FIN623 GDB 1 Solution and Discussion

[zareen]

Total Marks 5
Starting Date Thursday, November 21, 2019
Closing Date Wednesday, November 27, 2019
Status Open
Question Title Taxation Management
Question Description

Briefly answer the following questions. (2 + 1 + 1)

Why tax avoidance can be favored against tax evasion?
Which tax structure is levied in Pakistan for the taxation of income of individuals?
Mr. Log is the cultivator of wheat and uses it as raw material in his business. Profit and loss account of Mr. Log for the year ended June 30, 2019 showed the net profit of Rs. 4,350,000. The wheat processed in flour mill, if purchased from open market, would have cost to Mr. Log Rs. 1,500,000. What would be the taxable income of Mr. Log, if wheat is not ordinarily sold in the market? (Show complete calculations)

[zaasmi]

@zareen said in FIN623 GDB 1 Solution and Discussion:

Total Marks 5
Starting Date Thursday, November 21, 2019
Closing Date Wednesday, November 27, 2019
Status Open
Question Title Taxation Management
Question Description

Briefly answer the following questions. (2 + 1 + 1)

Why tax avoidance can be favored against tax evasion?
Which tax structure is levied in Pakistan for the taxation of income of individuals?
Mr. Log is the cultivator of wheat and uses it as raw material in his business. Profit and loss account of Mr. Log for the year ended June 30, 2019 showed the net profit of Rs. 4,350,000. The wheat processed in flour mill, if purchased from open market, would have cost to Mr. Log Rs. 1,500,000. What would be the taxable income of Mr. Log, if wheat is not ordinarily sold in the market? (Show complete calculations)

1. Why Tax Avoidance Can Be Favored Against Tax Evasion

Tax avoidance is generally preferred over tax evasion due to the following reasons:

• Legality: Tax avoidance is legal and involves using the tax code to minimize tax liability through deductions, credits, and exemptions allowed by law. Tax evasion, however, is illegal and involves hiding income or falsifying information to evade taxes.
• Ethical Compliance: Tax avoidance aligns with legal and ethical standards, showing compliance with the law. Tax evasion, in contrast, is unethical and often leads to penalties, legal action, or imprisonment.
• Incentives for Financial Planning: Many tax laws are designed to incentivize behaviors beneficial to the economy, like saving for retirement or investing. Tax avoidance takes advantage of these incentives, contributing positively to personal and national financial health.

Because of these reasons, tax avoidance is a lawful and strategic approach, while tax evasion is illegal and carries serious consequences.

2. Tax Structure Levied in Pakistan for the Taxation of Income of Individuals

Pakistan employs a progressive tax structure for individual income taxation. Under this structure, individuals with higher incomes are subject to higher tax rates, while those with lower incomes pay lower rates. This progressive structure aims to distribute tax burden equitably based on income levels and is outlined in Pakistan’s Income Tax Ordinance, 2001.

3. Calculation of Mr. Log’s Taxable Income

Since Mr. Log is a cultivator of wheat and uses it in his own business, we must consider the market value of the self-produced wheat as part of his income for tax purposes.

Given Data

• Net Profit (P&L Account): Rs. 4,350,000
• Market Value of Self-Produced Wheat: Rs. 1,500,000
• Condition: Wheat is not ordinarily sold in the market.

Calculation of Taxable Income

To calculate taxable income, we add the market value of the self-produced wheat (if it were bought from the open market) to the net profit from Mr. Log’s business:

1. Net Profit from Business: Rs. 4,350,000
2. Add Value of Self-Produced Wheat: Rs. 1,500,000



Taxable Income = Net Profit + Market Value of Wheat

Taxable Income = 4,350,000 + 1,500,000 = 5,850,000



Answer

Mr. Log’s taxable income would be Rs. 5,850,000 for the year ended June 30, 2019.

[zareen]

@zareen
government by the persons (juristic or natural) on whom it is imposed. … Taxable income under the individual Income tax consists of income derived from … evasion and avoidance that are widespread in tax systems. … pace of changes in economic structure and productivity in the past might have favored a fairly benign.
link text

[zaasmi]

@zareen said in FIN623 GDB 1 Solution and Discussion:

Total Marks 5
Starting Date Thursday, November 21, 2019
Closing Date Wednesday, November 27, 2019
Status Open
Question Title Taxation Management
Question Description

Briefly answer the following questions. (2 + 1 + 1)

Why tax avoidance can be favored against tax evasion?
Which tax structure is levied in Pakistan for the taxation of income of individuals?
Mr. Log is the cultivator of wheat and uses it as raw material in his business. Profit and loss account of Mr. Log for the year ended June 30, 2019 showed the net profit of Rs. 4,350,000. The wheat processed in flour mill, if purchased from open market, would have cost to Mr. Log Rs. 1,500,000. What would be the taxable income of Mr. Log, if wheat is not ordinarily sold in the market? (Show complete calculations)

1. Why Tax Avoidance Can Be Favored Against Tax Evasion

Tax avoidance is generally preferred over tax evasion due to the following reasons:

• Legality: Tax avoidance is legal and involves using the tax code to minimize tax liability through deductions, credits, and exemptions allowed by law. Tax evasion, however, is illegal and involves hiding income or falsifying information to evade taxes.
• Ethical Compliance: Tax avoidance aligns with legal and ethical standards, showing compliance with the law. Tax evasion, in contrast, is unethical and often leads to penalties, legal action, or imprisonment.
• Incentives for Financial Planning: Many tax laws are designed to incentivize behaviors beneficial to the economy, like saving for retirement or investing. Tax avoidance takes advantage of these incentives, contributing positively to personal and national financial health.

Because of these reasons, tax avoidance is a lawful and strategic approach, while tax evasion is illegal and carries serious consequences.

2. Tax Structure Levied in Pakistan for the Taxation of Income of Individuals

Pakistan employs a progressive tax structure for individual income taxation. Under this structure, individuals with higher incomes are subject to higher tax rates, while those with lower incomes pay lower rates. This progressive structure aims to distribute tax burden equitably based on income levels and is outlined in Pakistan’s Income Tax Ordinance, 2001.

3. Calculation of Mr. Log’s Taxable Income

Since Mr. Log is a cultivator of wheat and uses it in his own business, we must consider the market value of the self-produced wheat as part of his income for tax purposes.

Given Data

• Net Profit (P&L Account): Rs. 4,350,000
• Market Value of Self-Produced Wheat: Rs. 1,500,000
• Condition: Wheat is not ordinarily sold in the market.

Calculation of Taxable Income

To calculate taxable income, we add the market value of the self-produced wheat (if it were bought from the open market) to the net profit from Mr. Log’s business:

1. Net Profit from Business: Rs. 4,350,000
2. Add Value of Self-Produced Wheat: Rs. 1,500,000



Taxable Income = Net Profit + Market Value of Wheat

Taxable Income = 4,350,000 + 1,500,000 = 5,850,000



Answer

Mr. Log’s taxable income would be Rs. 5,850,000 for the year ended June 30, 2019.