
decisions and advice are based on objective analysis and not influenced by personal
relationships.

(The End)

Page 8 of 8
 Winter 23
Tax Planning and Practices Page 1 of 6

Q.1 Haq Halal Limited (HHL), an unlisted public company, is engaged in the manufacturing of
various information technology (IT) products and provision of IT services. It is registered with
and duly certified by the Pakistan Software Export Board.

The following information has been extracted from HHL’s records for the year ended
30 September 2023:
Rs. in million
Sales (net of sales tax) 260.0
Cost of sales (182.0)
Gross profit 78.0
Administrative and selling expenses (44.6)
Financial charges (10.0)
Other income 5.0
Profit before taxation 28.4

Additional information:
(i) Sales are comprised of:
 a sum of Rs. 12.6 million (net of discount) received for the supply of IT products
to charitable schools, run by an approved non-profit organization in the province
of Balochistan. A special discount of 30% was granted to the schools on their
purchases.
 an amount equivalent to Rs. 15 million invoiced for the provision of IT-enabled
services to Kemal Associates located in Turkey. The entire amount was realized
during the year after the deduction of applicable withholding tax.
 domestic sales of various IT products amounting to Rs. 232.4 million.
(ii) Cost of sales include depreciation of Rs. 11 million.
(iii) Other income is comprised of:
 a prize worth Rs. 1.2 million (net of withholding tax of Rs. 0.3 million) provided
by one of HHL's suppliers as part of a sales promotion campaign.
 gain of Rs. 1.0 million from the sale of shares in Micro Limited (ML) and
Chip Limited (CL).
HHL had 150,000 shares in a listed company, Micro Limited. These shares were
acquired on 30 April 2021 for Rs. 52 per share. On 1 June 2023, consequent to
SECP’s order, Micro Limited de-merged and split into two listed companies
i.e. Micro Limited (ML) and Chip Limited (CL). Consequently, HHL’s holding
in ML was reduced to 90,000 shares in its CDC account and 110,000 new shares
in CL were recognized in its account. On the date of the de-merger, the market
values of each share of ML and CL were Rs. 25 and Rs. 55 respectively.
On 30 September 2023, HHL sold 30,000 shares in ML for Rs. 35 each and
70,000 shares in CL for Rs. 65 each.
 the sale proceeds of Rs. 2.8 million generated from the sale of 85,000 shares in a
listed company, Karobari Limited at a negotiated price. HHL had purchased these
shares in June 2020 for Rs. 25 per share. On 15 August 2023 , HHL sold these
shares to an institutional investor through the over-the-counter (OTC) market. The
market value of these shares at the time of sale was Rs. 35 each.

Other information: (not included above)

(i) On 30 September 2023, HHL received a share of Rs. 6.0 million in income from the
AOP. The AOP's total gross turnover amounted to Rs. 125 million, and HHL holds a
32% interest in the AOP.
(ii) Tax depreciation amounts to Rs. 30.4 million.
(iii) HHL has not submitted the withholding tax statement for the tax year 2024 with the
FBR.
 Tax Planning and Practices Page 2 of 6

Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute under the correct head of income, the total income, taxable income and tax liability
of HHL for the tax year 2024. (22)
Notes:  Ignore WWF, WPPF and default surcharge, if any.
 Show all relevant exemptions, exclusions and disallowances.

Q.2 Augment (Private) Limited (APL), a manufacturing company, has investments in the
following companies:

Name of investee Investee’s business % of shareholdings Date of acquisition

Boundary (Private) Manufacturing
90% 1 October 2021
Limited (BPL) company
Compound (Private)
Trading company 80% 1 October 2022
Limited (CPL)

The following information has been extracted from the tax records of APL and its investee
companies for the year ended 30 September 2023:

APL BPL CPL

Income from business -------- Rs. in million --------
Taxable business income 240 (150) 50
Less: Brought forward losses related to tax year 2022 - (280) -
240 (430) 50

Capital gains
Gain/(loss) on sale of shares of a listed company 120 (200) -

Income from other sources

Profit on debt 60 80 -

Required:
In accordance with the provisions of the Income Tax Ordinance, 2001 and Rules made
thereunder, explain the amount of abovementioned losses of BPL that can be claimed by any
of the group companies in the tax year 2024. (06)
Notes:  Show all necessary computations.
 Discussion on associated conditions to be met in future is not required .

Q.3 Consider each of the following independent situations in the light of Income Tax Ordinance,
2001 and Rules made thereunder.
(a) Apna Ghar Limited (AGL), a non-banking finance company, is engaged in the housing
finance. AGL has been operating in major cities across Pakistan since 1 July 2020.
Below are the details of consumer loans and related income since its incorporation,
extracted from its financial statements:

Tax year
2021 2022 2023
------- Rs. in million ------
Interest income from consumer loans 42.00 144.00 220.00
Receivables - consumer loans 280.00 540.00 680.00
Bad debts expense in respect of doubtful
receivables - consumer loans 1.05 4.70 6.10

Required:
Calculate the allowable bad debt expense for the tax years 2021, 2022, and 2023, along
with the carried forward amounts, if any, in these tax years. (04)
 Tax Planning and Practices Page 3 of 6

(b) Murad has been a shareholder in Joyland (Pvt) Limited (JPL) since its incorporation.
JPL specializes in producing plastic toys. On 1 November 2023, due to severe financial
distress, JPL was forced into liquidation, with an unpaid tax liability of Rs. 15 million
for the tax year 2023. Subsequently, the Commissioner of Income Tax issued a notice
to Murad, requiring him to settle JPL’s outstanding tax dues for the tax year 2023.

Required:
Evaluate the validity of the Income Tax Commissioner’s notice to Murad and examine
Murad’s position in this scenario. (04)

Q.4 Glow Cosmetic (Pakistan) Limited (GCPL), a listed company, is engaged in the
manufacturing and sale of cosmetic products. It operates as a subsidiary of a UK based
company.
GCPL’s tax manager is in the process of finalizing the tax return for the tax year 2024 and has
presented the following information along with supporting notes for the year ended
30 September 2023 for management’s approval:
Income from business: Note Rs. in million
Profit before taxation (i) 59.00
Add/(Less): Inadmissible expenses/(income)
Dividend income (being FTR income) (ii) (10.00)
Lease rental income of new unit (iii) (18.00)
Brokerage fees (iii) 0.82
Loss on discontinuance of business segment (iv) 15.00
Accounting depreciation (v) 34.90
Tax depreciation (v) (40.76)
40.96
Income from property:
Gross lease rentals (iii) 18.00
Less: 1/5th for repair (3.60)
Brokerage fees (restricted to 4% of the gross rent) (0.72)
13.68
Income from other sources:
Expenses reimbursed by the parent company (vi) 3.00
Taxable income for the year 57.64

Notes to the computation:

(i) Profit before taxation includes insurance compensation of Rs. 8.4 million received from
Loyal Insurance Limited. The compensation was received against the loss of one of
GCPL’s warehouses in Sukkur. The warehouse was completely gutted down due to a
fire ignited by a short circuit. This warehouse was constructed in July 2021 at a cost of
Rs. 12 million. At the time of the fire, the warehouse had fair market value of
Rs. 11.5 million whereas its accounting and tax written down values were
Rs. 9.6 million and Rs. 8.1 million, respectively.
(ii) During the year, GCPL received dividend income equivalent to Rs. 8.5 million from a
UAE based entity, after the deduction of tax at source @ 15% in the UAE.
On 1 October 2022, GCPL made an investment of Rs. 63 million by acquiring a
42% shareholding in recently incorporated unlisted trading company, Shine LLC (SL),
based in UAE.
During the year ended 30 September 2023, SL earned solely income from property in
the UAE, amounting to AED 500,000, on which SL is not liable to pay income tax in
UAE.
GCPL carries this investment in SL at cost in its books of accounts.
Rate of PKR / AED on 30 September 2023 was Rs. 80.
 Tax Planning and Practices Page 4 of 6

(iii) In November 2022, GCPL completed the construction of a factory building, at a cost of
Rs. 98 million to enhance the manufacturing of skin care products. Further, GCPL
purchased and installed used plant and machinery within the new facility, for
Rs. 38 million. The machinery was in the same condition as when it was originally
imported from Germany by a commercial importer. No withholding tax was deducted
by GCPL when making payment to the importer.
Due to some unavoidable reasons, the new factory did not commence manufacturing
as planned. On 1 January 2023, GCPL leased the factory to Jalal Associates at a
monthly rent of Rs. 2 million and paid brokerage fees of Rs. 0.820 million to a real estate
broker for letting out the new unit on rent.
(iv) During the year, GCPL sustained a loss of Rs. 15 million on its business segment
relating to anti-aging products, which was discontinued in July 2022.
(v) Both accounting and tax depreciation are inclusive of depreciation charged on the newly
constructed factory building and used plant and machinery installed therein.
(vi) It represents 70% of the total expenditure incurred by GCPL in the tax year 2023 in
relation to the export of skin care products to its parent company.

Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
comment on each element of the above computation of the taxable income, including
adjustments, along with the accompanying notes prepared by the tax manager for the tax year
2024. Give suggestion(s), wherever necessary. (24)
Notes:  Revised computation of taxable income is not required.
 Ignore the discussion on tax liability.
 Ignore WWF, WPPF, Minimum tax u/s 113 and Alternative Corporate Tax, if any.
 Ignore tax treaty.

Q.5 (a) On 1 January 2023, Ahmed issued purchase order to Care Enterprises (CE), a registered
person, for purchase of CCTV cameras worth Rs. 300,000 (exclusive of sales tax) for his
shop. He made an advance payment of 20% against an advance payment receipt on the
same date. The remaining 80% was paid on 25 February 2023, when the cameras were
delivered to Ahmed. On 5 March 2023, CE’s staff installed the cameras in Ahmed’s
shop.

On 14 February 2023, the government announced an increase in the rate of sales tax
from 17% to 18%.

Required:
Explain the amount of sales tax charged by CE to Ahmed. (Show all necessary
computations) (04)

(b) Bari (Pvt) Limited (BPL) is a registered business involved in the import, export and
supply of garments. On 1 July 2021, BPL imported 1,000 pieces of ready-made garments
from Taiwan for equivalent to Rs. 2 million and paid applicable sales tax thereon.
Originally intended for sale in Punjab, these garments remained unsold due to
unforeseen circumstances that led to a business shutdown.
In August 2023, BPL resumed its operations. On 20 November 2023, BPL exported
these garments to a customer in Morocco for equivalent to Rs. 3 million.

