Ch06 Taxation of individuals.docx

TAXATION OF INDIVIDUALS AND TAXATION OF ASSOCIATION OF PE$ONS Exercise1-Sole Proprietorship Mr. A is running business as sole proprietor. From the following information / data relevant to tax year 2009. Opening Stock $.800, 000 Purchases $.1, 000,000 Sales $.2, 000,000 Carriage inwards $.30, 000 Closing stock $.800, 000 Electric bill of office paid $ 18,000 Telephone bill paid $ 20,000 Rent of office $ 120,000 Stationary for office $ 4000 Postages $ 3000 Salaries to staff $ 200,000 Advertisement expenses $ 10,000 Advance tax paid $ 60,000 Compute taxable income and tax thereon. Solution to Ex. 1: Tax Payer: Mr. A Tax Year: 2009 Sole proprietorship NTN: 000111 Trading and Profit & Loss Account In $ Opening balance 800,000 Sale 2,000,000 Purchases 1,000,000 Closing Stock 800,000 Carriage inward 30,000 Gross profit 970,000 Total 2,800,000 2,800,000 Electricity 18,000 Telephone 20,000 Office rent 120,000 Stationary 4,000 Postages 3,000 Salaries 200,000 Advertising 10,000 Net profit 595,000 Total 970,000 970,000 Tax payable 595,000 x 12.50%= $. 74,375 Advance tax paid $ 60,000 Tax payable $ 14,375 Tax paid with return $ 14,375 Tax payable / refundable Nil 5746750-322707096520-32270705739130-93535596520-9353551502410-32270701502410-9359902908300-32270702908300-9359904314190-32270704314190-935990 Exercise 2: Taxation of Association of Persons From the following information/ data for tax year 2009 regarding M/S XYZ brothers, a partnership firm, compute taxable income and tax liability of the firm as well as individual members. This firm comprises of three partners Mr. X, Mr. Y and Mr. Z, each partner has equal share in profits. Net profit of M/S XYZ brothers for tax year 2009 is worked out as $ 900,000. Mr. Z has also earned income amounting $ 200,000 from other sources. Solution Exercise 2: Tax Payer: M/S. XYZ Tax Year: 2009 Partnership Firm NTN: 000111 Net profit (taxable income) = $ 900,000 Tax liability of firm (900,000 x 17.50 %*) = $ 157,500 *Tax rate at serial # 12 for income range $ 800,000 to 1,000,000 is applied. Note: Tax liability is the obligation of firm and not of the partners However, if partner has income from any other source, his share of income from partnership is added to taxable income only for rate purposes. Share of profit of each member Mr. X, Mr. Y and Mr. Z $ 300,000 each. Computation of tax liability of Mr. Z Income from other sources $. 200,000 Share of profit of Mr. Z from firm M/s XYZ brothers (Add for rate purposes only) $ 300,000 Taxable income $ 500,000 Tax payable (500,000 x 10%) $ 50,000 Subtract tax liability due to addition of $ 300,000 for rate purposes (50,000/ 500,000 x 300,000 = 30,000) $ 30,000 Tax payable by Mr. Z $ 20,000 (50,000-30,000=20,000) If $ 300,000 would have not been added for rate purposes, Mr. Z would have paid tax at the rate of 4 % that is 200,000 x 4% = 8,000 instead of $ 20,000. TAXATION OF COMPANIES Minimum Tax on Resident Companies Sec 113 Resident Company is subjected to minimum tax @ 0.50% of its turnover for a tax year, even in cases where the company sustains loss. Turnover under this section means: The gross receipts, exclusive of sales tax and central excise duty or any trade discounts shown on invoice or bills, derived from the sale of goods; The gross fees for the rendering of services or giving benefits, including commissions; The gross receipts from the executions of contracts; and The company’s share of the amounts stated above of any association of peron of which the company is a member Exercise-1 M/S XYZ (PVT) Ltd. filed return for tax year 2009, declaring taxable income of $. 1,300,000 and paid entire liability of tax. On scrutiny of record by tax authorities, it came to their notice that following amounts have been paid by Cash. In the light of this information/data compute tax liability of said company for tax year-2009. Salary Office Rent Professional Fee Postages Freight paid Electricity bill Telephone Penalty Solution of E-1 Add Back Inadmissible Deductions under Section 21 Salary paid by cash Rent of office paid by cash Professional fee paid by cash Total Additions Declared income Tax already paid (1,300,000 x 35%) Additions made U/S 21 Tax payable on additions Note: Additions on account of rest of payments, although by cash not required to be added back as provided in section 21(L) Computation of Depreciation Exercise 2 M/S A.K. Brothers is a partnership firm. In the books of accounts the following information/data has been provided with respect to plant and machinery. Compute normal depreciation and initial allowance in the light of the given information. Book value of plant and machinery as on 01-07-2008 $. 