Registered Partnership Firm
FINANCIAL ACCOUNTING MBA (First Semester)-2010 NAME: JAWAAD HUSSAIN MALIK Roll Number: AH-504043 Regi Regist ster ered ed And
Part Partne ners rshi hip p
Firm Firm
Of
Paki Pakist stan an
Its Tax Issues
Allama Iqbal Open University Islamabad.
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Registered Partnership Firm
Acknowledgment:
The special thank goes to my helpful Teachers. The supervision and
support
that
they
gave
truly
help
the
progression
and
smoothness of the 2nd Assignment. The co-operation is much indeed appreciated.
My grateful thanks also go to Prof. Saqib. A big contribution and hard worked from him during the 2nd Assignment is very great indeed. All projects during the program would be nothing without the enthusiasm and imagination from him.
Besides,
this
2nd
Assignment
makes
me
realized
the
value
of
working together as a team and as a new experience in working environment, which challenges us every minute. Not forget, great appreciation go to the rest of organization staff that help me from time to time during the project. The whole program really brought us together to appreciate the true value of friendship and respect of each other.
Last but not least I would like to thank my friends and class fellows of MBA (AIOU) especially those who work together in 2nd Assignment.
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Registered Partnership Firm Abstract: A
partnership
individuals
is
agree
an
to
arrangement
cooperate to
where
entities
advance their
and/or
interests. In
the most frequent instance, a partnership is formed between one or
more
businesses
in
which
partners
(owners)
co-labor
to
achieve and share profits or losses. Partnerships are also frequent regardless of and among sectors. Non-profit organizations, for increase
the
likelihood
example, may partner together to
of
each
achieving
their
mission.
Governments may partner with other governments to achieve their mutual goals, as may religious and political organizations. In education, accrediting agencies increasingly evaluate schools by the level and quality of their partnerships with other schools and across sectors. Partnerships also occur at personal levels, such as when two or more individuals agree to domicile together. Partnerships between schools,
governments, interest-based
businesses,
and
individuals,
or
organizations,
some
combination
thereof, have always been and remain commonplace. Partnerships
have
widely
varying
results
and
can
present
partners with special challenges. Levels of give-and-take, areas of responsibility, lines of authority, and overarching goals of the partnership must all be negotiated. While partnerships stand to
amplify
mutual
interests
and
success,
some
are
considered
ethically problematic, or at least debatable. When a politician, for
example,
partners
with
a
corporation
to
advance
the
corporation's interest in exchange for some benefit, a conflict of
interest
standpoint
may of
make
the
the
public
partnership good.
problematic
Developed
from
countries
the
often
strongly regulate certain partnerships via anti-trust laws, so
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Registered Partnership Firm as
to
inhibit
monopolistic
practices
and
foster
free
market
competition. Among favored
developed over
countries,
corporations
in
business
partnerships
taxation
policy,
are
since
often
dividend
taxes only occur on profits before they are distributed to the partners.
However,
depending
on
the
partnership
structure
and
the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation
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Registered Partnership Firm
Topics
Page No
Introduction To The Topic
6
Tax Circular For Registered Firm
7
Tax Shall Not Be Deductible
8
Structural Problems
9
Mayfair (Practical Case Study)
10
SWOT Analysis Of Mayfair
13
Tax Issues In Cost Accounting
14
Conclusion
15
Recommendations & Reference
16
Introduction To The Topic: Page 5
Registered Partnership Firm The law relating to partnerships is contained in Pakistan as per the Partnership
Act,
1932
("Partnership Act")
which
defines
a
"partnership" as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. A Partnership firm can be formed with two or more individuals upto twenty partners (other than certain specified cases, such as partnership firms for law practice, accountants firm or any other consultancy services firm), otherwise it is required to be registered as a company under the Companies Ordinance, 1984. There is a percentage sharing that is agreed on based on the share in the equity or capital invested by each individual. At times land
there and
working
are
arrangements
building capital.
individual
brings
while While in
a
where
the
one
other
there
are
partner
brings
brings
in
in
the
machinery
and
partnerships
certain amount
of
money.
where In
each
each case
there will be an understanding on profit sharing ratios after deduction of all expenses. In partnership, like sole proprietorship, the liability of the firm is not limited as it extends to the personal assets of the incoming
partners.