Required:
Under the provisions of the Sales Tax Act, 1990, discuss the sales tax implications in
the above scenario. (Show all necessary computations) (05)
 Tax Planning and Practices Page 5 of 6

Q.6 Zang Electronics (ZE), a subsidiary of a Chinese company Ming Electronics (ME), is engaged
in the business of manufacturing and supply of household electronic appliances with its
principal place of business in Lahore. It is registered as an importer, manufacturer, and
distributor with the Sales Tax Authorities. The following information has been extracted from
ZE’s records for the month of November 2023:

Rs. in million
Purchases
From registered suppliers 42.0
From unregistered suppliers 1.2
Imports 185.0
Supplies
To registered suppliers 104.5
To unregistered suppliers 64.0

Additional information:
(i) Purchases from registered suppliers comprised of the following:
 Tempered glass worth Rs. 15 million from a local manufacturer, Shining Glass
(SG). On 2 December 2023, SG was blacklisted by the sales tax authorities due to
the issuance of fake invoices.
 Packaging material worth Rs. 24 million from a local manufacturer.
 Furniture worth Rs. 3 million for use in ZE’s head office.
(ii) Purchases from unregistered persons comprised of utility and food items purchased for
ZE’s head office.
(iii) Imports comprised of the following:
 Imports of deep freezers, touch screens to be installed in smart fridges and ovens,
and solar panels. The details are as follows:
Deep Touch Solar
Total
freezers screens panels
-------- Rs. in million --------
Costs 50.5 26.0 20.5 97.0
Value assessed by the custom authorities 51.0 25.0 21.0 97.0
Retail price 62.0 30.0 25.0 117.0

 Plastic at a cost of Rs. 88 million from Ming Trading (MT), another Chinese
subsidiary of ME. MT operates as the central purchasing unit for ME and all its
subsidiaries, enabling it to secure 12% discount on market value due to its large
purchasing volume. MT supplies these plastic to ME’s subsidiaries without adding
any extra charges. Surplus plastic that exceeds the requirement of these
subsidiaries is then sold at market value.
The value of imports is inclusive of custom and federal excise duties but exclusive of
sales tax.
(iv) Supplies to registered persons comprised of the following:
 Microwave ovens of Rs. 90 million. The retail price of these ovens was
Rs. 100 million. During the month, 5% of these ovens were returned by the
customers due to mechanical faults. ZE replaced these faulty units with new ones
at no additional charge, honouring their one-year warranty.
 Commercial ovens of Rs. 14.5 million, specifically purchased to fulfill an order
from a restaurant owner. The retail price of these ovens was Rs. 16 million.
(v) Supplies to unregistered persons consisted of the following:
 Sales of solar panels amounting to Rs. 22.5 million (net of discount) made through
an online marketplace. In celebration of 10-year anniversary, these items were
offered at a discount of 10%.
 Tax Planning and Practices Page 6 of 6

 Microwave ovens returned from customers were sold to a scrap dealer for
Rs. 1.5 million.
 Sales of deep freezers of Rs. 40 million to a retailer, PQR Electronics (PQRE).
Retail price of these deep freezers was Rs. 45 million. PQRE used to pay its sales
tax through its electricity bill till September 2023. In October 2023, PQRE
relocated its outlet from DHA, Lahore to an air-conditioned mall in Gulberg,
Lahore.
(vi) ZE donated smart refrigerators costing Rs. 18 million to a hospital run by a non-profit
organization. The retail price of these refrigerators was Rs. 20 million.
(vii) During the month, ZE paid a royalty of Rs. 15 million to ME.
(viii) During the month, ZE purchased 20 economy plus air tickets to Saudi Arabia costing
Rs. 5 million from a travel agent, registered in Lahore. These tickets were for employees
eligible to perform Umrah, as per the company’s policy, with the expenses borne by
ZE. The travel agent charged a fee of Rs. 0.2 million for his services.

All the payments were made through cross cheque / pay order. All the above figures are
exclusive of federal excise duty (FED) and sales tax, unless specified otherwise.

Required:
(a) In the light of the provisions of the Sales Tax Act, 1990, Federal Excise Act, 2005 and
Rules made thereunder, compute the amount of sales tax payable by or refundable to
ZE and the amount of input tax to be carried forward, if any, for the tax period
November 2023. Also compute withholding tax, wherever applicable. (Show all relevant
exemptions, exclusions and disallowances) (22)
(b) State the reason(s) for your treatment in part (a) above in respect of replacement of
faulty microwave units, royalty payment, purchase of air tickets and travel agent fee as
discussed in point nos. (iv), (vii) and (viii). (03)

Q.7 Razia Sultana, ACA, is a senior financial analyst in a firm of Chartered Accountants. She
reports to Dawood Khan, FCA, a senior partner in the firm.

Currently, Razia Sultana is conducting a comprehensive financial analysis for Mubarak

Limited (ML), a listed company. During her analysis, she uncovers evidence of potential
financial and tax misconduct within ML. These irregularities could significantly impact ML’s
financial statements and tax filings. She decides to bring this issue to the attention of Dawood
Khan. In response, Dawood Khan states that their firm’s responsibility is limited to financial
analysis, not investigating potential financial or tax issues. Therefore, he believes they should
not concern themselves with these irregularities.

Required:
Briefly discuss how Dawood Khan may be in breach of the fundamental principles of the
ICAP's Code of Ethics. Also, identify the potential threats that Razia Sultana may face in the
above circumstances and how she should respond. (06)

(THE END)
 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.1 Haq Halal Limited (HHL)

Computation of Total income, Taxable Income and Income Tax Liability
For the tax year 2024
Income from Business: Rs. in million
Profit before taxation 28.40
Add: / (Less): Inadmissible expenses / (income)
Sale of IT products to charitable schools - special discount
[18(12.6m ÷70%) × 30%] 5.40
Export of IT-enabled services to KA in Turkey -
It is not covered under FTR income as the withholding tax statement has not been filed
Accounting depreciation 11.00
Prize on account of sales promotion (1.20)
Gain on sale of shares in ML and CL (1.00)
Proceeds from the sale of shares in KL (2.80)
Tax depreciation (30.40)
9.40
Capital Gain:
Gain on sale of shares in ML and CL (W-1) 1.67
Gain on sale of shares in KL – [85,000 × 10(35−25)] 0.85
2.52
Income from Other Sources:
Share of profit from AOP 6.00
FTR income
Prize on account of sales promotion [1.20+0.30] 1.50
Total income for the year 19.42
Less: Gain on sale of shares in ML and CL (being SBI) (1.67)
Prize on account of sales promotion (being FTR) (1.50)
Taxable income for the year 16.25

Computation of tax liability:

Tax on taxable income [16.25m @ 29%] 4.71
Less : Tax credit on donation
Donations to charitable schools (special discount of 30% against the supply of
IT products ; Rs. 12.6 /0.7 × 0.3 = 5.4 OR
20 % of the taxable income i.e. Rs. 16.25 × 0.2 = 3.25 whichever is lesser
Tax credit allowed = 4.71 / 16.25 × 3.25 = 0.94 (0.94)
(i) 3.77
Minimum tax [305.40m(W-2) × 1.25% ] (ii) 3.82
Alternative corporate tax [30.08m(W-3)×17%] (iii) 5.11
Tax charged would be higher of (i), (ii) or (iii) above 5.11
Tax on sale of shares in ML and CL [1.67 × 12.5%] being shares were acquired
before 30 June 2022. 0.21
Tax on prize of sales promotion 0.30
Tax liability 5.62

Page 1 of 7
 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

W-1: Computation of gain on sale of shares in ML and CL

De-merger: Rs. in million
Capital gain:
Sale of 30,000 shares in ML @ Rs. 35 each 1.05
Less: Cost of 30,000 shares in ML @ Rs. 39 each [(150,000×52)÷200,000] (1.17)
Incidental expenses @ 0.5% of consideration (0.01)
Loss on sale of ML’s shares (0.13)

Sale of 70,000 shares in CL @ Rs. 65 each 4.55

Less: Cost of 70,000 shares in CL @ Rs. 39 each [(150,000×52)÷200,000] (2.73)
Incidental expenses @ 0.5% of consideration (0.02)
Gain on sale of CL’s shares 1.80

Net gain 1.67

W-2: Computation of turnover for minimum tax u/s 113 Rs. in million
Turnover as per HHL’s records 260.00
Add: Discount allowed to the school [18(12.6m ÷70%) ×30%] 5.40
HHL’s share in AOP’s gross sales [125m × 32%] 40.00
Export of IT-enabled services – [no adjustment since NTR] -
Adjusted turnover 305.40

W-3: Computation of accounting profit for ACT Rs. in million

Accounting profit-unadjusted 28.40
Less: Proceeds from the sale of shares in KL (2.80)
Less: Gain on sale of shares in ML and CL (1.00)
Less: Prize on account of sales promotion (1.20)
Add: Accounting gain on sale of shares in KL [2.8−2.125(85,000×25)] 0.68
Add: Share of profit from AOP 6.00
Accounting profit for the year 30.08

A.2 ▪ Since none of the group of companies are listed, APL to hold directly 75% or more of
the share capital of the subsidiary company for group relief.
▪ APL holds 90% shareholdings in BPL and as it is a manufacturing company, the
provisions related to group relief are applicable to both APL and BPL.
▪ Although APL holds 80% shareholdings in CPL, CPL’s classification as a trading
company excludes it from qualifying for group relief. Therefore, CPL is unable to
utilize the losses of BPL to set off with its income.
▪ APL can only avail the BPL’s losses arising from business other than brought forward
losses (i.e. Rs. 280 million). Moreover, capital losses cannot be surrendered to APL.
▪ BPL has also earned income from other sources of Rs. 80 million, therefore the net
amount of loss after adjustment of this income would be Rs. 70 million (150−80).
▪ The amount of loss available for APL to claim would be computed as Rs. 63 million
(70×90%) against its business income of Rs. 240 million. Profit on debt of
Rs. 60 million could not be set off with BPL’s loss because BPL’s losses can only be
surrendered against business income of APL.

Page 2 of 7
 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.3 (a) Interest Actual Deduction Closing

income expense allowed for the reserve
Opening Reserve for
from for the year E=(B+C) F= (B–D) OR
reserve the year
Year consumer year OR D, Zero,
(C) (D=A×3%)
loan (B) (whichever is (whichever is
(A) lower) higher)
------------------------------- Rs. in million -------------------------------
2021 42 1.05 0.00 1.26 1.05 0.00
2022 144 4.70 0.00 4.32 4.32 0.38
2023 220 6.10 0.38 6.60 6.48 0.00
(b) Where a tax payable by a private limited company, which has gone into liquidation,
cannot be recovered from the company, the Commissioner of Income Tax is
empowered to issue a notice to every person who was at any time in the related tax
year, a shareholder owning not less than 10% of the paid-up capital of the company.
Considering this provision of law, the notice issued by the Commissioner is valid.
In the scenario, if Murad owns 10% or more of the paid-up share capital in JPL, he is
jointly and severally liable to pay Rs. 15 million to the Commissioner. He is, however,
entitled to recover the tax paid from the JPL or any other shareholder owning not less
than 10% of the paid-up share capital in proportion to their shareholding.
The provisions of the Income Tax Ordinance shall apply to the above amount due as
if it were tax due under an assessment order.

A.4 Comments on the computation are as follows:

(i) Warehouse destroyed by fire:
Upon the destruction of the warehouse by fire, GCPL is to be considered to have
relinquished the ownership of the warehouse and, consequently, disposed of the
warehouse.
Irrespective of warehouse’s fair market value of Rs. 11.5 million, compensation of
Rs. 8.4 million received by GCPL from Loyal Insurance Limited is the consideration
for the warehouse.
As proceeds of Rs. 8.4 million is included in profit before tax, it shall be deducted
from it and instead the tax gain on disposal of the warehouse of Rs. 0.3 million (8.4
– 8.1) is to be added to the amount of profit before tax.
Since the warehouse was a depreciable asset, the gain arising on its disposal is the
business income of GCPL and will be taxed under NTR.
(ii) Investment in controlled foreign company:
Deduction of dividend income from profit before tax is correct. But along with this,
following provisions shall also be applicable in given scenario.
As GCPL acquired more than 40% i.e. 42% shares of UAE based (non-resident)
company i.e. SL so SL shall be classified as controlled foreign company of GCPL,
subject to fulfilment of following other conditions:
▪ Tax paid by non-resident company to tax authority outside Pakistan shall be
less than 60% of the tax payable on the said income under the ordinance. In
given scenario no income tax was paid in UAE in respect of its property income
so this condition is met by SL.
▪ Non-resident company does not derive any active business income. During the
year SL has just income from property therefore this condition is also met.
▪ The shares of non-resident company are not traded on any stock exchange.
Being SL is the unlisted company and its shares are not traded on any stock
exchange so this condition is also met.
Page 3 of 7
 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

Since all of the above conditions of controlled foreign company is fulfilled, SL is

classified as controlled foreign company and consequently its income equal to taxable
income determined in accordance with the provisions of the ordinance as if SL is a
resident taxpayer, shall be included in taxable income of GCPL. Under Income tax
ordinance 2001, 1/5 of income from property is allowed as repair allowance so UAE
400,000 (500,000 × 20%) is subject to tax in Pakistan after applying following
formula.
A × (B ÷ 100)
A = 400,000 × 42 ÷ 100 = 168,000
168,000 × 80 = 13.44 million
Rs. 13.44 million shall be included in taxable income of GCPL

In addition to above, GCPL shall be allowed a foreign tax credit of Rs. 1.5 million.