1,800,000 Machinery disposed of during the year with book value $. 600,000 Additions of eligible depreciable asset during the year $ 1,000,000 Solution of E-2 Tax Payer: A.K. Brothers Tax Year: 2009 Residential Status: Resident NTN: 000111 Particulars Book value Depreciation Opening W.D.V 1,800,000 ---- Disposals (600,000) ---- Balance W.D.V 1,200,000(X) ---- Additions during Year 1,000,000 Initial allowance @ 50% on 1,000,000 500,000 Balance book value (Y) 500,000 Total book value (X+Y) 1,700,000 Normal Depreciation@ 15% 255,000 Total Depreciation 755,000 On Speculation Business Exercise 3 M/s ABC Ltd. A manufacturing company has furnished the following accounting information for tax year 2009. Compute taxable income and tax thereon: - Gross Income from normal business $.2, 500,000 - Expenditures on normal business $. 1,000,000 - Gross income from speculation business $. 600,000 - Expenditures on speculation business $. 300,000 - Loss carried forward on normal business $. 200,000 - Loss Carried forward on speculation business $. 900,000 - Advance Tax Paid $. 200,000 Solution of E-4 Tax Payer: ABC Ltd. Tax Year: 2009 Residential Status: Resident NTN: 000111 Computation of taxable income and tax thereon: In $. Particulars Speculation Operations Normal Business Total Gross Income 600,000 2,500,000 3,100,000 Expenditures (300,000) (1,000,000) (1,300,000) Net Income 300,000 1,500,000 1,800,000 C/F Loss (900,000) (200,000) (1,100,000) Taxable Income Note-1 (600,000) 1,300,000 --- Taxable Income: Normal business $.1, 300,000 5860415-14611356350-14611355860415-4800606350-4800601554480-14611351554480-4806953290570-14611353290570-4806954561205-14611354561205-480695Tax payable= (1,300,000 x 35%) = $. 455,000 Note-1: Loss of $. 600,000 from speculation business can not be set off against business income, it can be set off against speculation business income, and hence this loss of $. 600,000 shall be carried forward to next year. Taxation of Companies Exercise-4 M/S XYZ is a limited company, running a chain of hospitals. The company filed tax return along with relevant accounts/ documents for tax year 2009. This return has been selected for total audit. As a taxation officer, work out taxable income and tax liability of the said company for tax year 2009. Medicines purchased $. 1,000,000 Ambulances- running expenses $. 300,000 Depreciation on ambulances $. 40,000 Depreciation on other assets $. 60,000 Salaries paid through bank accounts of employees $. 300,000 Unsupported payment for purchase of stationery $. 12,000 Depreciation on account of car owned by director and in his parsonaluses $. 40,000 Payment of legal fee by cash $. 60,000 Received payments from corporations on the panel of the hospitals $. 6,000,000 Other receipts $. 2,000,000 Gain on sale of a vehicle $. 200,000 Purchase of X-Ray machine for shown as expense in revenue account $. 1,000,000 Withholding tax deductions $. 525,000 Loss carried forward from tax year 2008 $. 1,200,000 Solution of E-4 Tax Payer: M/S XYZ Ltd. Tax Year: 2009 Resident Company NTN: 000111 Revenue Account as Submitted by Co. EXPENDITURES RECEIPTS Particulars Amount in $. Particulars Amount in $. Medicines 1,000,000 From Corporations 6,000,000 Ambulances 300,000 Other Receipts 2,000,000 Depreciation (Ambulances) 40,000 Gain on Sale of Vehicles 200,000 Depreciation Others 60,000 Salaries thru bank 300,000 Unsupported PAMT 12,000 Depreciation on parsonalcar 40,000 Legal Fee by cash 60,000 X-Ray machine 1,000,000 Net Profit 5,388,000 8,200,000 8,200,000 5746750-21367753024505-213677596520-21367755739130-825596520-82551993900-95253022600-95254622800-9525 Computation of Tax Payable: 5746750152409652015240427990015240 Net Profit as computed by Co. 5,388,000 Less set off of c/f losses (1,200,000) Taxable Income 4,188,000 Tax Payable 4,188,000x35% 1,465,800 Less withholding Tax deductions 525,000 Balance Tax Payable 940,800 Tax Paid with Return 940,800 Tax Payable/Refundable NIL Additions by Taxation Officer on account of inadmissible expenses: Unsupported payments 12,000 Depreciation claimed on personal car of Director 40,000 Payment of legal fee by cash 60,000 Purchase of X-Ray machine ( to be capitalized, balance sheet item as such 1,000,000 not to be shown in Revenue a/c) Total additions 1,112,000 Tax payable on account of add backs (1,112,000 x 35%= 389,200) 389,200 The company shall have to pay tax amounting $ 389,200.