Post # 22: Amendments of Finance Act 2012 Not to Apply on September 2012 Exam

Dear Students,

I have been recieving numerous queries from students regarding amendments in Income Tax Ordinance, 2001, and Sales Tax Act, 1990, vide Finance Act 2012. It is clarified that as per ICAP policy these changes will not apply to the upcoming attempt of September 2012. So, simply disregard them and don't waste time on reading about those changes.

Regards,
TT

Post # 21: Personal Status of ICAP under ITO-2001

Q. What is the personal status of ICAP under ITO-2001?

Ans. ICAP is a body corporate being formed by a law i.e. Chartered Accountants Ordinance, 1961, hence, as per provision of Section 80(2) (c) (ii) ICAP is a COMPANY for the purposes of Income Tax Ordinance, 2001.

Post #20: Employee Share Scheme - Disposal before Free Right

Q. If shares are issued with restriction under an Employee Share Scheme (ESS) and employee disposes off the shares before the date of free right, what impact will it have?

A. If shares are issued with restriction on their transfer by employer, following provision of law shall apply

a) The amount to be charged to tax under Salary of the employee shall be computed as follows:

FMV of Shares on the Date of disposal
Les: Consideration paid by employee for option, right or shares
Amount Chargeable to Salary
[Section 14(3)]

b) Since there has been disposal of shares, hence, capital gains u/s 37 or 37A on their sale need to be computed as follows:

Consideration Recieved
Less:Cost
C.Gain/Loss

In this case consideration recieved shall be taken equal to the FMV of the shares on the date of disposal and cost equal to sum of consideration paid for option, right, or shares and the amount charged under Salary for shares [Section 14(4)]. Thus, in this situation gain will be zero. But, computation thereof must be shown in the paper.

Treatment of Input Tax on Fixed Assets

Q: What is the treatment of input tax paid on fixed assest?
Ans: All the amount of the input tax paid on fixed assets used or to be used in making a taxable supply is claimed fully in the same month. Also, the restriction on input tax upto 90% of the outtax is not applicable on the input tax on fixed assets. (Previously input tax on fixed assets was allowed credit from output tax in 12 equal instalments over a period of 12 months).

Raw Materials Purchased from Un-regd Person and Used Exclusively in Taxable Supplies

Q: What are the provisions of Sales Tax Law in case raw material is purchased from un-registered person and is exclusively used in taxable supplies?

Ans: If raw material is purchased from an un-registered person, input tax (if any) is not admissible, but output tax is to be charged and paid on such supplies regardless of the fact  whether the supplies are made to a registered person or to a non-registered person.

With respect to the fact that a certain amount of raw materials purchased from unregistered person is wholly used in taxable supplies, it must be noted that this fact does not have any effect on the computation and it cannot be used to reduce the input tax credit.

The ‘purchase/sale ratio’ has been invented and used by some to limit the input tax paid on purchases from registered persons. There is no such ratio in the Sales Tax Act, 1990, or Sales Tax Rules, 2006, and the restriction on input tax in such a way in not intended by the law maker. (I must say it’s a smart idea, though, but without any legal basis.)

The whole concept has been derived from Rule 25 of the Sales Tax Rules, 2006, which relates to allocation/proration of input tax. The said rule says:

-         Input tax paid on raw materials relating wholly to taxable supplies is wholly admissible.

-         Input tax paid on raw materials relating wholly to exempt supplies is not admissible.

-         Input tax paid on raw materials relating to both taxable supplies and exempt supplies (called ‘residual input tax’) is to be apportioned according to the following formula.

Residual input tax credit on taxable supplies

=

Value      of    Taxable    supplies           (Value of Taxable + Exempt Supplies)

×

Residual input tax

Here, the gross value of taxable supplies for the month is to be taken for denominator and numerator (as computation is done on monthly basis) and not the value reduced by any ‘purchase/sale ratio’.

Note that ICAP has examined this point at least twice in Spring 2011 and Autumn 2009 and in its suggested answers has not used any ‘ratio’ to reduce the input tax credit. ICAP suggested answer is correct and in accordance with law and rules of sale tax.

To sum up:

-         Input tax (if any) on purchases from unregistered person is not allowable.

-         Output tax is chargeable on supplies made to registered person, as well as un-registered person.

-         If it is given that a specified amount of raw material is purchased from unregistered person and is used exclusively in taxable supplies, ignore it and don’t use any formula not provided in the law/rules to reduce the input tax credit.

-         Input tax paid on raw materials relating wholly o taxable supplies is wholly admissible as adjustment.

-         Input tax paid on raw material relating to wholly exempt supplies is not admissible.

-         Input tax paid on raw materials relating to both taxable supplies and exempt supplies (called ‘residual input tax’) is to be apportioned according to the aforesaid formula.

Interest-free Loan Used in Property Producing Taxable Income

Q: What is the tax treatment of concessionary/interest-free loan which is used by the employee in acquiring an asset or property producing income chargeable to tax? (Section 13(8) of ITO-2001)

Ans: If concessionary/interest-free loan acquired by employee from employer is used by him in acquiring an asset or property which produces income chargeable to tax under ITO-2001, following provions shall apply:

(1) An amount equal to the bench mark rate in case of interest-free loan and difference of the bench mark rate and the interest charged by employer in case of concessionary loan, shall be charged to tax under the head Salary in accordance with Section 13(7).

(2) The amount of profit on loan equal to the bench mark rate shall be DEEMED to have been PAID by the employee to employer.

(3) Although the employee may not have actually paid any amount to employer on account of the profit on loan, but an amount equal to the bench mark rate is assumed to have been paid to the employer owing to the reason that DEDUCTION for profit on loan equal to the benchmark rate may be allowed to employee under the head in which income arising from the asset/property is charged to tax.

Example: Mr. A is an employee at XYZ Ltd. He has received interest free loan at Rs. 800,000 from his employer and has purchased a car from that loan. The car, being used in rent-a-car, produces income from business at Rs. 350,000. Bechmark rate is 13%.

Solution:

Amount chargeable under Salary   800,000 x 13% = 104,000

Amount chargeable under IFB    350,000
Deduction for profit on loan        104,000
Income under IFB                       246,000

Note: In case the property purchased from loan is land or building and rental income is generated from the said property, then there will be no benefit of the aforesaid provision of law to the employee as no deduction is allowed under Income from Property.      

Gain on Disposal of Immovable Property

Q: An immovable property is sold for Rs. 20 (m). The cost of the said property was Rs. 10 (m). Accumulaed Depreciation is Rs. 1(m). What will be the tax gain?

Ans:

Consideration Recieved   10
WDV (10-1=9)                 09
Tax Gain                          01

According to Section 22(14) if consideration recieved on disposal of an immovable property exceeds the cost of the property, the consideration recieved is to be taken equal to the cost. Due to this provision of law, gain shall always be equal to the depreciation deduction claimed by the taxpayer, the maount of gain over and above the claimed deprecation will not be charged to tax. This provision is designed only to re-coup the amount of depreciation deductions claimed by the taxpayer.