(iii) Lease of factory building with machinery:

Both lease rent of Rs. 18 million (2×9) and brokerage fees of Rs. 0.820 million are
correctly excluded from the business income.

However, their classification under ‘Property income’ is incorrect. Income from the
lease of the building together with plant and machinery is classified under ‘Other
source income’. Further, an allowance of Rs. 3.6 million in respect of 1/5th of rental
income for repairs is not available against the ‘Other source income’.

In computing GCPL’s income chargeable to tax under the head “Income from other
sources”, a full deduction of Rs. 0.82 million is to be allowed for the brokerage fees
and is not to be restricted to 4% of the gross rental income.

On making payment to the commercial importer for the used plant and machinery,
GCPL was not required to deduct withholding tax, based on the premise that the
plant and machinery were sold by the importer in the same condition as they were
when imported.

Consequently, GCPL is entitled to claim:

▪ initial allowance of Rs. 9.5 million (Rs. 38 × 25%) against the plant and
machinery used for the first time in Pakistan, irrespective of the fact that it was
imported in a used condition, and
▪ normal depreciation deductions of Rs. 9.8 (Rs. 98 million × 10%) against the
factory building, and a deduction of Rs. 4.275 million (Rs. 38 million × 0.75 ×
0.15) against the used plant and machinery installed in the factory
building. No initial allowance in respect of factory building is available.

(iv) Loss from discontinued business:

The addition of a loss of Rs. 15 million to profit before tax, on the basis that it relates
to a business activity that ceased during the previous tax year, is an incorrect
treatment.

Income derived by a person in a tax year from a business that has ceased, before the
commencement of the year is chargeable to tax as if the business had not ceased at
the time the income was derived. As income includes loss of income, GCPL is
entitled to adjust the loss from discontinued business against its business income.

Page 4 of 7
 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

(v) Depreciation:
Adding back of accounting depreciation is correct. However, tax depreciation
(including initial allowance) of Rs. 23.575 million as computed above, related to the
new factory building and plant and machinery, installed therein, shall be deducted
under the head ‘income from other sources’ instead of under the head ‘income from
business’. The deduction of rest of the tax depreciation under the head ‘income from
business’ is correct.

(vi) Recouped expenditure:

Recoupment of expenditure can only be included in the income chargeable to tax, in
the tax year in which it is received if previously the same has been allowed as a
deduction in computing the taxable income. In given scenario, taxation of recouped
expenditure is depend on that whether the exports in tax year 2023 were subject to
tax under FTR or NTR. If it was FTR, the recoupment of expenditure shall not be
chargeable to tax as it was not allowed as a deduction in computing the taxable
income of tax year 2023. However, if GCPL had opted the NTR regime for its exports
in 2023, then this recoupment of expenditure shall be chargeable to tax in 2024 being
the expense was allowed as a deduction in computing the taxable income of tax year
2023. Moreover, it will be chargeable to tax under the head ‘income from business’
instead of ‘income from other sources’.

A.5 (a) As there is a change in sales tax rate from 17% to 18% on 14 February 2023, supply
of CCTV cameras made by CE shall be charged at such rate as in force at the time of
supply.
Time of supply is the time when the goods are delivered or made available to the
recipient. However, part payment is accounted for in the return for that tax period in
which part payment is received.
In given scenario, cameras are delivered to Ahmed on 25 February 2023 so this date
is considered as time of supply, irrespective of their installation. However, since 20%
was paid as an advance on 1 January 2023 so this date is considered as time of supply
for 20% part payment.
In light of above, Rs. 60,000 (300,000×20%) was subject to sales tax rate of 17% i.e.
rate in force in January 2023. However, Rs. 240,000 (300,000×80%) was subject to
revised sales tax rate of 18% i.e. the rate in force on 25 February 2023.
Resultantly, the sales tax amount on this transaction was computed to be Rs. 53,400
(Rs. 10,200+Rs. 43,200).

(b) Drawback on re-export:

On import of ready-made garments from Taiwan, BPL paid sales tax of
Rs. 400,000 (2,000,000×20%) at the import stage.
Since BPL re-exported the garments to Morocco, BPL is entitled to be repaid the
seven-eight of the sales tax paid at the import stage as a drawback i.e. Rs. 350,000
[400,000×7÷8], subject to the following conditions.
▪ The Customs Act, 1969, applies to this drawback process, similar to customs
duties.
▪ There is a two-year time limit for re-exporting the garments from the date of
import i.e. on or before 30 June 2023. Since the re-export occurred after the
deadline, BPL can request an extension from the Board if it has a valid reason.
The Board has the authority to extend the re-export period by an additional one
year.

Page 5 of 7
 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.6 (a) Zang Limited

Computation of sales tax
For the month of November 2023
Value of supply Rate of Sales tax / FED
(Rs. in million) tax/ FED (Rs. in million)
Input Tax
Tempered glass 15.00 inadmissible -
Packaging material from local manufacturer 24.00 18% 4.32
Furniture 3.00 inadmissible -
Purchase from unregistered persons 1.20 inadmissible -
Import of deep freezers 62.00 25% 15.50
VAT on deep freezers 62.00 - -
Import of touch screens 25.00 18% 4.50
VAT on touch screens 25.00 - -
Import of solar panels 21.00 Exempt -
VAT on solar panels 21.00 - -
Import of plastic 100.00 18% 18.00
(88/0.88)
VAT on plastic 100.00 - -
Payment of royalty [see part (b)] 15.00 -
Tickets to Saudi Arabia [see part (b)] 5.00 -
Travel agent fee [see part (b)] 0.20 -
Total input tax for the month 42.32
Less: Input tax on exempt supplies (W-1) (4.42)
Less: Inadmissible input tax due to supplies to unregistered 15.50/62×
person over threshold in a month 35(45–10) (8.75)
29.15
Output Tax
Microwave ovens 100.00 18% 18.00
Replacement of faulty units of microwave oven [see part (b)] -
Commercial ovens 14.50 18% 2.61
Sale of solar panel through online marketplace to 25.00 Exempt -
unregistered persons (22.5/0.90)
Microwave ovens sold to scrap dealer 1.50 18% 0.27
Supply of deep freezers to retailers 45.00 25% 11.25
Donation of refrigerators to a hospital 20.00 Exempt -
Total output tax 32.13
Less: lower of:
- 90% of output tax (32.13×90%) 28.92
- input tax 29.15 (28.92)
3.21
Further tax @ 4% on sales through online marketplace 25.00 - -
Further tax @ 4% on scrap sales to unregistered person 1.50 4% 0.06
Further tax @ 4% on sales to unregistered tier-1 retailer 45.00 - -
WHT on purchases from unregistered persons 1.20 5/118 0.05
WHT on purchase from SG 15.00 5/118 0.64
Royalty to ME-FED payable 15.00 10% 1.50
Sales tax / FED payable 5.46
Sales tax to be carried forward (29.15 – 28.92) 0.23

W-1: Apportionment of input tax Supplies Input tax

Taxable supplies except exempt supplies and supplies to unregistered 101.5 22.40
person over threshold (10 million) in a month (100+1.5)
Exempt Supplies 20.0 4.42
121.5 26.82
(42.32-15.5)
OR
(4.32+4.5+18.0)

Page 6 of 7
 TAX PLANNING AND PRACTICES (Paper 1)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

(b) ▪ The ‘sale price’ of the microwave ovens sold includes the cost of replacement units
to be supplied during the warranty period, therefore it is not considered as a
‘separate supply’ and hence no sales tax is chargeable at the time of supply of
replacement units to meet the warranty claim.

▪ Royalty is chargeable @ 16% under Punjab Sales Tax on Services Act, 2011 and
the input is not claimable under reverse charge mode in PRA.
OR
Royalty is chargeable @ 10% under Federal Excise Act, 2005. And as it is not in
VAT mode, therefore, no input is claimable against it in Sales Tax Return.

▪ FED is chargeable @ Rs. 5,000 per ticket but as it is not in VAT mode, therefore,
cannot be claimed in the Sales Tax Return.
Travel agent services are subject to tax @ 5% under Punjab Sales Tax without input
tax adjustment. However, this provision is not applied on services for Hajj and
Umrah.

A.7 In this scenario, Dawood Khan, FCA, may potentially be in breach of the following
fundamental principles of the ICAP's Code of Ethics for chartered accountants:

Professional Behaviour:
The principle of professional behaviour expects members to act in a manner consistent with
the reputation of the profession and to avoid any action that discredits the profession. Dawood
Khan response, indicating a lack of concern about potential financial and tax irregularities,
may raise questions about the firm's commitment to ethical conduct and professional
behaviour in addressing significant issues identified during an engagement.

Integrity:
Dawood Khan response may raise concerns about the principle of integrity. Integrity requires
honesty and straightforwardness in all professional and business relationships. By dismissing
potential financial and tax misconduct without investigation, there may be a lack of integrity
in addressing ethical concerns.
Following is the threat that Razia Sultana may face in the above circumstances:
▪ There could be an intimidation threat if Razia Sultana is concerned about the
consequences of reporting the irregularities, such as potential repercussions within the
firm.

Safeguards:
Identified threat is significant as Razia Sultana is being instructed from the highest level of
the firm’s management. In order to reduce the threat to an acceptable level, one or more of
the following safeguards should be applied:
▪ Discuss the matter with Dawood Khan and persuade him to follow code of ethics.
▪ Consider informing appropriate authorities like senior tax partner.
▪ Thoroughly document her findings.
▪ Seek legal advice/guidance from the regulatory bodies, if necessary.
▪ consider resigning from the job, if the threat could not be reduced to an acceptable level.

