AIOU 5055 Taxation Management Solved Assignment 1 Spring 2025
AIOU 5055 Assignment 1
Q1. Discuss in detail the taxation of capital gains under the Income Tax Ordinance 2001.
1. What are Capital Gains?
Capital gains refer to profits arising from the disposal of a capital asset during the tax year. These assets may include immovable property (e.g., land and buildings), securities (e.g., shares, bonds), and other tangible or intangible assets. Capital gains are taxable unless specifically exempted under the Ordinance.
2. How Are Capital Gains Taxed?
(A) Gains from Immovable Property:
Gains from selling immovable property are taxed under Section 37. Taxation depends on the holding period (the time the property is held before being sold):
- Held for up to 1 year: Full gain is taxable.
- Held for 1–2 years: A reduced percentage of the gain is taxable.
- Held for 2–3 years: Tax liability decreases further.
- Held for more than 4 years: Exempt from tax.
The formula for calculating gains: Capital Gain = Sale Price - Cost of Acquisition - Allowable Expenses.
(B) Gains from Securities:
Capital gains from securities, such as shares and mutual funds, are governed by Section 37A. Taxation varies based on:
- Type of Security: Listed or unlisted securities.
- Holding Period: Securities held for shorter durations attract higher rates.
Rates for listed securities are specified in the First Schedule of the Ordinance, with favorable rates for promoting investment.
3. What Exemptions Apply?
Some capital gains are exempt to encourage investment and fairness:
- Inheritance: Gains on assets inherited are exempt.
- Gifts: Assets received as gifts from specific relatives are exempt.
- Agricultural Land: Gains from the disposal of specified agricultural land are exempt from taxation.
4. How Are Losses Deducted?
Capital losses (arising when assets are sold at a loss) can offset capital gains within the same tax year. However, these losses cannot offset other types of income like salary or business income.
5. Are Taxpayers Required to File Capital Gains?
Taxpayers must report capital gains in their annual tax return. Proper documentation, such as sale deeds and purchase records, is necessary to ensure compliance.
6. Are There Special Provisions?
The Ordinance includes relief measures, such as reduced tax rates or amnesties for particular gains, especially in real estate and securities, to boost economic activities.
Q2. a) What is withholding tax? Explain the legal provisions as per the Income Tax Ordinance 2001.
What is withholding tax? Withholding tax is a system where tax is deducted at the source of income or payment. It ensures timely tax collection and compliance by requiring certain entities, known as withholding agents, to deduct tax before making payments to individuals or businesses.
Explain the legal provisions as per the Income Tax Ordinance 2001. Under Pakistan's Income Tax Ordinance 2001, the legal provisions for withholding tax include:
Obligations of Withholding Agents: Specific entities, such as employers, banks, and businesses, are required to deduct tax at the time of payment for transactions like salaries, dividends, and payments to contractors.
Applicable Rates: The Ordinance specifies rates for different types of payments, which may vary based on the nature of the transaction and the recipient's tax status.
Time of Deduction and Deposit: Tax must be deducted at the time of payment and deposited into the Federal Government's account within a prescribed timeframe.
Exemptions and Reduced Rates: Certain transactions or entities may qualify for exemptions or reduced rates under specific conditions.
Consequences of Non-Compliance: Failure to deduct or deposit withholding tax can result in penalties, fines, and legal action.
Q2. b) Compute the tax liability of a registered firm XY where X and Y equal partners are working.
| Expenses | Rs. | Revenues | Rs. |
|---|---|---|---|
| Purchases | 180,000 | Sales | 800,000 |
| Wages to workers | 20,000 | Interest on bank Deposits | 15,000 |
| Maintenance | 10,000 | ||
| Personal expenses X | 4,000 | ||
| Personal expenses Y | 5,000 | ||
| Commission X | 10,000 | ||
| Commission Y | 9,000 | ||
| Depreciation | 12,000 | ||
| Salaries | 50,000 | ||
| Net Profit | 515,000 | ||
| Total | 815,000 | Total | 815,000 |
Additional Information:
