TAX - SPECIAL CASES - ICAP F MODARABA a) Tax rate on Modarabas income is 25% except dividend income, section 153

and 154 (Clause 1 !"## 2nd $c%&)& T%ere'ore, one can sa( t%at 'inancin) activit( o' a modaraba is taxable at 25% b) #ncome o' a Modaraba, not bein) income 'rom tradin) activities, is exempt sub*ect to +,% distribution o' pro'it a'ter mandator( reserve re-uired to be set aside b( t%e $tate .an/& #t means t%at a modaraba involved in manu'acturin) activities or 'inancin) activities includin) leasin) is exempt 0it%out an( time limit sub*ect to t%e said condition& #ssue o' bonus s%ares s%all not be considered as distribution o' pro'it 'or t%e purpose o' t%is clause& #t means t%at cas% dividend is re-uired (Clause 1,, !"# 2 nd $c%edule) c) Minimum tax provisions u1s 113 are not applicable 'or a Modaraba 2 Clause 11(xiii) !"#3 2nd $c%edule d) Modaraba en)a)ed in leasin) s%all be treated at par 0it% a leasin) compan( i' +,% o' pro'its is not distributed i&e& similar treatment s%all be t%ere in respect o' rentals, 'inance income, tax dep and restriction on unabsorbed dep& 4o0ever, tax rate s%all be applicable 5 25%& LEASING i) 6ease rentals are treated as income o' t%e lessor& #n t%e case o' 'inance lease, lease rentals s%all be added 0%ile 'inance income and tax dep s%all be deducted 'rom accountin) pro'it& ii) Tax dep, initial allo0ance and unabsorbed dep in respect o' assets )iven on lease are allo0able to t%e lessor sub*ect to t%e condition t%at t%e same s%all be allo0ed onl( a)ainst income 'rom lease rentals& 4o0ever, tax dep on o0ned assets s%all be allo0ed in t%e normal manner& iii) 7o tax is deductible on lease rentals and t%ere'ore !T8 is not applicable on leasin) business& Illustration: 9ollo0in) is t%e ! : 6 a1c o' a leasin) compan( approved b( t%e C.8& T%e compan( 'ollo0s ;'inancin) met%od< in accountin) 'or reco)nition o' lease and installment loan income& T%e applicable corporate income tax rate is 35%& PROFIT AND LOSS ACCOUNT #ncome 'rom= 9inance lease #nstallment loan >peratin) lease >t%er income 6ess= 9inance and ban/ c%ar)es ?dministration and )eneral expenses @irect cost o' 'inance lease includin) installment loan @irect cost o' operatin) lease ?llo0ance 'or potential lease losses Aain on cancellation o' leases >peratin) pro'it be'ore taxation 5,,,, ,,,, 3,,,, 2,,,, 2,,,, (2,,,,) 8s&(,,,) 8s&(,,,) 1,,25, 4,,,, 2,5,, 2,5,, 1+,25,

1 ,,,, 1,25,

#n addition (ou %ave access to t%e 'ollo0in) in'ormation= i& 6ease rentals received and receivable a)ainst 'inance lease 4,,,,, ii& Tax depreciation on o0ned assets as per 0or/in) 1,5,, iii& Tax depreciation on leased assets as per 0or/in) 3 ,,,, iv& Bnabsorbed depreciation o' t%e previous (ears Crelated to leased assetsD 4,,,, v& ?dministrative and )eneral expenses include= o !rovision 'or )ratuit( sc%eme 2,,,, o !rovision 'or doubt'ul receivables 5,, o @epreciation on o0ned assets 1,,,, vi& Tax )ain on cancellation o' leases 4,, Re uire!: Compute taxable income o' t%e compan( and t%e amount o' tax t%ereon& Solution Co""on ta# e#$enses to %e a$$ortione! %et&een leasin' %usiness an! ot(er in)o"e 9inancial c%ar)es ?dministrative expenses as per accounts Tax depreciation on o0ned assets ?ccountin) depreciation on o0ned assets !rovision 'or )ratuit( !rovision 'or doubt'ul debts 1,,,,,,, , 2,,,,,,, , 5,,,,, , 5,,,,,,,, ,,,,,,,, 1,5,,,,,, 14,5,,,,,,

3,5,,,,,, 11,,,,,,,,

Ta#a%le in)o"e an! ta# $a*a%le 6ease rentals" 'inance lease #nstallment loan 6ease rentals" operatin) lease >t%er income Common expenses Tax )ain on cancellation o' leases @irect cost o' 'inance and operatin) leases and installment loan Ta#a%le ot(er in)o"e Ta#a%le in)o"e %e+ore ta# !e$re)iation on lease! assets Tax dep on leased assets Bnabsorbed dep on leased assets b1' Total una%sor%e! !e$re)iation ),+ #ncome tax 5 35% on 8s&1,+3 ,FF5