(The End)

Page 7 of 7
 Winter 23 Part 2
Tax Planning and Practices Page 1 of 5

Q.1 Iman Limited (IL), a listed company, is engaged in the production and trading of various
leather goods. IL operates five retail outlets located in Karachi and is registered with the sales
tax authorities as a Tier-1 retailer. The following information has been extracted from IL’s
records for the year ended 30 September 2023:
Rs. in million
Sales – (net of sales tax) 272
Cost of sales (193)
Gross profit 79
Administrative and selling expenses (49)
Other income 10
Profit before taxation 40

Additional information:
(i) Sales include a sum of Rs. 8.91 million (net of withholding tax) received from the sale
of leather jackets to Baramad Enterprises, which is registered under the Duty and Tax
Remission for Export Rules, 2001. IL manufactured these jackets at a cost of
Rs. 6.3 million. No other expenditure was incurred by IL on these jackets.
(ii) Cost of sales include accounting depreciation of Rs. 12 million. Tax depreciation for
the year amounted to Rs. 15.3 million.
(iii) Administrative and selling expenses include:
 Rs. 0.5 million in respect of technical books purchased to enhance IL’s production
processes.
 Rs. 0.6 million for the purchase of point-of-sale machines, which were installed in
all outlets on 1 October 2022, to integrate with the FBR’s computerized system for
real-time reporting of sales.
 a bad debt of Rs. 4 million, with the opening and closing balances of the provisions
for bad debts account standing at Rs. 7.7 million and Rs. 6.6 million, respectively.
 Rs. 18 million in relation to an advertising campaign, launched on 20 July 2023.
IL expects to receive its benefits over the years.
(iv) Other income comprises of:
 dividend-in-specie received on 1 December 2022 in the form of 35,000 shares in a
listed company, Munafa Limited (ML). The dividend income was recorded by IL
at Rs. 45 per share. A tax of Rs. 0.236 million was collected from IL in respect of
this dividend-in-specie. On 1 May 2023, IL sold 15,000 shares in ML at
Rs. 48 each. The gain of Rs. 0.045 million from this sale is also included in other
income.
 share of profit of Rs. 8.38 million from an associate, Tijarat Limited (TL), recorded
under equity method of accounting. IL holds 1 million shares representing
20% shareholding in TL.
During the year, TL paid dividend of Rs. 5 per share to its shareholders. The
turnover of TL during the year amounted to Rs. 380 million.
(v) Following are the details of losses brought forward from previous years:
Rs. in million
Loss from business relating to the tax year 2021 4
Unabsorbed tax depreciation 22
Capital losses on sale of listed securities relating to:
 tax year 2020 1
 tax year 2021 2
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute under the correct head of income, the total income, taxable income and tax liability
of IL for the tax year 2024. (21)
Note:  Ignore WWF and WPPF.
 Show all relevant exemptions, exclusions and disallowances.
 Tax Planning and Practices Page 2 of 5

Q.2 Green Bike (Private) Limited (GBPL) is considering to start the business of manufacturing
motorcycles. It has a plan to sell the motorcycles to dealers, who will then subsequently sell
them to end-customers at retail price. During a recent board meeting, the following extracts
have been presented to the board:

Details of total projected sales for the first year:

Dealer Registered under Sales Tax Act, 1990 and Projected sales
name appearing in Active tax payers’ list (Rs. in million)
A No 600
B Yes 435
C No 625
D No 90
1,750

Other information:
Projected deductible expenses for the first year (Rs. in million) 1,590
Dealer price per motorcycle (Rs.) 175,000

In addition, the dealer would be entitled to a commission of Rs. 5,000 per motorcycle.

During the meeting, the finance director raised a concern that since most of the dealers are
unregistered under the Sales Tax Act, 1990, there could be certain disallowance of expenses
and addition to income for GBPL under the Income Tax Ordinance, 2001, due to making
sales through them.

Required:
(a) Comment on the concern raised by the finance director in the light of Income Tax
Ordinance, 2001. Support your comments with all possible computations. (11)
(b) Explain whether there are any implications for GBPL in respect of supplies to
unregistered dealers in the light of Sales Tax Act, 1990. (04)

Q.3 Karam Limited (KL) is a trading company which follows a normal tax year. The following
information has been extracted from the records of KL:

Up to Tax year 2024

30 November 2023 (Estimate)
---------- Rs. in million ----------
Sales 450 1,050
Cost of sales (280) (630)
Gross profit 170 420
Administrative and selling expenses (100) (210)
Finance cost (30) (60)
Net profit before tax 40 150

Inadmissible expenses 16 35

Withholding tax deductions:

 Under section 153(1)(a) 5 11
 Under section 152 2 5
 Under section 147 (Note) 4 4

Note: This represents the tax liability paid for the quarter ended 30 September 2023, which
was computed on the basis of tax assessed on the prior year’s turnover at 2%.

Assume that the turnover for the month of December 2023 amounts to Rs. 95 million.
 Tax Planning and Practices Page 3 of 5

Required:
In the light of the provisions of Income Tax Ordinance, 2001, compute the advance tax
liability of KL for the quarter ending 31 December 2023. (Ignore minimum tax and super tax) (07)

Q.4 Muslim Sports Limited (MSL), an unlisted company, is engaged in the business of
manufacturing and selling sports items. It was incorporated on 1 October 2022 with share
capital of Rs. 102 million. It operates as a subsidiary of Baka Corporation, a Filipino
company, which holds a 52% shareholding in MSL.

MSL recently appointed a tax manager who has submitted the following initial draft of MSL’s
tax computation for the year ended 30 September 2023, along with accompanying notes, for
management’s approval:

Income from business: Note Rs. in million

Sales (including exports of Rs. 40 million) 234.00
Expenses (i) (181.87)
Other income 15.00
Profit before taxation 67.13
Add/(Less): Inadmissible expenses / (income)
Other income being subject to tax under separate block of income (ii) (15.00)
Interest expense paid to Baka Corporation (iii) 8.10
Warehouse rent (iv) 5.40
Taxable income for the year 65.63

Tax liability:
Normal tax regime @ 29% 19.03
Separate block of income @ 5% 0.75
Total tax liability 19.78

Notes to the tax computation:

(i) MSL incurred an exchange loss of Rs. 1.2 million in relation to machinery acquired on
1 November 2022, from the USA through a short-term foreign currency loan of
USD 36,000. The loan was repaid on 30 April 2023.
(ii) A gain of Rs. 15 million was realized from the sale of an office building to a Rental
REIT Scheme at Rs. 115 million on 1 May 2023. MSL had acquired this building in
November 2022 for Rs. 100 million.
(iii) A mark-up of Rs. 8.1 million incurred on a loan denominated in USD equivalent to
Rs. 180 million, obtained on 1 April 2023, from Baka Corporation. The repayment of
the principal is scheduled to commence in March 2025.
(iv) This represents the annual rent payable in arrears to the landlord for a warehouse
obtained in Hyderabad. The rent is due on 1 October 2023. MSL has not paid any
withholding tax on this amount.

Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder:
(a) discuss the tax regimes available to MSL for determining its tax liability. (09)
(b) comment on each note to the tax computation, prepared by the tax manager for the tax
year 2024. Assume that MSL plans to file its return under the normal tax regime. (12)
Note:  Revised computation of taxable income and tax liability is not required.
 Ignore WWF and WPPF.
 Tax Planning and Practices Page 4 of 5

Q.5 Moin Limited (ML) is an audit and tax client of Hashim & Co., Chartered Accountants (the
firm). The ML’s amended assessment proceedings for the tax year 2021 are ongoing, and the
firm has filed an appeal with the Appellate Tribunal (ATR). ML has offered a fee of
Rs. 1 million for this engagement, along with an additional bonus of 25% if the matter is
resolved in ML’s favour.

Required:
In light of the ICAP’s Code of Ethics, discuss the potential threats that the firm may face in
the above situation and how these threats should be responded to. (Your answer should be
limited to the threats faced by the tax department and the tax partner) (06)

Q.6 (a) Rabia operates a business of selling homemade spices through Easy Foods (EF), an
online food delivery platform, which is registered with the sales tax authorities and has
its head office in Faisalabad. She receives orders from EF’s online platform, which are
collected by EF’s riders and delivered to the customer. To support her business, she has
hired two employees. Below is an extract from Rabia’s business records for the year
ended 30 November 2023:

Rupees
Sales 4,500,000
Cost of sales (1,920,000)
Commission to EF (20%) (900,000)
Profit 1,680,000

Rabia is considering expanding her business to sell her products in Australia, with the
help of her cousin, Fatema, who lives there.

Required:
In the light of the provisions of Sales Tax Act, 1990 and Rules made thereunder, discuss
whether Rabia’s business is required to be registered with the sales tax authorities. (04)

(b) Aqua Enterprise (AE) is a registered person under the Sales Tax Act, 1990, and is
engaged in the business of manufacturing and supplying electric coolers. AE has
received two notices from the sales tax authorities regarding the following transactions:

(i) On 1 August 2023, AE supplied taxable goods worth Rs. 2.8 million to one of its
associates at a concessional price of Rs. 2.1 million. However, AE inadvertently
failed to levy sales tax or issue a sales tax invoice for the supply. On
10 December 2023, the Assistant Commissioner Inland Revenue served a notice
requiring AE to show cause for the non-payment of the amount specified in the
notice.

AE intends to make the payment on 20 December 2023 and seeks clarification on

the exact amount owed to the sales tax authorities.

Required:
Under the Sales Tax Act, 1990, compute the amount of sales tax payable by AE. (05)

(ii) AE placed five electric coolers worth Rs. 200,000 at a leading departmental store
for advertisement purposes and received a security deposit of Rs. 100,000. On
9 December 2023, AE received a notice from the Deputy Commissioner Inland
Revenue, demanding payment of Rs. 54,000 for sales tax on the electric coolers
and security deposit.

Required:
Under the Sales Tax Act, 1990, advise on the legality of the notice issued by the
Deputy Commissioner Inland Revenue. (03)
 Tax Planning and Practices Page 5 of 5

Q.7 Craft Cove (CC) is engaged in the business of manufacturing and supplying furniture. It also
operates two retail outlets in Lahore, and is registered with the Sales Tax Authorities as an
importer, manufacturer and retailer. Both the retail outlets of CC are integrated with the
Board’s computerized system, enabling real-time reporting of sales. The following
information has been extracted from CC’s records for the month of November 2023:

Rs. in million
Purchases
From registered suppliers 261.0
Imports 40.0
Supplies
To registered persons 104.5
To unregistered persons 80.0
Exports of manufactured furniture to USA 52.0

Additional information:
(i) Purchases from registered suppliers comprise the following:
 Hardwood worth Rs. 80 million.
 Bulk packaging for wood polish at Rs. 38 million (net of a 10% trade discount and
a 5% cash discount). The retail price of the polish is Rs. 50 million.
 Milling machine under a hire purchase agreement, signed during the month. The
fair market value of the machine on the date of the agreement was Rs. 85 million,
and CC is to make payments in 20 equal monthly instalments of Rs. 5 million. The
machine will be delivered to CC in December 2023.
 Artificial leather worth Rs. 38 million for use as tapestry for sofa sets, sourced from
a local manufacturer cum retailer. The retailer is integrated with the Board’s
computerized system for real-time reporting of sales and maintains a 10% value
addition on its sales.
 Hand carved wooden doors worth Rs. 20 million from a local carpenter located in
FATA.
(ii) Imports comprise the following:
 Specialized foam worth Rs. 28 million for use in executive chairs for office use.
The retail price of this type of foam is Rs. 30 million.
 Ready to assemble (RTA) furniture worth Rs. 12 million.
(iii) Supplies to registered persons comprise the following:
 Household furniture worth Rs. 78 million to an interior design firm. 60% of the
furniture was delivered during the month, and the remaining will be delivered after
two months.
 Furniture worth Rs. 1.5 million as donation to a welfare organization.
 Office furniture worth Rs. 25 million to Shehzor Limited, which was blacklisted
during the last month.
(iv) Supplies to unregistered persons comprise furniture worth Rs. 80 million sold to end
consumers through CC’s retail outlets.
(v) An amount of Rs. 4.5 million was paid to a digital marketing agency in Singapore for
advertisement services.

All the payments were made through cross cheque / pay order. All the above figures are
exclusive of sales tax, unless specified otherwise.

