The Professionals’ Academy of Commerce

Pakistan’s Leading Accountancy Institute

Certified Finance and Accounting Professional Stage Mock Examinations

21st November, 2024
3 hours – 100 marks
Additional reading time - 15 minutes

Tax Planning & Practices

Q.1 (a) Bakir Hughe Inc (BHI) head quartered in Malaysia counts among the most internationally aligned Malaysian
based company in the global marketplace. BHI. operates worldwide with leading brands and technologies in the
business areas of home care, laundry and beauty care.
Hiba Limited (HL), a wholly owned subsidiary of BHI is a company incorporated under the Companies Act,
2017. HL is considering entering business relation with BHI under the following arrangements:
 HL will import raw material from Bakir Hughess Inc (BHI).
 Raw material imported will be delivered by HL to ABC Manufacturing Ltd for toll manufacturing subject
to payment of toll manufacturing charges. Goods will be delivered back to HL after manufacturing.
 Goods to be manufactured will be a Third Schedule item under the Sales Tax Act, 1990.
 Bakir Hughess Inc (BHI) Dubai will mainly be used to provide funds for marketing/sales promotion
expenses.

Required:
In respect of the above arrangement:
What will be the Income Tax implications on Hiba Limited (HL) in respect of following possible ways of
injecting/incurring money vis-a-vis Trade Promotion/ Advertisement committed to be incurred by Bakir
Hughees Inc (BHI) Dubai.
(i) Hiba Limited will incur marketing/trade promotion expenses on behalf of BHI Dubai and BHI will
reimburse the said expenses to Hiba Ltd.
(ii) BHI Dubai will directly incur marketing/trade promotion expenses in Pakistan.
(iii) Hiba Limited will incur marketing/trade promotion expenses on behalf of BHI Dubai and BHI Dubai will
reimburse the said expenses to Hiba Ltd through reduction in price of imported raw material purchased from
BHI. (08)

Q.1 (b) M/s. Cotton Limited, a holding company of five companies is engaged in the business of cotton farming,
ginning, spinning, weaving and trading. Approximately 60% of the output of each company is consumed by the
next follower. The remaining 40% is being sold in the open market through the trading company out of which
60% is exported and 40% is sold in the local market.
Mr. Zaidi, Director Finance of the group of companies has received a notice from tax department regarding
applicability of section 108 of the Income Tax Ordinance, 2001-transactions between associates. Mr. Zaidi
approached you to seek advice about the following:
(i). What are the methods which may be applied to determine arm’s length results? (02)
(ii). Which method will be used by Commissioner where the arm’s length results cannot be reliably determined
under any of the methods as mentioned at (i) above. (01)
Q.1 (c) As part of group restructuring, a resident holding company has set up a wholly owned subsidiary outside
Pakistan. The control and management of the subsidiary affair’s is situated wholly in Pakistan. Shares held by
the holding company in different subsidiaries and associated companies have been transferred to offshore
subsidiary at breakup values being higher than their respective costs.
Required:
In the light of the provisions of the Income Tax Ordinance, 2001 briefly explain whether holding company is
required to pay any tax on the difference between the breakup value of shares and their respective cost prices.
(04)
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Q.1 (d) Agha Limited (AL) is engaged in the business of manufacturing and sale of cement exclusively to the Pakistan
market. The newly elected government in Souft Africa is keen to attract foreign investors to help develop the
economy and is also offering tax incentives.
AL plans to set up a subsidiary company in South Africa and the CEO and wider board have approved the idea
in principle.
The board is keen to utilize the skills of the highly experienced current management in the new venture wherever
possible. Additionally subsidiary company can be provided with loan by the parent company whenever required.
It is expected that invest will start to generate profits in two years’ time.
Required:
Identify the possible ways of repatriating the profit to Pakistan in a legal manner and discuss the tax implications
for AL of each of the possible ways. (07)

Q.2 For the purpose of this question, assume that the date today is 31 October 2025.
Shakeel (Private) Limited (SPL) is primarily engaged in the business of manufacturing and sales of various
products. SPL’s finance department is in the process of finalizing income tax return for the tax year 2025 and
has prepared the following computation along with the supporting notes for the year ended 30 June 2025:

Income from business Note Rs. In

Million
Profit before tax (i) 470.0
Adjustments:
Less: Unrealized gain on investment properties (i) (140.00)
Add: Purchases of imported make-up sets (ii) 26.00
Add: Loss from toll manufacturing services (iii) 2.00
Add: Administrative and selling expense (iv) 18
Less: Interest income from a Sukuk (FTR income) (v) (4.25)
Less: Cash dividend (FTR income) (vi) (22.00)
Taxable income 349.75
Tax liability:
Tax @ 29% 101.42
Tax on cash dividend (22×15%) 3.30
Total 104.72
Notes to the computation:
(i) It represents net appreciation in the fair market value (FMV) of SPL’s investment properties. The details
are given below:

Name of the property FMV on 30 FMV on Increase/

June 2024 30 June Decrease
2025
---------Rupees in Million------------
Property A 150 250 100
Property B 330 290 (40)
Property C 220 200 (20)
Property D 400 500 100
Total 140