Leasin' Business 4,,,,,,,,, 4,,,,,,,, 2,5,,,,,, 4E,5,,,,,, (1,,43 ,FF5) 4,,,,,, (5,,,,,,,,)

Ot(er in)o"e

Total

2,5,,,,,, 2,5,,,,,, (5E1,225 )

4+,,,,,,,, (11,,,,,,,,)

1,+3 ,FF5 31,4E1,225 (3 ,,,,,,,,) (4,,,,,,,,) 1,,53 ,FF5 EF ,5F1

ALTERNATI-E MET.OD OF CALCULATION OF TAXABLE INCOME:

A!"in/ e#$enses an! +inan)ial )(ar'es a!0uste! as $er ta# 1123332333 4or5in' o+ ta#a%le ot(er in)o"e to %e )onsi!ere! se$aratel*: >t%er income 2,5,,,,,, 6ess= !roportionate admin& expense and 'inancial c%ar)es ad*usted as per tax 0or/in) G2,5,,,,,, x 11,,,,,,,, 4+,,,,,,,, 5E1,225 1,+3 ,FF5 Co"$utation o+ Ta#a%le In)o"e an! Ta# Pa*a%le !ro'it be'ore tax as per pro'it and loss account ?dd= ?llo0ance 'or potential lease losses 6ease rentals received and receivable !rovision 'or )ratuit( !rovision 'or doubt'ul receivables Tax )ain on cancellation o' leases ?ccountin) depreciation on o0ned assets 1,25,,,,, 2,,,,,,,, 4,,,,,,,, , 2,,,,,,,, 5,,,,,, 4,,,,,, 1,,,,,,, , 4F,15,,,, ,

6ess= 9inance income Tax depreciation on o0ned assets ?ccountin) )ain on cancellation o' leases >t%er income 'or separate consideration as per 0or/in) 6ess= Tax depreciation on leased assets Bnabsorbed depreciation o' previous (ear Total unabsorbed depreciation c1' >t%er taxable income Tax 5 35%

1,,25,,,, , 1,5,,,,,, 2,,,,,,,, 1,+3 ,FF 5 3 ,,,,,,, , 4,,,,,,, ,

15,E

,FF 5 31,4E1,22 5 42,,,,,,, , 1,,53 ,FF 5 1,+3 ,FF5 EF ,5F1

6/7 De) 8331 F: 9irst ?.C Modaraba, a client o' (our o''ice, is a perpetual, multipurpose and multidimensional modaraba en)a)ed in providin) 'inance on moraba%a and mus%ari/a arran)ements, leasin), commodit( tradin) and dealin) in listed and non"interest bearin) securities& 9ollo0in) is an extract 'rom t%e ! : 6 a1c o' t%e modaraba 'or t%e (ear= Ru$ees 21, 44,,,, F,,,,,, F,,,,,,,, E5E,,,, 3,,2,,,,,, 1,5,,,,,, 14,,,,,,,, ,,,,,,,,

Re9enue +ro": 6easin) operation Mus%ari/a #nvestment >t%er sources E#$en!iture: ?dministrative expenses ?mortiHation on leased assets 9inancial c%ar)es !rovision 'or=

23,5,,,,,, E,F,,,,,,

@iminution in t%e value o' investments @oubt'ul debts !ro'it 'rom operations

1,55,,,,, 2,,,,,, 1,F5,,,,, 4,+5,,,,,

#n addition t%e 'ollo0in) additional in'ormation is available= i& ii& iii& T%is is t%e 4t% (ear o' operation o' t%e modaraba& 7o provision 'or tax %as been made in t%e accounts& T%e modaraba is re-uired to trans'er appropriate amount to statutor( reserve as re-uired under t%e Modaraba Companies and Modaraba (9lotation and Control) >rdinance, 1+ , and t%e 8ules 'ramed t%ereunder 0%ic% %as to be 0or/ed out& Modaraba Compan(s mana)ement 'ee at 1, % %as not been incorporated in t%e accounts& 6ease rentals are recorded under ;>peratin) 6ease Met%od<& 9ollo0in) are t%e brea/ up o' leasin) operations, investments income and income 'rom ot%er sources= Ru$ees Leasin' o$erations 6ease rentals 21,2,,,,, , 9ront"end 'ee 544,,,, Aain on disposal o' leased assets 1,,,,,, 21, 44,,, , In9est"ent in)o"e @ividend income 3,,,,,,,, .an/ pro'it 4,,,,,,,, F,,,,,,,, Ot(er sour)es @ocumentation c%ar)es 25,,,,, Aain on disposal o' 'ixed assets 2 o0ned 2,,,,,, assets Misc& income 2,E,,,, E5E,,,, ?dministrative expenses include t%e 'ollo0in)= ?ccountin) depreciation 2 o0ned assets !rovision 'or )ratuit( 15,,,,, 3,,,,, E5,,,, 1,,,,,,,,, 25,,,, 1,F,,,,,,

iv& v& vi&

vii&

viii& Tax depreciation on >0ned assets 6eased assets ix& Tax loss on disposal o' >0ned assets 6eased assets Bnabsorbed depreciation 'rom leasin) operation b1'13,,,,,,,,

x&

Re uire!: a) Compute t%e amount o' modaraba compan(s mana)ement 'ee& :Mar5s 8;

b) c)