Required:
In light of the provisions of the Sales Tax Act, 1990 and the Rules made thereunder, compute
the amount of sales tax payable by or refundable to CC and the amount of input tax to be
carried forward, if any, for the tax period November 2023. (Show all relevant exemptions,
exclusions and disallowances) (18)

(THE END)
 TAX PLANNING AND PRACTICES (Paper 2)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.1 Iman Limited (IL)

Computation of total income, taxable income and income tax liability
For the tax year 2024
Income from Business: Rs. in million
Profit before taxation 40.000
Add: / (Less): Inadmissible expenses / (income)
Income from sale of leather jackets – FTR (Rs. 8.91Rs. 6.3) (2.610)
Technical books 0.500
Accounting depreciation 12.000
Purchase of point of sale machines 0.600
Provisions for bad debts 4.000
Bad debts written off [7.7 + 4 – 6.6 = 5.1] (5.100)
Advertising campaign 18.000
Amortization of advertising campaign(0.720(18/25) / 365×73) (0.144)
Dividend-in-specie (35,000×45) (1.575)
Share of profit from TL (8.380)
Gain on sale of shares in ML (0.045)
57.246
Less: B/f business loss (4.000)
Tax depreciation for the year
[Rs. 15.3 m + 0.181{0.125(0.5×0.25%)+0.056(0.5×0.75×15%)}] (15.481)
Income before unabsorbed tax depreciation 37.765
Less: Unabsorbed tax depreciation
(Rs. 22 million but allowed to 50% of the income) [37.765×50%] (18.883)
Total business income 18.882

Capital Gain:
Gain on sale of shares in ML [(480)×15,000] 0.720
Less: B/f capital losses
Tax year 2020 – Not allowed as more than three years old (Rs. 1 million) -
Tax year 2021 – Allowed (Rs. 2 million)* (0.720)
Capital losses -

FTR:
Dividend-in-specie (35,000×45) 1.575
Income from sale of leather jackets [(Rs. 8.91/0.99)Rs. 6.3] 2.700
Dividend income from associate (1 million × 5) 5.000
9.275
Total income for the year 28.157

Less: FTR
Dividend-in-specie (1.575)
Sale of leather jackets (2.700)
Dividend income from associates (1 million × 5) (5.000)
(9.275)
Taxable income for the year 18.882
*(The remaining capital loss shall not be c/f as 2024 is the third tax year.)

Page 1 of 8
 TAX PLANNING AND PRACTICES (Paper 2)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

Computation of tax liability:

Tax on taxable income [18.882 m @ 29%] (i) 5.476
Minimum tax [263.09 m (W-1) × 1.25% ] (ii) 3.288
Alternative corporate tax [27.39m (W-2) × 17%] (iii) 4.656
Tax charged would be higher of (i), (ii) or (iii) above 5.476
Tax on FTR:
Tax on dividend-in-specie [Rs. 1.575m @ 15%] 0.236
Tax on sale of leather jackets [Rs. 9m @1%] 0.090
Tax on dividend from associates (5×15%) 0.750
6.552
Less: Tax credit u/s 64D [Amount invested i-e Rs. 0.6 million OR maximum limit
i.e. 0.75(0.15 × 5), whichever is lower] (0.600)
Tax liability after tax credit 5.952

W-1: Computation of turnover for minimum tax u/s 113 Rs. in million
Sales 272.000
Less: Sale of leather jackets (FTR) (8.910)
Turnover of TL -
Adjusted turnover 263.090

W-2: Computation of accounting profit for ACT Rs. in million

Accounting profit 40.000
Less: Share of profit from TL (8.380)
Income from sale of leather jacket (2.610)
Gain on sale of share in ML included in accounting profit (0.045)
Dividend-in-specie (1.575)
27.390

A.2 (a) The following are the disallowance of expenses /addition to income, GBPL would face
if sales are made to unregistered dealers:
(i) Any expenditure related to the sales made to persons who are required but not
registered under the Sales Tax Act, 1990 by an industrial undertaking, shall be
disallowed. However, such disallowance shall not exceed 10% of the total
claimable deductions. Moreover, this clause only applies when sales to such
unregistered persons exceed rupees one hundred million per person.
In the given scenario, this disallowance is computed as follows:

Rs. in million
Total sales for the year (A) 1,750
Total deductions (B) 1,555
[1,590–34.94(ii)]
Sales to un-registered persons A & C (600+625) (C) 1,225
Total that may be disallowed (B÷A×C) 1,088
Maximum disallowance under the ITO-2001 (D = B×10%) 156
Income tax impact of disallowance (D×29%) 45

(ii) Moreover, since the Motorcycles are listed in the Third Schedule of the STA-1990,
any commission paid in excess of 0.2% of the gross amount of supplies to persons
who are required to be registered under the STA-1990 but are not, will be
disallowed.

Page 2 of 8
 TAX PLANNING AND PRACTICES (Paper 2)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

In the given scenario, the commission paid to dealer shall be disallowed as

computed below:
Number of Motorcycles sold to unregistered dealer
7,514
[Rs. 1,315 m (600+625+90)] ÷ Rs. 175,000)

Rs. in million
Commission paid to un-registered dealers (7,514×5,000) 37.57
Less: Commission allowed under ITO (1,315 m ×0.2%) 2.63
Total disallowance 34.94

Tax impact of disallowance (34.94 m × 29%) 10.13

(iii) Where a person supplies products listed in the Third Schedule the STA-1990 under
a dealership arrangement with the dealers who are not registered under the STA-
1990 and are not appearing in active taxpayers’ list, an amount equal to 75% of the
dealer’s margin shall be added to the income of the person making such supplies.
Furthermore, ITO-2001 also specifies for the purpose of operation of this section
that 10% of the sale price of the manufacturer shall be treated as dealers’ margin.

In the given scenario, the following deemed dealer margin shall be added to the
income of GBPL:
Rs. in million
Dealer margin (Rs. 1,315 m × 10%) 131.50
Amount to be added in the income of GBPL
(Rs. 131.50 m × 75%) 98.63
Tax impact (Rs. 98.63 m × 29%) 28.60

(b) A registered person shall not be entitled to deduct input tax, which is attributable to such
taxable supplies exceeding, in aggregate, Rs. 100 million in a financial year or Rs. 10
million in a tax period, when made to a certain person who is not a registered person
under this act.

Considering the above provision, GBPL cannot claim input tax for dealers A and C on
taxable supplies exceeding Rs. 100 million. Furthermore, even in the case of dealer D,
input tax would not be available on taxable supplies exceeding Rs. 10 million in any tax
period.

Further, GBPL shall not be entitled to claim the input tax paid on input goods
attributable to supplies made to unregistered distributors on pro-rata basis for which sale
invoice do not bear the NIC or NTN.

Page 3 of 8
 TAX PLANNING AND PRACTICES (Paper 2)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.3 Tax liability as per section 147(4):

Turnover till 30 November 2023 450
Turnover for December 95
Less: Turnover for the quarter ended 30 September 2023 (4÷2%) (200)
Turnover for the quarter ending 31 December 2023 345
Tax assessed of the prior year/turnover of prior year 2%
Advance tax liability for the quarter (A) 6.90
Tax liability as per section 147(4A):
Taxable income for tax year 2024 (Estimate) (150+35) 185
Tax liability (185×29%) 54
Less: Deductions at source (11+5) (16)
Advance tax liability for the year 38
Less: Advance tax liability for half year (19)
Less: Already paid in first quarter (4)
Advance tax liability for the quarter (B) 15
Higher of A and B 15

A.4 (a) Since MSL is engaged in manufacturing and its business turnover in the tax year does
not exceed Rs. 250 million, it shall be classified as a ‘small and medium enterprise’
(SME). Fourteenth Schedule of the ITO-2001 deals with SMEs.
Consequently, the following tax regimes are available to MSL for the taxation of its
income:

1- Local sales under NTR and exports under FTR

This regime is available to all companies having local sales and exports.
Under this regime, common expenses shall be apportioned between exports and local
sales amount on a reasonable basis. Further, the following provisions shall apply to
export income:
 It shall not be chargeable to tax under any head of income while computing taxable
income of MSL.
 No deduction shall be allowable for any expenditure incurred in deriving the
income.

2- Both local sales and exports under NTR

This regime is available to all companies having local sales and exports.
If MSL opts for NTR for its exports, it is eligible to deduct admissible expenses under
the head ‘Income from businesses’. The option shall be exercised every year at the time
of filing of return.
The tax deducted at the time of exports shall be considered as minimum tax.

3- Both local sales and exports under FTR

This regime is available only to SMEs.
If MSL opts for FTR for its entire business turnover, no deduction shall be allowed for
any expenditure incurred in deriving the income. This option shall be exercised at the
time of filing of return of income, and once exercised, it shall be irrecoverable for three
tax years.

Page 4 of 8
 TAX PLANNING AND PRACTICES (Paper 2)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

Provisions applicable to all regimes discussed above

Income subject to NTR is chargeable to tax @ 15% while income subject to tax under
FTR (including exports) is chargeable to tax @ 0.5%.
Furthermore, provisions related to minimum tax under section 113 of the ITO-2001
and alternate corporate tax are not applicable to MSL being SME.
(b) Comments on the computation are as follows:
(i) Since MSL acquired the machinery with a loan denominated in foreign currency,
and before the full and final repayment of the loan, MSL’s liability under the
loan, as expressed in rupees, increased.
Consequently, the amount of Rs. 1.2 million by which the liability was increased
shall be added to the cost of the machinery in the year of occurrence, and initial
allowance and depreciation of Rs. 0.3 million and Rs. 0.135 million shall be
charged on it at the rate of 25% and 15% respectively.
Therefore, in tax computation, the amount of Rs. 1.2 million shall be
added back to ML’s profit before taxation and Rs. 0.435 million (0.3+0.135) shall
be deducted from profit before taxation as admissible expense.
(ii) Gain on sale of office building:
The subtraction of gain on sale of office building from profit before tax is correct.
However, the reason mentioned is incorrect as office building was not a capital
asset rather it was depreciable asset. Gain arose from the sale of a building to the
REIT Scheme in May 2023, is exempt from tax under the Second Schedule of
the ITO-2001.
The tax gain shall be computed as follows:
Rs. in million
Sales proceeds (not exceeding the cost) 100.00
Less: Tax WDV (no depreciation has been charged yet) 100.00
Gain on sale Nil

Since the tax gain on sale is nil, there is no other adjustment of this transaction
on the tax liability.
(iii) Thin capitalization:
The add-back of the entire mark-up of Rs. 8.1 million to profit before tax is
incorrect. Instead, the following treatment shall be followed:
Since MSL is a foreign-controlled resident company, it cannot claim mark-up
paid by it to its foreign controller, Baka Corporation, on that part of its foreign
debt of Rs. 180 million which exceeds a 3:1 ratio i.e. foreign debt : foreign equity
ratio.
The amount of inadmissible mark-up would be computed as follows:
Rs. in million
Amount of foreign debt 180.00
MSL’s equity at the beginning of the year 102.00
Share of Baka Corporation in the equity of MSL (0.52 × 102m) 53.04
Thin capitalization ratio = Foreign equity × 3 159.12
Total amount of interest expense on foreign debt 8.10
Less: Deductible interest expense on foreign debt (8.1÷ 180× 159.12) (7.16)
Amount of inadmissible interest expense 0.94
Page 5 of 8
 TAX PLANNING AND PRACTICES (Paper 2)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

The provisions of section 106A shall not be applicable to MSL, as the total foreign
profit on debt claimed as a deduction is less than Rs. 10 million for the tax
year 2024.

(iv) Warehouse rent payable:

The rent of Rs. 540,000 payable to the landlord in respect of the warehouse has
been incorrectly added to the taxable income.