The
limited
liability
partnership
model
is
not practiced in Pakistan. A Partnership in Pakistan is a business entered into by a formal agreement between two or more persons or corporations carrying on
a
business
in
common.
The
capital
for
a
Partnership
is
provided by the partners who are liable for the total debts of the firms and who share the profits and losses of the business concern according to the terms of the partnership agreement. Partnership
in
Pakistan
(other
than
banking
companies)
are
generally limited in size to twenty partners. The interest of a
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Registered Partnership Firm partner is transferable only with the prior consent of the other partner(s).
However,
a
partner’s
right
to
a
share
of
the
partnership income may be received in trust for another person. For taxation purposes in Pakistan, partnerships are classified into: Registered firms and Unregistered firms. The income of the registered firm is subject to super tax before distribution to the partners. Also the individual income of the partners is subject to income tax at the usual rates.
Tax Circular For Registered Firm Federal Board of Revenue (FBR) on Monday issued an explanatory Income
Tax
advance
tax
Circular on
No
07-2010
different
to
explain
transactions
in
the
bank
0.3
percent
against
cash
exceeding Rs 25000.
This tax shall also be charged on payment if made in cash on cancellation of any of the instruments including demand draft; pay
order;
CDR;
SDR;
STDR;
RTC;
or
any
other
instrument
of
bearer nature.
Income Tax Circular No 07-2010 issued here stated that through Finance Act 2010, new section 231AA has been introduced in the Income Tax Ordinance, 2001. Under this section every banking company; non-banking financial institution; exchange company; or authorized dealer of foreign exchange
is
required
to
deduct
rate
0.3
percent
on
sale
of
adjustable
of
any
advance
instrument
tax
at
against
the cash
including the demand draft; pay order; CDR; SDR; STDR; RTC; or any other instrument of bearer nature.
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Registered Partnership Firm The
tax
is
deductible
on
transfers
if
made
against
cash
including online transfer; telegraphic transfer; mail transfer; and any other mode of electronic transfer. This tax shall also be charged on payment if made in cash on cancellation of any of the instruments referred above. This tax shall
only
be
transactions
charged
referred
where
to
total
above
amount
exceeds
of
twenty
payments five
for
thousand
rupees in a day.
This tax shall not be deductible on – payment made through a crossed cheque for purchase of any of the financial instrument as
referred
This
tax
federal
above;
and
shall not or
diplomatic
be
provincial mission
in
inter-bank
applicable
and
on
government; Pakistan;
and
intra-bank
transactions
a
foreign a
person
transfers.
made
by the
diplomat who
or
a
produces
a
certificate from the Commissioner that his income during the tax year is exempt.
Tax deducted shall be paid according to the law, to the credit of the person purchasing any of the above-mentioned instruments against cash and to the credit of the person receiving cash on cancellation deducted
of
under
any this
of
the
instrument
section
shall
be
referred
above.
adjustable,
and
Tax its
chargeability is effective from 1st July 2001 Similar to most countries, objectives of the taxation system in Pakistan resource
are
not
well-defined.
generation,
activities,
promoting
discouraging
The
stated
objectives
area/sector-specific
undesired
include economic
imports/production,
and
encouraging savings and investment. These objectives have been
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Registered Partnership Firm met through a variety of tax concessions and exemptions, rebates and
credits,
revenue
and
short
treatment
of
differentiated
falls/leakages the
desired
tax
rates
resulting
and
from
activities
were
tariffs.
The
preferential
tax
offset
through
appropriate changes in various fiscal instruments, e.g. high tax rates and tariffs, regulatory duties, extended withholding and presumptive These
taxes,
measures, in
excise turn,
duties
on
services,
have complicated
and
many
the taxation
more. system
and adversely affected the equity, neutrality and progressivity thereof. Consequent
to
the
Pakistan's
taxation
pursuit
of
system
is
above
conflicting
characterized
by
objectives, a
number
of
structural problems. These include: (i) The overall level of fiscal effort is low and the Tax-to-GDP ratio
remains,
more
or
less,
stagnant
at
between
12
to
13
percent. (ii) There is over dependence on indirect taxes notwithstanding that the share of direct taxes has increased from 16 percent in 1990-91 to over 35 percent during 1997-98. This has increased the
regressivity
of
the
taxation
system
and
imposed
a
higher
excess burden of taxation.