1. Tax depreciation is of Rs. 30,000
2. The travelling expenses of Rs. 15000 have not been recorded.
3. The salaries include salary of X of Rs. 10,000 and salary of Y of Rs. 5,000.
4. The maintenance expenses include a payment of Rs. 3000 to Mr. X.
Taxable Income Calculation:
Starting Point:
Net Profit (as per accounts): Rs. 515,000
Add Back Non-Deductible Expenses:
Personal expenses of partners X and Y = Rs. 4,000 (X) + Rs. 5,000 (Y) = Rs. 9,000
Salaries paid to partners = Rs. 10,000 (to X) + Rs. 5,000 (to Y) = Rs. 15,000
Maintenance expenses paid to Mr. X = Rs. 3,000
Total Non-Deductible Expenses = Rs. 27,000
Subtract Unrecorded Deductible Expenses:
Travelling expenses not recorded = Rs. 15,000
Adjust Depreciation:
Tax Depreciation = Rs. 30,000
Accounting Depreciation = Rs. 12,000
Deduction for Tax Purposes = Rs. 30,000 - Rs. 12,000 = Rs. 18,000
Taxable Income Formula:
Taxable Income = Net Profit + Non-Deductible Expenses - Unrecorded Deductible Expenses - Depreciation Adjustment
Final Taxable Income Calculation:
Taxable Income = Rs. 515,000 + Rs. 27,000 - Rs. 15,000 - Rs. 18,000 = Rs. 509,000
Tax Liability Calculation:
Taxable Income: Rs. 509,000
Tax Rates for AOPs in Pakistan:
1. Up to Rs. 600,000: 0% tax rate (exempt)
2. Rs. 600,000 to Rs. 800,000: 7.5% of the amount above Rs. 600,000
3. Rs. 800,000 to Rs. 1,200,000: Rs. 15,000 + 15% of the amount above Rs. 800,000
4. Rs. 1,200,000 to Rs. 2,400,000: Rs. 75,000 + 20% of the amount above Rs. 1,200,000
5. Rs. 2,400,000 to Rs. 3,000,000: Rs. 315,000 + 25% of the amount above Rs. 2,400,000
6. Above Rs. 3,000,000: Rs. 465,000 + 30% of the amount above Rs. 3,000,000
Tax Liability:
Since Rs. 509,000 falls below Rs. 600,000, the firm is exempt from tax under the current tax slabs for AOPs.
Q3. a) Calculate the tax liability of M.Y Ltd from the following records:
| Expenses | Rs. | Revenues | Rs. |
|---|---|---|---|
| Cost of goods sold | 510,000 | Sales | 11,00,000 |
| Travelling | 15,000 | Dividend received | 14,000 |
| Legal fee | 10,000 | Capital gain on sale of shares of public company | 25,000 |
| Zakat fee | 5,000 | ||
| Rent | 16,000 | ||
| Withholding tax paid | 11,000 | ||
| Net profit | 572,000 | ||
| Total | 11,39,000 | Total | 11,39,000 |
Additional information:
1. Tax depreciation amounts to Rs.15,000.
2. Cost of goods sold includes a payment of Rs.12000 to an advertising agency for last year's advertisement.
3. Travelling expenses of Rs.5000 are recorded without invoice proof.
4. Legal fee includes a payment of Rs.3000 to the settlement of a case.
5. The corporate income tax rate is 28% and alternate corporate tax rate is 17%.
Adjust the Net Profit
Start with Net Profit = Rs. 572,000
Adjustments:
1. Cost of Goods Sold: Includes Rs. 12,000 for last year's advertisement. Add back Rs. 12,000.
2. Travelling Expenses: Recorded Rs. 5,000 without invoice proof. Add back Rs. 5,000.
3. Legal Fee: Rs. 3,000 for settlement of a case. No adjustment is required for this as it is assumed to be legitimate.
4. Tax Depreciation: Given as Rs. 15,000, which we will use for deduction (no adjustment needed as accounting depreciation is unknown).
Adjusted Taxable Income from Business:
Taxable Income (Business) = Net Profit + Adjustment for Cost of Goods Sold + Adjustment for Travelling Expenses
Taxable Income (Business) = Rs. 572,000 + Rs. 12,000 + Rs. 5,000
Taxable Income (Business) = Rs. 589,000
Add Income from Other Sources
1. Dividend Received: Rs. 14,000 (assumed taxable).
2. Capital Gain on Sale of Shares: Rs. 25,000 (assumed taxable).
Total Taxable Income = Taxable Income (Business) + Dividend Received + Capital Gain
Total Taxable Income = Rs. 589,000 + Rs. 14,000 + Rs. 25,000
Total Taxable Income = Rs. 628,000
Compute Tax Liability
Using Corporate Tax Rate (28%):
Tax Liability = Total Taxable Income × Corporate Tax Rate
Tax Liability = Rs. 628,000 × 0.28
Tax Liability = Rs. 175,840
Using Alternate Corporate Tax Rate (17%):
Tax Liability = Total Taxable Income × Alternate Tax Rate
Tax Liability = Rs. 628,000 × 0.17
Tax Liability = Rs. 106,760
Final Tax Liability
The tax liability depends on the applicable tax rate:
- At 28% Corporate Tax Rate: Rs. 175,840
- At 17% Alternate Corporate Tax Rate: Rs. 106,760
Q3. b) What are the corporate tax credits and rebates under the Income Tax Ordinance 2001. Explain in detail.
What are the corporate tax credits under the Income Tax Ordinance 2001?