Withholding tax is deducted at the time of payment of rent, not on the basis of
accrual. Since the above amount is payable on 1 October 2023, it can be claimed
as admissible deduction.

A.5 The 25% bonus offered by the client is contingent upon a positive outcome in this case and is
therefore considered as a contingent fee, and could create a self-interest threat to the firm’s
objectivity. However, the firm should evaluate:
 whether the bonus offered by the client is immaterial to the firm or the partner.
 whether the amount charged for representing client in the Appellate Tribunal Appeals
aligns with the firm’s current practices.

If the response to this evaluation is positive, it would reduce the significance of the
threat. Should the firm determine that the threat cannot be sufficiently mitigated, they should
request ML to agree to a fixed fee for the engagement.

Furthermore, in representing ML, the tax partner might promote the client’s position to the
extent that he may compromise his objectivity and create an advocacy threat. To reduce this
threat, the tax partner should consult with other partners of the firm on how to approach this
matter with the ATR.

Page 6 of 8
 TAX PLANNING AND PRACTICES (Paper 2)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.6 (a) The annual turnover of Rabia's business is Rs. 4.5 million, which is less than the
threshold of Rs. 8 million. Secondly, Rabia has a total labour workforce of two people.
Thirdly, since she prepares her spices at home, her business is located in a residential
area. Fourthly, it appears that her business does not have an industrial gas or electricity
connection.

Keeping the above factors in view, Rabia's business falls under the definition of a cottage
industry. Therefore Rabia is not required to get her business registered with the sales tax
authorities.

However Rabia plans to expand her business by exporting her products to Australia.
Therefore, considering her future plans, she would be required to get registered in order
to avail sales tax refund against zero-rated supplies.

(b) (i) Since AE inadvertently failed to levy sales tax and issue tax invoice to its associate
it would be liable to pay the following amounts to the sales tax authorities:

Rupees
Value of taxable supplies for sales tax purposes 2,800,000

Sales tax to be recovered as tax fraction of the value of supply

(18/118) 427,119

Penalty
For non-issuance of sales tax invoice (Rs. 5,000 or 3% of
Rs. 427,119, whichever is higher) 12,814

For non-depositing of sales tax in time (Rs. 10,000 or 5% of

Rs. 427,119, whichever is higher) 21,356

Default Surcharge
Period of default (15+31+30+19) = 95 days
Amount of default surcharge (427,119 × 12% × 95/365) 13,340
Amount to be paid by AE 474,629

(ii) Supply means a sale or other transfer of the right to dispose of goods as owner,
including such sale or transfer under a hire purchase agreement. In the given
situation, the placement of cooler for advertisement purposes and remittance of
security deposit do not constitute supply nor do it fall within the ambit of taxable
activity and as such AE is not liable to pay sales tax of Rs. 36,000 either on
placement of such electric coolers at the leading departmental stores nor on receipt
of security deposit. Therefore, the contention of DCIR is not correct.

Page 7 of 8
 TAX PLANNING AND PRACTICES (Paper 2)
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2023

A.7 Craft Cove

Tax period November 2023
Computation of net sales tax liability
Amount of
Taxable supply Sales tax
sales tax
(Rs. in million) rate
(Rs. in million)
Sales Tax Credit (Input Tax)
Purchase of hardwood 80.0 18% 14.40
Wood polish (38/0.95) 40.0 18% 7.20
Artificial leather 38.0 15% 5.70
Hand carved doors (Goods supplied from tax-exempt
areas of erstwhile FATA/PATA to the taxable areas) 20.0 16% 3.20
Import of specialized foam 28.0 18% 5.04
VAT on import - for in-house consumption 28.0 - -
RTA furniture 12.0 25% 3.00
VAT on RTA furniture 12.0 3% 0.36
Advertising services (being under reverse charge made) 4.5 - -
38.90
Less: Input tax related to Exports (W-1) (9.00)
29.90
Sales Tax Debit (Output Tax)
Supply to interior design firm 46.8 18% 8.42
Donation to a welfare organization 1.5 18% 0.27
Supply of office furniture to a blacklisted supplier 25.0 18% 4.50
Supply to end consumers 80.0 18% 14.40
Export of furniture 52.0 0% -
205.3 27.59
Less: Admissible credit [90% of output tax i.e. 24.83(27.59×90%) or input tax i.e.
Rs. 29.90 million, whichever is lower] (24.83)
2.76
Less: Input tax on machine (W-1) (11.42)
(8.66)
Sales tax to be carried forward (30.4424.83) (5.61)
Sales tax carried forward (14.27)

Sales tax payable on advertisement services (4.5×16%) 0.72

Further tax to unregistered end consumers -

Further tax to black listed customer (25×4%) 1.00
1.00

Sales tax refundable (3.88+9.00) (W-1) 12.88

W-1: Apportionment of input tax Taxable Input tax on Residual

supplies machine input tax
------------ Rs. in million ------------
Exports 52.00 3.88 9.00
Local sales 153.30 11.42 26.54
205.30 15.30 35.54
38.90– 3.36(3.00+0.36)

(The End)

Page 8 of 8
 Certified Finance and Accounting Professional Stage Examination

The Institute of 10 June 2023

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Tax Planning and Practices

Instructions to examinees:
(i) Answer all SEVEN questions.
(ii) Answer in black pen only.

Q.1 Cloud (Private) Limited (CPL) was incorporated on 1 January 2022. 55% shares of CPL are
owned by UAE based company namely Temperature LLC (TL).
Under a technical license agreement with a European Company, namely Rainbow Ltd (RL),
CPL made an investment of Rs. 100 million to setup a plant for manufacturing agricultural
drones that aid in crop monitoring and optimisation. On 1 May 2022, CPL was awarded the
status of greenfield industrial undertaking when it began its commercial production.
The following information has been extracted from CPL’s records for the year ended
31 December 2022:
Particulars Rs. in million
Balance sheet
Share capital 60
Non-current liabilities 190
Current liabilities 50
Equity and liabilities 300
Non-current assets 180
Current assets 120
Total assets 300

Profit or loss statement

Sales 220
Other income 20
Expenses (including finance costs of Rs. 22 million) (197)
Net profit before tax 43

Additional information:
(i) Sales include exports of Rs. 55 million, which includes an advance receipt of
USD 20,000 equivalent to Rs. 5 million against an export order delivered in
February 2023.
(ii) Other income is comprised of:
 a government grant of Rs. 10 million, received to promote awareness among
farmers about the usage of agricultural drones. The grant was intended to cover
the actual expenses incurred in this regard. During the year, Rs. 3 million was
spent for this purpose.
 rent and non-adjustable security deposit amounting to Rs. 4 million and
Rs. 6 million, respectively, received for providing office space. No material
expense was incurred against this income.
(iii) Expenses include:
 amortization of Rs. 5 million regarding the payment of Rs. 15 million made to a
foreign consultant for conducting a feasibility study of the business. This expense
is being amortized over a period of three years.
 Tax Planning and Practices Page 2 of 6

 royalty of Rs. 20 million payable under the technical license agreement. Due to the
government’s restrictions on the outflow of US dollars, only Rs. 8 million could be
remitted to RL by the end of the year.
 advertisement expense of Rs. 8 million.
 traveling expense of Rs. 1.3 million, paid to an authorised travel agent for
purchasing air ticket for CEO to attend an international conference in the
United Kingdom. No withholding tax was deducted at the time of payment.
 depreciation of Rs. 36 million. Tax depreciation other than plant is Rs. 14 million.
(iv) Finance costs include the interest expense of Rs. 15 million paid to TL. On 1 July 2022,
CPL borrowed Rs. 150 million from TL to meet its working capital requirement. The
principal is repayable in 2025.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute the total income, taxable income, and tax liability of CPL for the tax year 2023,
considering all available options for computing its tax liability. (20)
Note:  Ignore WPPF and WWF.
 Show all relevant exclusions, deductions and exemptions.

Q.2 (a) The following information pertains to four different not-for-profit companies registered
with the Securities and Exchange Commission of Pakistan under the
Companies Act, 2017, for the year ended 31 December 2022:
A B C D
Year of commencement of business 2018 2021 2018 2017

Income: -------------- Rs. in million --------------

Donations and subscriptions 48.2 97.9 197.6 297.3
Dividend 2.0 4.0 6.0 8.0
Profit on debt from a scheduled bank 12.0 14.0 16.0 18.0
Total 62.2 115.9 219.6 323.3

Expenses in respect of:

Administration and management 12.0 20.0 40.0 42.0
On-going projects as per their charter 32.2 71.9 131.6 215.3
Total 44.2 91.9 171.6 257.3
None of the above companies have receivables or payables at year-end.
All four companies have consistently filed their income tax returns, deducted or
collected the necessary taxes, and ensured their timely payment. They have also been
diligent in filing withholding tax statements and obtaining approval from the
Commissioner. Additionally, these companies have fulfilled their obligations by
submitting the statement of voluntary contributions and donations received.

Required:
Under the provisions of the Income Tax Ordinance, 2001, calculate the tax liability of
each of the above four companies for the tax year 2023. (13)
(Ignore minimum tax and alternative corporate tax)
(b) Lighting Resource (Private) Limited (LRPL), owned by Falak Holding Limited (FHL),
a Pakistan based group, is engaged in the business of commercial imports of generator
sets from Germany. These imported generators are then sold to power generation
companies, including their installation and commissioning services.
Considering the income tax exemption available in United Arab Emirates (UAE), FHL
is evaluating the option to incorporate a separate company in UAE. The new company
would import generators from Germany and export them from the UAE directly to the
power generation companies in Pakistan. However, LRPL will remain responsible for
the installation and commissioning of those generators.
 Tax Planning and Practices Page 3 of 6

Required:
Under the provisions of the Income Tax Ordinance, 2001, advise whether introduction
of changes in the existing corporate structure would be beneficial for FHL. (05)
(Ignore tax treaty)

Q.3 Feels-Like (Private) Limited (FLPL) is engaged in the business of manufacturing and
supplying foam mattresses.

FLPL’s finance department is currently in the process of finalizing the income tax return for
the tax year 2023 and has prepared the following computation, along with the supporting
notes for the year ended 31 December 2022:

Note Rs. in million

Income from business:
Sales 1,252
Other income 150
Expenses (840)
Profit before tax 562

Adjustments:
Deemed income on loan provided to CEO (i) 5
Inadmissible expenses (ii) 40
Accounting gain on sale of showroom (iii) (110)
Interest income on government debt securities (being FTR income) (30)
Loss on sale of government debt securities (iv) (18)
Gain on sale of unlisted shares (v) 28
Accounting depreciation 51
Tax depreciation (77)
Income from business before adjustment of b/f losses 451
Less: Brought forward business loss – Tax Year 2016 (29)
– Tax Year 2020 (224)
50% of unabsorbed tax depreciation (186 × 50%) (93)
105
Capital Gain:
Gain on sale of showroom (158 – 120) (iii) 38
Loss on sale of government debt securities (iv) (18)
Gain on sale of unlisted shares (28 × 75%) (v) 21
41
Total income 146
Less: Capital gain – Separate block of income (41)
Taxable income 105
Notes to the income tax computation:
(i) In January 2022, an interest-free loan of Rs. 50 million was provided to FLPL’s CEO.
Interest income at benchmark rate of 10% is offered for tax purposes as FLPL’s deemed
income. The CEO owns 5% of FLPL shares.
(ii) These expenses are attributable to sales made to Breeze Enterprise (BE), an unregistered
dealer. During the year, sales of mattresses totalling Rs. 106 million (exclusive of sales
tax) were made to BE, which sells mattresses to end users at a margin of 20%.
(iii) On 31 December 2022, FLPL sold one of its showrooms for Rs. 158 million. This
showroom was purchased on 1 April 2016 at a cost of Rs. 120 million.
(iv) On 15 August 2022, FLPL sold government securities at a loss of Rs. 18 million. These
securities were purchased on 31 October 2018.
(v) Only 75% of the gain amount is offered for tax purposes, taking into account the holding
period of unlisted securities being more than a year.
 Tax Planning and Practices Page 4 of 6

Required:
Under the provisions of the Income Tax Ordinance, 2001, and Rules made thereunder,
comment on each element of the above computation of total and taxable income, including
adjustments, along with the accompanying notes, prepared by the finance department for the
tax year 2023. Give suggestion(s), wherever necessary. (22)
Note:  Ignore discussion on tax liability.
 Ignore discussion on withholding tax requirements.
 Ignore WWF, WPPF, Minimum tax u/s 113 and Alternative Corporate Tax, if any.