Case Study on Mayfair Page 9
Registered Partnership Firm
The
House
of
Mayfair
is
amongst
the
most
respected
business
groups of Pakistan operative in: 1. Confectionery 2. Textiles It Comprises of: 1. Asian Food Industries Limited 2. Mayfair Limited The House of Mayfair's Production units are located near Lahore, Pakistan.
History: Late Mr. Mehboob Elahi established Asian food Industries in 1969 with
an
objective
to
produce
"international
quality"
confectionery products in Pakistan. Through sheer hardwork, fair business
dealings
and
unmatched
quality
products,
Mr.
Mehboob
Elahi succeeded in making Asian Food Industries the undisputed market leader in Pakistan. Mr. Jawed Iqbal, son of Mr. Mehboob Elahi, joined the group in mid
seventies
assisted business.
Modern
Mr. Jawed His
methodologies
Iqbal
deep are
education in
business
his
major
and
a
broad
modernising insight
western
exposure,
and further
expanding
and
strengths.
His
effective immense
marketing experience
led him to set up, He thought of setting up a spinning unit. The group again worked with utmost zeal and devotions and finally in 1993, Mayfair was installed and started giving fruitful results. Recently, Mr. Jawed Iqbal's son Mr. Shahid Iqbal has joined the group. He has been trained extensively in the United states and
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Registered Partnership Firm his vigor and knowledge of modern textiles/spinning has resulted in
an
overall
uplift
of
yarn's
quality
being
manufactured
at
the
manufacturer
of
Mayfair Limited.
Asian Foods Limited: Asian
Food
‘Mayfair’ company
Industries Brand
has
more
than
Karachi,
facility
hub
into
Mayfair
of
AFI
the
years.
commercial
diversification
in
in
port
Group’s
and
1969,
city
relocated
to
Pakistan. quality
export
AFI
of
business, plant
from
premier
domestic
textile
was
its
Setup &
is
products
marketing
products
thirty
consolidate
(AFI)
confectionery
been
confectionery
Limited
located
Pakistan. was
locations. Raiwind
sugar
market
was
it
The
With
decided
The
for in the to
production
Industrial
Area.
Raiwind a satellite town 30 kilometres from Lahore, also houses Mayfair
Spinning
Mills
Limited.
Mayfair
Group
takes
pride
in
both its businesses; Mayfair Spinning produces 100% cotton yarn of premium quality for the export market. Asian Food Industries is always planning for future challenges. A
proactive
strategy
is
pursued
in
acquisition
of
newer
technologies and techniques in order to develop new products in a more hygienic environment with increased efficiencies. In the year
2004
the
company
will
be
pleased
to
offer
its
valuable
customers, savoury and delicious biscuits produced on the most modern biscuit making plant. This is part of the company’s plan to
broaden
its
product
base
and
capitalise
on
its
wealth
of
experience in the confectionery industry.
Mayfair Limited: Mayfair Limited is one of the leading cotton yarn manufacturers in
Pakistan, producing high
quality
cotton yarn
for sensitive
consumers in Europe, the Far East and other regions.
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Registered Partnership Firm Operation of the mill began in the year 1991, being promoted by its
illustrious
founders.
Since
then
the
mill
has
shown
remarkable growth not only in the area of sales & volume, but more importantly, in its stature. It is interesting to note that the mill commands a premium price in the markets where it is present, a recognition accorded to it by
its
customers
quality,
in
price
appreciation and
towards
consistency
its of
commitment
to
supply.
It is a firm belief, bequeathed by the founders, that even in adverse
market
conditions,
that
supply
be
maintained
to
the
extent required. It is an endearing quality well appreciated by our
customers,
who
have
been
the
mainstay
in
the
remarkable
progress of the company.