 Property A was agriculture land owned by company. It was rented on 01 July 2024 for monthly rental
of Rs. 500,000 per month.
 Property B was used as SPL’s head office.
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 Property C was purchased during the year for capital gain purpose. However, it could not be sold due
to financial crises.
 Property D SPL intended to rent out this building but it could not materialize and remained vacant
during the year. Fair market rent of the property was 25 million per annum.
(ii) These purchases were made from Cacha Limited (CL), an importer. No withholding tax was deducted at
the time of payment to CL. These make up sets were sold by SPL after making certain modification with
respect to its packaging/repacking.
(iii) Toll manufacturing services were provided to Haseen Limited, an exporter of textile. These services were
considered to be subject to tax under minimum tax regime.
(iv) The following payments were made without deducting any income tax:
 Purchase of airline tickets from a travel agent amounting to Rs. 500,000.
 Payment of lease rentals of Rs. 1,000,000 to a non-resident company having no permanent
establishment (PE) in Pakistan.
 Payment of copyrights and patents amounting to Rs. 1,500,000.
 Company executives acquired goods and services worth Rs. 2,000,000 through credit card payments
that were later reimbursed to them by the company.
 Company issued ordinary shares worth Rs. 1,000,000 to its creditors in lieu of settlement of their
accounts.
(v) The amount was credited to SPL’s bank account after deduction of withholding tax at the rate of 15%.
(vi) Cash dividend from Pakistan based company, Shakeel Technology Limited (STL) was received without
deduction of tax at source. SPL acquired 100% shareholdings in STL on 1 July 2024. STL is engaged in
the business of exporting IT enabled services to its clients in various countries. STL is registered with and
duly certified by Pakistan Software Export Board. Extract from STL’s income statement for the year
ended 30 June 2025 is as follows:
Rs. In million
Revenue 320
Expenses 400
Net loss (80)
Required:
 Under the provisions of the Income Tax Ordinance, 2001, and Rules made thereunder, comment on each
element of the above computation of taxable income and tax liability including adjustments along with the
notes, prepared by the finance department for the tax year 2025. Give suggestion(s), wherever necessary.
(25)
Note:
 Revised computation is not required.
 Ignore WWF, Super tax, WPPF, Minimum tax u/s 113 and Alternative Corporate Tax, if any.

Q.3 On December 2024, Bakir Limited (BL) a tier one retailer purchased two point of sale machines amounting to
Rs. 120,000 and Rs. 250,000 respectively for installation and integration with Board’s computerized system.
Taxable income for tax year 2025 was Rs. 12,000,000. The income was arrived at after adjustment of the
following items:
Stock consumed has been computed as follows:
Opening stock 5,000,000
Purchases 65,000,000
Closing stock (32,000,000)
38,000,000
The net realizable value of the closing stock is Rs. 40,000,000 against its cost of Rs. 35,000,000.
(i) An amount of Rs. 2,500,000 received a compensation from Sui Northern Gas Limited (SNGP) for partial
loss of profits on account of disrupted gas supply, as per the terms of agreement.
(ii) Legal and other fees of Rs. 200,000 paid in connection with acquisition of piece of land during the year
amounting to Rs. 5,000,000.
(iii) Gain of Rs. 1,000,000 on sale of piece of land (sale value Rs. 6,000,000) acquired during the year at (iii)
above. The entire sale proceed was received in cash.
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(iv) Sold a machine for total consideration of Rs. 1,000,000. The machine had been purchased for Rs. 1,500,000
on 01 August 2023 and was used in manufacture of IT products. No gain or loss has been recognized in
the accounts as the sale proceeds were still recoverable by the company on 30 June 2025.
(v) Gain of Rs. 200,000 on sale of locally manufactured 1500CC motor vehicle which was sold prior to its
registration. BL purchased the vehicle from local manufacturer in 2025.
(vi) Rs. 1,000,000 as return on investment in sukuks from a special purpose vehicle.
(vii) Administrative expenses including the following:
(a) Rs. 1,000,000 paid as rent for an office for two years from 01 July 2024.
(b) Rs. 50,000 as donation to a political party which is staunch supporter of lower taxation for corporate
sector.
(c) Rs. 100,000 as legal expenses for filing a court case against a former employee for the recovery of loan
advanced
(d) Rs. 200,000 to Karachi Port Trust (KPT) for not lifting imported goods from the docks within the time
stipulated in KPT rules.
Required:
Compute correct taxable income and tax liability of BL under the appropriate heads of income for the tax year
2025. (15)