Charitable Donations: Tax credits are available for donations to approved charitable organizations.
Investment in Shares and Life Insurance: Tax credits are provided for investments in listed shares and life insurance premiums.
Pension Funds: Contributions to approved pension funds are eligible for tax credits.
Balancing, Modernization, and Replacement (BMR): Tax credits are offered for investments in BMR of plant and machinery.
Enlistment on Stock Exchange: Companies that enlist on a stock exchange in Pakistan can claim tax credits.
Equity Investment in New Industrial Undertakings: Tax credits are available for equity investments in newly established industrial undertakings.
Startups: Certified startups registered with the Pakistan Software Export Board (PSEB) are eligible for tax credits for up to three years.
What are the corporate tax rebates under the Income Tax Ordinance 2001?
Senior Citizens: Individuals aged 60 and above are eligible for a rebate on their tax liability.
Full-Time Teachers and Researchers: A rebate is available for full-time teachers and researchers working in recognized institutions.
Profit on Debt: Rebates are provided for profit on debt for the construction or purchase of a house.
What are the exemptions and incentives under the Income Tax Ordinance 2001?
Special Economic Zones (SEZs): Enterprises in SEZs enjoy tax exemptions for a specified period.
Power Generation Projects: Profits from power generation projects are exempt from tax under certain conditions.
Venture Capital Funds: Tax exemptions are available for venture capital funds until a specified date.
Cinema Operations: Income from cinema operations is exempt for five years from the commencement of operations.
Q4. a) MR. Raheem has reported the following transactions for the tax year 2018.
1. Rent received Rs 30,000 per month.
2. Income from fruit selling business Rs.200000
3. Income from the Sale of juices Rs.10,00,000
4. Ground rent received=Rs.30000
5. Royalty income received=Rs.60000
6. Capital gain on sale of shares of a Pvt Ltd of Rs.
70000. The holiday period is 6 months.
7. Donation to a govt. school of Rs.15000
8. Share of income received from AOP Rs.90000
9. Mr Raheem is claiming a senior citizen tax rebate.
Gross Income: Rs. 1,810,000
Step 1: Rent Received: Rs. 30,000 × 12 = Rs. 360,000
Income from Fruit Selling Business: Rs. 200,000
Income from Sale of Juices: Rs. 1,000,000
Ground Rent Received: Rs. 30,000
Royalty Income: Rs. 60,000
Capital Gain on Sale of Shares: Rs. 70,000 (Note: May be taxed separately based on holding period and applicable rates)
Share of Income from AOP: Rs. 90,000 (Exempt if tax has already been paid by the AOP)
Step 2: Deduct Allowable Expenses and Exemptions:
Donation to Government School: Rs. 15,000 (Eligible for tax credit, not a direct deduction)
Step 3: Taxable Income: Rs. 1,810,000 (Donations do not reduce taxable income directly)
Step 4: Tax Calculation:
Income up to Rs. 600,000: Rs. 600,000 × 0% = Rs. 0
Income from Rs. 600,001 to Rs. 1,200,000: Rs. 600,000 × 15% = Rs. 90,000
Income from Rs. 1,200,001 to Rs. 1,600,000: Rs. 400,000 × 20% = Rs. 80,000
Income from Rs. 1,600,001 to Rs. 1,810,000: Rs. 210,000 × 30% = Rs. 63,000
Total Tax Liability (before credits): Rs. 233,000
Step 5: Tax Credit for Donation:
Assuming full eligibility: Rs. 15,000
Net Tax Liability: Rs. 233,000 - Rs. 15,000 = Rs. 218,000
Step 6: Senior Citizen Rebate:
Not applicable as taxable income exceeds Rs. 1,000,000.
Final Tax Liability: Rs. 218,000
Q4. b) Explain in detail the concept of deductions allowed and deductions not allowed in income from business as per the Income Tax Ordinance 2001.
What are Deductions Allowed?
Deductions allowed are expenses that can be subtracted from gross income to calculate taxable income. These include:
1. Ordinary Business Expenses: Expenses incurred exclusively for business purposes, such as salaries, rent, utilities, and office supplies.
2. Depreciation: Deduction for the wear and tear of assets used in the business. Tax depreciation is calculated as per the rates specified in the Ordinance.
3. Initial Allowance: A one-time deduction for newly acquired assets.
4. Scientific Research Expenditure: Costs related to research and development activities.
5. Employee Training and Facilities: Expenses incurred for employee development and welfare.
6. Bad Debts: Deduction for debts that are proven to be irrecoverable.
7. Profit on Debt: Interest paid on loans used for business purposes.
8. Pre-Commencement Expenses: Costs incurred before the business starts operations, provided they are directly related to the business.
What are Deductions Not Allowed?