Q.4 Pleasant Healthcare Limited (PHL) is engaged in the business of manufacturing and
supplying pharmaceutical and nutritional products. It is registered as an importer,
manufacturer, and distributer with the Sales Tax Authorities.

The following information has been extracted from PHL’s records for the month of May 2023:
(i) Import of Active Pharmaceutical Ingredients (APIs) worth Rs. 150 million for the
manufacture of medicines. 80% of the related medicines produced are sold locally, and
the remaining 20% are exported to Bangladesh.
(ii) Import of multi-vitamins (not registered under the Drugs Act, 1976) worth
Rs. 30 million used as food supplements from an international brand. PHL sells these
multi-vitamins in the same condition as imported.
(iii) Purchase of artificial flavours worth Rs. 20 million from the local market for use in
various medicines of PHL.

All medicines and drugs purchased and supplied, unless specified otherwise, by PHL are
registered under the Drugs Act, 1976.

Required:
Under the provisions of the Sales Tax Act, 1990 and Rules made thereunder, discuss the
chargeability of sales tax on the above transactions. (Calculations are not required) (07)

Q.5 Storm Limited (SL) is engaged in the business of manufacturing and supplying cigarettes and
e-liquid for electronic cigarette kits. SL is registered under the Federal Excise Act, 2005. The
following information is available from SL’s records for the month of May 2023:
(i) Purchase of 5,000 kg of un-manufactured tobacco worth Rs. 8,000,000. SL paid 80%
of this amount, while the remaining is payable on 20 June 2023.
(ii) Payment of inland carriage charges of Rs. 30,000 to an air cargo company for shipping
the consignment of un-manufactured tobacco from the purchase location to SL’s
manufacturing facility.
(iii) Sale of 9,500 packs of cigarettes to dealers at a wholesale price of Rs. 8,000 per pack.
(iv) Export of 2,500 packs of cigarettes to Indonesia via sea at a price of Rs. 9,000 per pack.
(v) Payment of Rs. 10,000 for marine insurance in respect of cigarettes exported to
Indonesia.
(vi) Sale of 1,000 kg of un-manufactured tobacco to another cigarette manufacturer located
in Export Processing Zone, Karachi, at Rs. 2,000 per kg.
(vii) Import of bulk shipment of 200kg of e-liquid. The value assessed by the customs
authorities at the import stage amounted to Rs. 3,000,000.
(viii) Sale of the entire imported 200 kg of e-liquid after processing and packaging in small
bottles at Rs. 7,000,000.

For the purpose of (iii) and (iv), each pack contains 400 cigarettes, and its retail price is
Rs. 9,800.

Required:
Under the provisions of the Federal Excise Act, 2005, compute the amount of duty payable
by or refundable to SL for the month of May 2023. (08)
Note: Show all relevant exemptions, exclusions and disallowances.
 Tax Planning and Practices Page 5 of 6

Q.6 Heatwave Pakistan Limited (HPL) is engaged in the business of manufacturing and supplying
automotive vehicles and their parts. It is registered as an importer, manufacturer and
distributer with the Sales Tax Authorities. The following information has been extracted from
HPL’s records for the month of May 2023:

Rs. in million
Purchases
From registered suppliers 218.0
From unregistered suppliers 40.0
Imports 1,365.5
Supplies
To registered persons 1,150.0
To unregistered persons 125.0
Exports 45.0

Additional information:
(i) Purchases from registered suppliers include 2,500 car batteries in retail packaging for
Rs. 8,000 each. The retail price of these batteries is Rs. 10,000 each.
(ii) Purchases from unregistered suppliers comprise various auto parts.
(iii) Imports are comprised of:
 plant and machinery worth Rs. 500 million for setting up a new assembly facility
of electric vehicles duly certified and determined by the Engineering Development
Board.
 40 electric cars with 50 KWH battery in CBU condition for Rs. 6.20 million each.
 25 heavy motorbikes in CBU condition for Rs. 0.70 million each.
 various auto parts for the manufacturing of motor vehicles for Rs. 600 million.
(iv) Supplies to registered persons are comprised of:
 32 imported electric cars at a price of Rs. 7.50 million each.
 200 locally manufactured cars for Rs. 4.50 million each.
 motorcycle parts for Rs. 10 million to distributors whose names are not appearing
in the active taxpayers list.
(v) Supplies to unregistered persons (individuals) are comprised of:
 1,000 motorcycles sold for Rs. 0.11 million each.
 20 heavy motorbikes sold for Rs. 0.75 million each.
(vi) Exports comprise of 300 motorcycles to Sri Lanka, priced at Rs. 0.15 million each.

Further information (not included above):

(i) Electricity charges of Rs. 16 million were paid. The bill showed the subsidies of
Rs. 4 million and a late payment surcharge of Rs. 1 million.
(ii) A payment of Rs. 12 million was made for software maintenance to a software house,
registered under the Islamabad Capital Territory (Tax on Services) Ordinance, 2001.
(iii) The input tax carried forward from previous tax period is Rs. 14 million, which
includes Rs. 5 million in respect of auto parts that were taxable but became exempted
through a notification issued by the Federal Board of Revenue in the current tax period.
(iv) 10 ambulance vehicles manufactured by HPL were sold to a charitable hospital with
100 beds, for Rs. 9 million each.

All the payments were made through cross cheque/pay order. All the above figures are
exclusive of sales tax, unless specified otherwise.

Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute
the amount of sales tax payable by or refundable to HPL and the amount of input tax to be
carried forward, if any, for the tax period May 2023. Also compute withholding tax, wherever
applicable. Note: Show all relevant exemptions, exclusions and disallowances. (20)
 Tax Planning and Practices Page 6 of 6

Q.7 Hina Abbasi (HA) is a tax partner in a firm of Chartered Accountants. Blazing (Private)
Limited has approached her and disclosed their involvement in the tax evasion in the past.
However, they express their willingness to rectify their situation and become compliant. They
seek HA’s assistance in filing accurate tax returns going forward, while keeping their previous
illegal activities hidden from the tax authorities.

Required:
In the light of ICAP’s Code of Ethics, identify and evaluate the fundamental principles of
code of ethics that may be breached in the above situation. (05)

(THE END)
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

A.1 Cloud (Pvt) Limited (CPL)

Computation of Total income, taxable income and tax liability
For the tax year 2023
Since CPL meets the criteria of ‘Small and Medium Enterprise’, its income is subject to tax under the 14th
Schedule. Consequently, CPL income is subject to tax under any of the following options:

Option 1: NTR except for exports which will be subject to tax under FTR
Option 2: FTR

Computation under option 1:

Income from business Rs. in million
Income subject to NTR (14.1+7) (W-1) 21.1

Income from property

Rent 4.0
Non-adjustable security deposit (6÷10) 0.6
4.6
Repair allowance (4.6×20%) (0.9) 3.7

Income related to exports (subject to FTR) (W-1) 4.6

Total income 29.4
Less: Income subject to FTR (4.6)
Taxable income 24.8
Tax liability
Tax on taxable income [24.8×15%] 3.7
Tax on exports [55×0.5%] 0.3
Tax payable 4.0
Tax credit related to investment in green field project (100×25%) (25.0)
Tax credit c/f for two years (21.0)
Alternate corporate tax & minimum tax are not applicable on SME.

Computation under option 2: FTR

Rs. in million
Turnover 230×0.5% 1.2
No expenses allowed -
Income from property (as above) (3.7×15%) 0.6
Tax liability 1.8
Tax credit related to investment in green field project (100×25%) (25.0)
Tax credit c/f for two years (23.2)

W-1: Apportionment of expenses between NTR and FTR

Local sales Exports Other income
NTR FTR NTR
------------------ Rs. in million ------------------
Sales/other income 165.0 55.0 10.0
Sales ratio 75% 25%
Less: Expenses (138.2) (46.1) (3.0)
[184.3(W-2)×75%] [184.3(W-2)×25%]
Financial cost – TL *(7.4) (2.5) -
[9.9(W-3)×75%] [9.9(W-3)×25%]
– Others (5.3) (1.8) -
[7(22–15)×75%] [7(22–15)×25%]
14.1 4.6 7.0
*(S.106A is not applicable in this case because the amount deductible is less than Rs. 10 million.)

Page 1 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

W-2: Adjustment in expenses Rs. in million

Given (197–22–3) 172.0
Amortization of pre-commencement expenditure [3(15×20%)–5] (2.0)
Royalty -
Advertisement expense -
Tax depreciation less Accounting depreciation (14–36) (22.0)
Tax deprecation of plant – initial allowance (100×25%) 25.0
– normal depreciation (75×15%) 11.3
Payment for air ticket -
184.3

W-3: Thin capitalization Rs. in million

Foreign equity at the beginning of the year (60×55%) 33.0
Foreign debt 150.0
Interest expense on foreign debt 15.0
Interest expense allowed for the tax purposes [99(33×3)÷150×15] 9.9

A.2 (a) Eligibility for 100% tax credit: [S.100C]

A B C D
Year of commencement of business 2018 2021 2018 2017
------------------ Rs. in million ------------------
Total receipts (a) 62.2 115.9 219.6 323.3
15% of total receipts (b) = (a)×15% 9.3 17.4 32.9 48.5
Administrative and management
expenditure (Given) (c) 12.0 20.0 40.0 42.0

Test 1: Is (c) < (b)? No No No Yes

Where ‘No’ is the answer in the above row, check the following:

Test 2: Is receipt < Rs. 100 million? Yes No No

Test 3: Is business commenced within
the last three years? No Yes No

If the answer to any of the above three tests is ‘Yes’, then it is eligible for a 100% tax credit. As a
result, except for company ‘C’, all other companies are eligible for a 100% tax credit. Further, the
following test is employed to determine which company’s surplus fund is subject to a tax rate of
10%.

25% of total receipts (d) 15.6 29.0 80.8

Surplus fund (e) 18.0 24.0 66.0
(62.2–44.2) (115.9–91.9) (323.3–257.3)
Is (e) > (d) ? Yes No No

Page 2 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

Considering the aforementioned eligibility criteria, the tax computation for all four companies
is given below:
A B C D
------------------ Rs. in million ------------------
Total receipts 62.2 115.9 219.6 323.3
Less: Dividend(not included in eligible income) (2.0) (4.0) (6.0) (8.0)
60.2 111.9 213.6 315.3
Less: Administrative and management (12.0) (20.0) (40.0) (42.0)
Project (32.2) (71.9) (131.6) (215.3)
16.0 20.0 42.0 58.0
Tax rate 20% 20% 20% 29%
(being small company)
Tax liability 3.2 4.0 8.4 16.8
Less: 100% Tax credit (3.2) (4.0) - (16.8)
- - 8.4 -
10% tax on surplus fund 1.8 - - -
(18×10%)
Tax liability on dividend @ 15% 0.3 0.6 0.9 1.2
Total tax liability 2.1 0.6 9.3 1.2

(b) The income of the proposed UAE-based entity will be classified as Pakistan Source Income
because the import of generators by UAE based entity is part of an overall arrangement for
supply of goods, installation or principal activities undertaken by the associates of the
person.