Q.4 Ahad is the tax partner in Hammad and Company, Chartered Accountants. Ahad is presently in the process of
preparing the annual tax return of Deewar Limited (DL), a listed audit client. The tax manager, Kamran Wasi,
responsible for DL’s return is on emergency medical leave and the return has to be submitted within three days
from now. DL has been denied any further extension in date of filing of return by the tax authorities. Due to
excessive workload and shortage of staff, Ahad has requested one of their audit partners to temporarily assign
a team member for the timely preparation and filing of DL’s income tax return. The audit partner has assigned
Feroze, who has been associated with DL’s audit for the past two years. However, Feroze has no previous
experience in filing of tax returns. While working on the assignment, Feroze discovered some errors in the
preparation of DL’s previous year’s tax return. These errors were the fault of Kamran Wasi. Ahad has requested
Feroze not to disclose the errors to DL.
Required:
In the light of ICAP’s Code of Ethics, identify the potential threat(s) and the fundamental principles of code of
ethics which may be breached in the above situation. Also suggest corresponding safeguard(s) to
minimize/mitigate the threat(s). (05)

Q.5 (a) Indus Valley Silk (IVS) is located near Sukkur, in Sindh province. It is a well-established, family-owned
business which buys raw silk in bulk, spins it into thread, then weaves it into yarn. This is sold to clothing
manufacturers, mainly in Pakistan.
For many years, the majority of the silk was purchased from a trusted local supplier. Unfortunately, this
supplier's silkworms suffered from a serious disease recently, meaning the whole plantation had to be destroyed
at short notice. The supplier is unfortunately not intending to restart their business.
The operations director, Ehsan Majeed, is determined to turn the business around, and has outlined plans for
IVS to invest in a new mulberry plantation and produce its own raw silk, reducing its cost base significantly
compared to purchasing the raw silk externally as previously. It is also anticipated that if IVS produces more
than the amount of silk required for its own purposes, the excess can be sold to other manufacturers.
Required:
Discuss the income tax and sales tax implications if the board approves the investment in the new mulberry
plantation. (08)

Q.5 (b) Hamid Mir planned to start a manufacturing business and obtained sales tax registration in March 2024.
However, due to unforeseen circumstances, he was unable to start his business as planned. Consequently, no
sales tax returns were filed from March to August 2024, as he did not engage in any taxable activity.
Required:
Under the provisions of the Sales Tax Act, 1990 and the Rules made thereunder, discuss the following:
(i) The requirement to file the sales tax return and the consequences, if any, for the non-filing of such returns.
(ii) Power of the Commissioner in abovementioned scenario. (04)
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Q.5 (c) Waseem and Sons (WS), a registered person under the Sales Tax Act, 1990 (STA), sold taxable goods to Haleem
and Sons (HS) in February 2024.
Required:
Under the provisions of the Sales Tax Act, 1990 and the Rules made thereunder, for each of the following
independent cases, specify the document that WS and HS are required to issue, if any, and state the effect
(increase, decrease or no effect) on the sales tax liability of WS and HS:
(i) HS is registered under the STA and returned 25% of the goods in July 2024.
(ii) HS is not registered under the STA and returned 25% of the goods in May 2024.
(iii) HS is registered under the STA and returned 25% of the goods in September 2024.
(iv) The value of supply and corresponding sales tax were erroneously understated by WS. The error was
rectified in June 2024.
(v) The value of supply and corresponding sales tax were erroneously overstated by WS. The error was rectified
in June 2024. (05)

Q.6 MODAM Limited (ML) is engaged in the production and supply of Cement business. ML is registered with the
Inland Revenue Department for sales tax purposes as Manufacturer, importer and trader. Following data has
been extracted from ML’s records for the month of November 2024:
Rupees
Purchases:
Raw material:
 from local registered suppliers 9,700,000
 Import 900,000
Import of finished goods-Chocolates 1,200,000
Supplies:
Local:
 taxable supplies to registered persons 7,200,000
 taxable supplies to un-registered persons 3,500,000
 exempt goods 250,000
 sale of imported finished goods-Chocolates 1,500,000
Supply of cement for consumption on plane proceeding from Lahore to UAE 600,000
Additional information:
(i) ML imported specific machinery at Rs. 500,000 for the production of bio diesel after obtaining
certification from Alternative Energy Development Board (AEDB) and machinery of Rs. 1,000,000
under export facilitation scheme, 2021.
(ii) Purchases from local registered suppliers include 500 metric ton locally produced coal amounting to
Rs. 3,000 per metric ton from Tele Limited and limestone flux amounting to Rs. 500,000.
(iii) 7,500 boxes of biscuits without retail packing were purchased from registered suppliers, not included
above, at a wholesale price of Rs. 60 per box for onward sale. The retail price of these boxes was Rs.
90 per box.
(iv) Taxable supplies to registered persons include the following:
 Cement worth Rs. 700,000 supplied to a registered exporter Baramad Limited.
 Tiles of Rs. 650,000 supplied to Raja (Pvt) Limited. These Tiles were purchased directly from the
manufacturer in October 2024. The retail price of tiles is Rs. 800,000.
(v) Taxable supplies to un-registered persons include supply of Storage Batteries worth Rs. 400,000 to a
private school. Purchase invoice confirms that these Batteries were purchased in September 2024 from
an importer for Rs. 325,000 against payment of sales tax at the rate of 18%. The retail price of storage
batteries is Rs. 500,000.
All the above figures are exclusive of sales tax, wherever applicable. Except for the item specified under Eight
Schedule, sales tax is payable at the rate of 18%.
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 ML for the tax period November 2024. (16)
(THE END)