Products Textiles 1. CARDED YARN 10/S,
12/S,
16/S,
18/S,
20/S,
30/S,
40/S
20/S,
30/S,
40/S
Hosiery Yarn and also in Weaving Yarn
2. COMBED YARN 10/S,
12/S,
16/S,
18/S,
Hosiery Yarn and also in Weaving Yarn
3. DOUBLED YARN All above Counts can be doubled knotless (with Aqua Slicers
4. YARN ON DYE TUBES
For the convenience of Yarn Dying Importers, we can supply Yarn on Perforated Polypropylene Dye Tubes (cylindrical)
Confectionery 1. Deposited Candy
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Registered Partnership Firm 2. Soft Chew 3. Hard Boiled Candy 4. Toffee 5. Bubble Gums 6. Biscuits
SWOT Analysis of
Mayfair:
Opportunity & Strengths: •
Retain your Best Managers
•
Increase Top Line Business.
•
Increase Bottom Line Profits.
•
Grow and Develop Mayfair.
•
Significantly Increase Sales Revenue.
•
Increase Market Share.
•
Reduce Overhead Labour Costs.
•
Reduce Recruitment Costs.
•
Have
a
Focused Cost
Effective
Labour
Force
all Pulling Together.
Weakness
& Threats: •
Focus on limited brands:
•
Lack of advanced technologies:
•
Old training methods of training:
•
Less annual increments of employee salaries:
•
No annual bonus system:
Cost Accounting Decisions In Mayfair: In
Mayfair
Inventory values can differ
from
one manufacturing
process to the next. In general terms, there are usually three
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Registered Partnership Firm different inventory asset level values throughout the production process in Mayfair: 1.
raw materials
2.
work in process
3.
finished goods
Decision In Manufacturing Inventory Valuation Methods Of Mayfair For Tax Point Of View.
The two basic methods for assigning value to inventory are the absorption costing and variable costing methods in Mayfair. With these
two
related
methods
to
the
of
cost
accounting,
manufacturing
process
various are
expense
assigned
costs
to
the
inventory value. The expenses used to value inventory are not reported
on
the
income
statement.
Instead
the
expenses
are
deducted from total revenue as they are sold to determine gross.
Decision
In
Mayfair
Raw
Materials
Costing
For
Reducing
Tax
Issues:
Since raw materials haven’t been introduced to the manufacturing process,
cost
accounting
inventory valuation.
methods
For this
aren’t
reason,
normally
used
assigning value
is
for very
simplistic. With the exception of valuing inventory for income tax purposes, the value assigned to raw materials in Mayfair.
Conclusion:
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Registered Partnership Firm Cost Accounting delivers product costing, profitability analysis and
decision
support
in
of
all
sizes
and
in
all
sectors
of
Mayfair.
Using its Activity Based Process Model you can build cost models of
even the
the
system
materials
most
complex manufacturing processes and, because
understands and
the
components
profitability eroded by manufacturing,
sale
business are
consumed,
non value
and
logic
added
distribution
Assigning inventory values to
finished
of
how
are
activities,
accumulated
and
activities during the process goods
of
will
Mayfair.
also differ
depending on inventory valuation methods in Mayfair.
Using the variable costing method will exclude the fixed costs associated with production.
Variable costing may not be acceptable for external reporting of the
income
professional variable have
statement
for
income
be
consulted
before
method.
Inventory
costing
should
costing
an affect
on
asset
tax
valuation
purposes.
as
A
CPA
or
implementing methods
reported
will
tax the also
on the balance
sheet.
Recommendations:
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Registered Partnership Firm Mayfair Absorption costing takes into consideration the majority of
costs
associated
with
manufacturing
expense.
The
following
are the recommendations to Mayfair for the betterment of
costs
decision in organization. •
Mayfair Should control the variable manufacturing cost
•
Mayfair Should
increase the variable sales costs
•
Mayfair Should
fixed manufacturing overhead
•
fixed selling costs
•
Mayfair must Optimize the
•
Maximize Return On Investment and Return On Assets
product and customer mix through
proper use of cost accounting •
To promote a profitable and sustainable business activity that meets the customers needs.
•
To increase the Mayfair market share.
•
To gain the competitive edge on Candy land, JoJo.
•
To
increase
the
Mayfair
role
in
relations
to
social
responsibility. •
To provide excellent customer service.
•
A high level of drive and energy.
•
Enough
self-confidence
to
take
carefully
calculated,
moderate risks.
References: http://www.freehills.com.au/4811.aspx Page 16
Registered Partnership Firm
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