Compute t%e amount o' statutor( reserve and t%e minimum distributable amount o' +,%& :Mar5s 8; Calculate t%e taxable income o' t%e modaraba and income tax t%ereon assumin) t%at= i& Modaraba %as not distributed +,% o' its pro'its to its certi'icate %olders& ii& Modaraba %as dul( distributed +,% o' its pro'it to its certi'icate %olders& :Mar5s 17;

Solution a) ?ccordin) to t%e previous !rudential 8e)ulations 'or Modarabas (8e)ulation 1F), mana)ement 'ee o' a modaraba compan( in respect o' a modaraba 'loated b( it s%all not exceed 1,% o' t%e net annual pro'its as s%o0n in t%e audited ! : 6 a1c o' t%e modaraba %e+ore )(ar'in' su)( "ana'e"ent +ee& T%ere'ore t%e mana)ement 'ee s%all be 8s&4+5,,,, 0%ic% is admissible 'or tax purposes& b) ?ccordin) to circular < o+ 833< 'or !rudential 8e)ulations 'or Modarabas, an amount not less t%an 2,% and not more t%an 3,% o' its a+ter ta# a))ountin' $ro+its s%all be credited to a reserve 'und till suc% time t%e reserve 'und e-uals t%e paid up capital and t%erea'ter not less t%an 5% o' its a'ter tax pro'its& #t is assumed t%at t%e amount o' reserve 'und is less t%an paid up capital, t%e amount to be credited to statutor( reserve is as under= 7et pro'it as per accounts be'ore tax and mana)ement 'ee 4,+5,,,,, 6ess= Mana)ement 'ee 4+5,,,, 4,455,,,, Tax (i' +,% o' t%e pro'its is distributed t%en no tax s%all be pa(able& $ection 113 is not applicable as 0ell) "" $tatutor( reserve (minimum) 5 2,% o' t%e above +1,,,, !ro'it a'ter statutor( reserve 3,5E4,,,, ?mount re-uired to be distributed +,% o' t%e above 3,2,F,E,, (T%is amount is re-uired to be distributed b( 0a( o' cas% dividend to avail exemption as t%e issue o' bonus s%ares s%all not be considered as per clause 1,,) ); Ta#a%le In)o"e an! Ta# Lia%ilit* assu"in': +,% o' t%e pro'its is not distributed income 'rom documentation c%ar)es is related to leasin) business no expense is allocable a)ainst dividend income (separate bloc/ o' income) and ban/ pro'its Co""on ta# e#$enses to %e a$$ortione!: 9inancial c%ar)es ?dministrative expenses as per accounts Mana)ement 'ee Tax depreciation on o0ned assets Tax loss on disposal o' o0ned asset ?ccountin) depreciation on o0ned assets !rovision 'or )ratuit( Ta#a%le in)o"e an! ta# $a*a%le Mus(ari5a 15,,,,, 3,,,,, ,,,,,,,, 1,5,,,,,, 4+5,,,, +,++5,,,, E5,,,, 25,,,, 1,,, 5,,,, 1 ,,,,, +,+,5,,,,

6ease rentals 9ront end 'ee @ocumentation c%ar)es Mus%ari/a .an/ pro'it Miscellaneous income Common expenses Tax loss on disposal o' leased assets Tax dep on leased assets Bnabsorbed dep on leased assets (8estricted) Taxable income excludin) @ividend income Bnabsorbed dep o' leased assets c1'

Leasin' Business 21,2,,,,, , 544,,, , 25,,,, ,

an! ot(er sour)es

Ban5 Pro+it

Total

F,,,,,, 2,E,,,, +,E,,,, 3+1, F5 514,125 4,,,,,,,, 4,,,,,,,, 4,,,,,,,, 2E,+,,,,,, +,+,5,,,, 1,F,,,,,, 15,2+5,,, , 1,,,,,,,,, F ,, F5 514,125 4,,,,,,,, 4,514,125

21,++4,,, , +,513,125 1,F,,,,,, 1,,F ,, F 5 1,,,,,,,, , F ,, F 5 7il 12,21+,12 5

#ncome tax 5 25% on 8s&4,514,125 #ncome tax on dividend 1,% o' 3,,,,,,,, Total tax liabilit(

1,12 ,531 3,,,,,, 1,42 ,531

#' +,% o' t%e distributable pro'its as calculated above is distributed t%en no tax s%all be pa(able b( t%e modaraba and minimum tax u1s 113 is not applicable as 0ell&