These are expenses that cannot be subtracted from income for tax purposes, even if recorded in the business accounts:
1. Personal Expenses: Any expenditure for personal use rather than business purposes.
2. Fines and Penalties: Payments for violations of laws or regulations.
3. Entertainment Expenses: Excessive or non-business-related entertainment costs.
4. Contributions to Unapproved Funds: Payments to provident funds, pension funds, or gratuity funds that are not recognized by tax authorities.
5. Cess, Rate, or Tax on Profits: Taxes levied on business profits or gains.
6. Non-Deducted Tax Payments: Expenses where tax was required to be deducted but was not.
7. Payments to Members of an Association: Profit on debt, brokerage, commission, or salary paid to members of an association of persons.
8. Excessive Commission Payments: Commission payments exceeding prescribed limits.
9. Non-Banking Transactions: Payments exceeding Rs. 250,000 made without a crossed banking instrument.
Why Are These Rules Important?
These rules ensure that only legitimate business expenses are deducted, preventing misuse and ensuring fair taxation.
Q5. a) Calculate Sales Tax Due/Refundable in each case:
GEE Ltd a registered manufacturer has reported the following transactions for December for the calculation of sales tax:
(1) Supplies to registered person Rs. 12, 00,000
(2) Supplies to an NGO Rs. 100,000
(3) Supplies to non-registered persons at a discount (5%) Rs.80, 000
(4) Supplies to registered government supplies Rs. 100,000
(5) Purchases from registered persons Rs. 500,000
(6) Imports of raw materials Rs. 40,000
(7) Purchases from non-registered persons on discount (10%) Rs.50, 000
(8) Sales tax refund due.
1. Output Tax (on Sales):
Pakistan’s standard sales tax rate is typically 17% (or adjust if a specific rate applies). Let’s calculate the output tax for each supply:
Supplies to registered person: Rs. 1,200,000 × 17% = Rs. 204,000
Supplies to an NGO (often tax-exempt unless specified otherwise): Rs. 100,000 × 17% = Rs. 17,000
Supplies to non-registered persons at a 5% discount:
Sales after discount: Rs. 80,000 × 95% = Rs. 76,000
Rs. 76,000 × 17% = Rs. 12,920
Supplies to registered government suppliers: Rs. 100,000 × 17% = Rs. 17,000
Total Output Tax = Rs. 204,000 + Rs. 17,000 + Rs. 12,920 + Rs. 17,000 = Rs. 250,920
2. Input Tax (on Purchases and Imports):
Purchases from registered persons: Rs. 500,000 × 17% = Rs. 85,000
Imports of raw materials: Rs. 40,000 × 17% = Rs. 6,800
Purchases from non-registered persons:
Purchases after discount: Rs. 50,000 × 90% = Rs. 45,000
Note: Purchases from non-registered persons are not eligible for input tax under Pakistan’s tax rules.
Total Input Tax = Rs. 85,000 + Rs. 6,800 = Rs. 91,800
3. Sales Tax Due/Refundable:
Sales Tax Due = Output Tax − Input Tax
Rs. 250,920 − Rs. 91,800 = Rs. 159,120 (Sales Tax Payable)
If there’s an additional Sales Tax Refund due as stated, that amount will reduce the payable tax.
Q5. b) Explain in detail the key features of the Customs Act 1969.
What is the Customs Act, 1969? The Customs Act, 1969, is a cornerstone of Pakistan's legal framework for regulating customs duties and trade. Here are its key features:
Scope and Applicability: The Act applies to the entire territory of Pakistan, covering all customs-related activities, including import, export, and transit of goods.
Appointment of Customs Officers: It provides for the appointment of customs officers and defines their powers, duties, and responsibilities, such as inspection, seizure, and confiscation of goods.
Customs Ports and Stations: The Act allows for the declaration of customs ports, airports, and land customs stations, specifying the areas where customs operations are conducted.
Prohibition and Restrictions: It includes provisions to prohibit or restrict the import and export of certain goods, ensuring compliance with national security and public interest.
Customs Duties: The Act outlines the levy, exemption, and repayment of customs duties on goods. It also specifies the rates of duties and taxes under trade agreements.
Valuation of Goods: It provides guidelines for determining the customs value of goods, ensuring transparency and fairness in the valuation process.
Warehousing: The Act includes provisions for licensing public and private warehouses and the storage of goods before clearance.
Audit and Documentation: It mandates the production of documents and information for customs audits, ensuring accountability and compliance.
Penalties and Offenses: The Act prescribes penalties for violations of customs laws, including smuggling and evasion of duties.
Appeals and Dispute Resolution: It establishes mechanisms for appeals and dispute resolution, allowing stakeholders to challenge decisions made by customs authorities.
AIOU 5055 Taxation Management Solved Assignment 2 Spring 2025
AIOU 5055 Assignment 2
Contact for AIOU 5055 Assignment 2 +92 333 2231409
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