Further, the Commissioner may apply the provisions related to recharacterisation of

income and deductions in the given scenario by:
 disregard the proposed corporate structure or an entity that does not have an economic
or commercial substance or was created as part of the tax avoidance scheme.
 treat LRPL as a permanent establishment in relation to UAE based entity on a ground
that business (installation and commissioning of generators) carried out by LRPL
constitute complementary functions that are part of a cohesive business operation.

Conclusion:
Proposed strategy does not change the existing tax implications.

A.3 (i) Loan provided to CEO

The loan provided to the CEO, who is a shareholder of a private limited company as
defined in the Companies Act, 2017, falls under the definition of dividend to the extent of
accumulated profits of FLPL. Therefore, the addition of interest income as deemed income
on this loan is an incorrect treatment.

(ii) Sales to unregistered dealer

The inadmissible expenses attributable to sales made to an unregistered person amount to
Rs. 73 million. This calculation is derived as follows:

Amount of deduction claimed under ‘income from business’

[ × Amount of sales exclusive of sales tax]
Turn over for the tax year
866(W-1)
× 106
1,252

The amount of Rs. 73 million is less than 86.6 million (10% of 866), so it should be added
back instead of Rs. 40 million on this account.

Page 3 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

W-1: Amount of deduction claimed under income from business Rs. in million
Expenses (Given) 840
Accounting depreciation (51)
Tax depreciation 77
866

Further, Rs. 8 million shall also be added to profit before tax on account of sale of Third
Schedule item (foam mattresses) to an unregistered dealer. This is calculated as 75% of
dealer margin i.e. Rs. 10.6 [10% of 106].
(iii) Gain on sale of showroom
The deduction of the accounting gain on the sale of showroom from the profit before tax is
the correct treatment. However, classifying this gain as ‘Capital gain’ (separate block of
income) is incorrect. The showroom is not a capital asset, rather it is a depreciable asset.
Therefore, tax gain/loss on sale of showroom should be computed and added/deducted to
the profit before tax amount. The computation of gain/loss on sale of showroom is as
follows:
Rs. in million
Sale proceeds 158
Less: Book value:
Cost (Consideration received treated as cost) 158
Tax depreciation [120 – 64(120×0.96)] (56)
(102)
Tax gain on sale of showroom 56

(iv) Government debt securities

Interest income on government debt securities by FLPL is subject to tax under the NTR
regime instead of the FTR regime. However, it should be classified under ‘Income from
other sources’.
Regarding the treatment of the loss on the sale of government debt securities, deducting it
from profit before tax is an incorrect treatment. Instead, the loss should be added to the
profit before tax. Further, since government debt securities is classified as security defined
in section 37A under the head of capital gain, setting off the loss on the sale of government
debt securities with the gain on sales of unlisted shares is not correct. The loss on the sale
of government debt securities can only be set off with securities mentioned in section 37A.
Therefore, this loss should be carried forward for the subsequent three tax years, in
accordance with Section 37A.
(v) Gain on sale of unlisted securities
The addition of the gain on the sale of unlisted shares into profit before tax is an incorrect
treatment. Instead, it should be deducted from profit before tax. Further, the gain on the
sale of unlisted securities is not subject to tax under a separate block of income. Instead, it
should be subject to tax under the NTR regime classified under the head of capital gain.
Moreover, the entire gain should be subject to tax, rather than just 75% of the gain amount.

Accounting and tax depreciation

Adding back of accounting depreciation is the correct treatment. However, tax depreciation
should be deducted last. Before deducting tax depreciation, the b/f business loss should be
taken into account.
Brought forward business losses and unabsorbed tax depreciation
The brought forward business loss related to the tax year 2016 could not be taken into
account in the tax year 2023 as business loss shall not be carried forward for more than six
tax years. However, b/f business loss related to the tax year 2020 can be set off against the
current year’s income.
Page 4 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

The brought forward unabsorbed tax depreciation should be set off against 50% of the
income chargeable under the head “income from business”, after setting off the brought
forward loss. Consequently, the entire unabsorbed depreciation of Rs. 186 million (being
lower than 188 million) [376(W-2)×50%] instead of Rs. 93 million can be adjusted against
the income of this year.

W-2: Income from business Rs. in million

Profit before tax 562
Less: Other income (150)
Inadmissible expense (73+8) 81
Tax gain on showroom 56
Accounting depreciation 51
600
Less: b/f business loss – 2020 (224)
376

Taxable income:
In given calculation, the entire capital gain is deducted from total income to determine the
taxable income, which is incorrect rather it should be just Rs. 18 million on account of loss
of sale of government debt securities that shall be added back into total income to arrive at
taxable income.

A.4 Taxability

(i) The import of APIs is subject to reduced rate of 1% sales tax under the Sales Tax Act 1990,
subject to the following conditions:
 DRAP shall certify requirement of PHL and shall furnish all relevant information to
Pakistan Customs Computerized System; and
 No input tax shall be adjusted by PHL.

Further, these imports are not subject to 3% value addition tax.

20% export of related medicines made to Bangladesh are subject to zero rate. However no
input tax shall be adjusted by PHL against exports.

80% of the related medicines are sold to local supplies and is subject to reduced rate of 1%
sales tax, subject to the following conditions:
 Tax charged and deposited by PHL shall be final discharge of tax in the supply chain.
 No input tax shall be adjusted by PHL.

(ii) As multi-vitamins are not registered under Drugs Act 1976, sales tax at the normal rate i.e.
17% will be charged on these items. Further since multivitamins are sold by PHL in the
same condition as imported, 3% value addition shall also be charged at import stage. Input
adjustment shall be allowed.

(iii) Artificial flavours are excluded from the application of Eight Schedule. Consequently, they
are subject to sales tax at the normal rate of 17%.

Page 5 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

A.5 Storm Limited (SL)

Computation of duty payable / refundable
For the tax period May 2023
Taxable Duty Amount
Value Rate of Duty
INPUT DUTY --------------- Rupees ---------------
Purchase of un-manufactured tobacco (8,000,000×80%) 6,400,000 390/kg 1,560,000
(5,000×80%×390)
Inland carriage charges (carriage inwards) 30,000 16% 4,800
Marine Insurance for export 10,000 Exempt -
Import of E-liquids (200 kg) 3,000,000 10,000/kg 2,000,000
(200×10,000)
3,564,800
Input duty related to exempt supplies inadmissible [(1,564,800/4,000)×1,000] (391,200)
Input duty related to zero rated supplies [1,173,600(1,564,800–391,200)/12,000×2,500)] (244,500)
Input duty for the month 2,929,100

OUTPUT DUTY
Sale of 9,500 packs - retail price is 24,500 per thousand 24,700,000
(i.e. 9,800/400×1,000) more than 6,660/1000 93,100,000 6,500/1,000 3,800,000(9,500×400)
÷1,000×6,500
Sale of 2,500 packs – export to Indonesia 22,500,000 0% -
(2,500×9,000)

Supply of un-manufactured tobacco to Export 2,000,000 Exempt -

Processing zone for further manufacturing (1,000×2,000)
Sale of e-liquid 7,000,000 10,000/kg 2,000,000
(200×10,000)
Output duty for the month 26,700,000

Net duty payable 23,770,900

Duty drawback on Export of Cigarettes 244,500

Page 6 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

A.6 Heatwave Pakistan Limited

Tax period May 2023
Computation of sales tax payable/refundable/carry forward
Taxable supply Amount of sales
Sales tax rate
(Rs. in million) tax (Rs. in million)
Input Tax
Purchased auto-parts in retail packing 20 17% 3.4
(2.5×8)
Remaining purchases from registered suppliers 198 17% 33.7
(218–20)
Purchase auto parts from the unregistered taxpayer 40 (no input allowed) -
Import of plant and machinery 500 Exempt -
Import of 40 electric cars 248 12.5% 31
(40×6.2)
Value addition tax condition (Not applicable) -
Import of 25 heavy motorbikes in CBU condition 17.5 17% 2.98
(25×0.7)
Import of 25 heavy motorbikes in CBU condition –
17.5 3% 0.53
value addition tax
Import of parts for manufacturing of motor cars 600 17% 102
Value addition tax (Not applicable) -
Electricity bill 19 17% 3.23
(16+4–1)
Payment for software maintenance services 12 5% 0.6
Total input tax for the month 177.44
Less: Input tax on zero-rated and exempt supplies
(16.61)
(5.44+10.87+0.3)(W-1)
160.83
Add: Input tax b/f from the previous tax period 14.00
174.83
Output Tax
Supply of 32 imported electric vehicles 240 12.5% 30
(32×7.5)
Supply of 200 locally manufactured motor cars to 900 17% 153
registered persons (200×4.5)
Supply of motorcycles parts to non-active distributors 10 17% 1.7
Supply of 1000 motorcycles to unregistered person 110 17% 18.7
(1,000×0.11)
Supply of 20 heavy motorbikes to unregistered person 15 17% 2.55
(20×0.75)
Exports of 300 motorcycles to Sri Lanka 45 Zero-rated -
(300×0.15)
Sale of 10 ambulance vehicles to a hospital run by a non- 90 Exempt -
profit organization (10×9)
Total output tax for the month 1,410 205.95
Admissible credit [Lower of 174.83 or 185.36 (205.95×90%)] 174.83
31.12
Sales tax withheld on purchase of taxable supplies from unregistered persons (40×5÷117) 1.71
Further tax (10×3%) 0.3
Sales tax payable 33.13
Sales tax refundable (W-1) 5.44

Page 7 of 8
 TAX PLANNING AND PRACTICES
Suggested Answer
Certified Finance and Accounting Professional Examination – Summer 2023

W-1: Apportionment of input tax Input tax

Between taxable Among taxable,
Supplies
and exempt zero rated and
supplies exempt supplies
------------ Rs. in million ------------
Taxable except zero-rated and exempt supplies 1,020 3.1 123.22
(900+10+110)
Zero-rated supplies 45 - 5.44
Exempt supplies 90 0.3 10.87
1,155 3.4 139.53
(177.44–31–2.98–0.53–3.4)

A.7 In the given situation, the following are the potential breaches of fundamental principles of the
Code of Ethics for Chartered Accountants:

(i) Integrity:
Advising BPL to conceal its past tax evasion would raise doubts about HA’s integrity.

Encouraging or assisting BPL in continuing to conceal past tax evasion undermines this
principle and compromises public trust in the fairness and effectiveness of the tax system

(ii) Confidentiality:
While HA has a responsibility to maintain client confidentiality, she also has a duty to
disclose tax evasion to tax authorities or government authorities.

If there are legal obligations or regulatory requirements to disclose the illegal activities, it
would be her first responsibility to disclose this fact as per law.

(iii) Professional Behaviour:

HA should prioritize compliance with tax laws. By assisting BPL in filing accurate tax
returns without disclosing past evasion, HA may be facilitating ongoing non-compliance,
which contradicts the duty to promote lawful behavior.

Agreeing to not disclosing past tax evasion to obtain the engagement might account for
non-compliance with relevant laws and regulations of taxation.

(The End)

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