CAF-2 · Chapter 4
Basic Concepts of Taxation MCQs with Answers
15 multiple-choice questions on Basic Concepts of Taxation for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
ABC Ltd. shifted its tax year from the normal tax year (ending June 30, 2026) to a special tax year ending September 30. What is the period from July 1, 2026, to September 30, 2026, called under the Income Tax Ordinance, 2001?
- A) A) Normal tax year
- B) B) Special tax year
- C) C) Transitional tax year
- D) D) Intervening tax year
Show answer & explanation
Answer: C) C) Transitional tax year
Where the tax year of a person changes as a result of an order by the Commissioner, the period between the end of the last tax year prior to change and the date on which the changed tax year commences shall be treated as a transitional tax year.
Question 2
If a company is allowed to adopt a special tax year spanning from 1st April 2025 to 31st March 2026, how will this tax year be denoted?
- A) A) Tax Year 2025
- B) B) Tax Year 2026
- C) C) Tax Year 2027
- D) D) Transitional Tax Year
Show answer & explanation
Answer: B) B) Tax Year 2026
A special tax year is denoted by the calendar year relevant to the normal tax year in which the closing date of the special tax year falls. Since March 31, 2026, falls within the normal tax year of July 1, 2025, to June 30, 2026, it is denoted as Tax Year 2026.
Question 3
Mr. X received a dividend of Rs. 100,000, which was subject to a Zakat deduction of Rs. 10,000 under the Zakat and Ushr Ordinance, 1980. How will this Zakat be treated for tax purposes?
- A) A) It will be deducted from his total income under Part IX (Deductible Allowances).
- B) B) It will be deducted directly out of the dividend income under the head "Income from Other Sources".
- C) C) It will be carried forward to the next tax year.
- D) D) It will not be allowed as a deduction at all.
Show answer & explanation
Answer: B) B) It will be deducted directly out of the dividend income under the head "Income from Other Sources".
Where Zakat has been deducted out of the profit on debt or dividend, such Zakat shall not be deducted out of total income as a standard deductible allowance, but rather it shall be allowed as a deduction while computing the income from other sources.
Question 4
Mr. Ali, an individual with a taxable income of Rs. 1,400,000, paid tuition fees for his two children amounting to Rs. 400,000 during the tax year. What is the maximum deductible allowance for education expenses he can claim?
- A) A) Rs. 100,000
- B) B) Rs. 350,000
- C) C) Rs. 20,000
- D) D) Rs. 120,000
Show answer & explanation
Answer: C) C) Rs. 20,000
The allowance cannot exceed the lesser of: (a) 5% of tuition fee (Rs. 20,000); (b) 25% of taxable income (Rs. 350,000); or (c) Rs. 60,000 x number of children (Rs. 120,000). The lesser amount is Rs. 20,000.
Question 5
Under Section 80 of the Income Tax Ordinance, 2001, which of the following is specifically included in the definition of a "Company" and NOT treated as an Association of Persons (AOP)?
- A) A) A firm
- B) B) A Hindu undivided family
- C) C) An artificial juridical person
- D) D) A trust
Show answer & explanation
Answer: D) D) A trust
The definition of an Association of Persons includes a firm, a Hindu undivided family, and any artificial juridical person. A trust is specifically included within the definition of a Company for tax purposes.
Question 6
Which of the following entities qualifies as a "Public Company" for tax purposes?
- A) A) A company where 40% of the shares are held by the Federal Government.
- B) B) A private company with an annual turnover exceeding Rs. 500 million.
- C) C) A company in which a foreign government holds 50% or more of the shares.
- D) D) A company whose shares were delisted from the stock exchange before the end of the tax year.
Show answer & explanation
Answer: C) C) A company in which a foreign government holds 50% or more of the shares.
A public company includes a company in which not less than 50% of the shares are held by a foreign Government, or a foreign company owned by a foreign Government.
Question 7
Mr. Sameel, a citizen of Pakistan, stayed in Pakistan for 150 days during the tax year 2026. He spent the rest of the year travelling for leisure, did not stay in any other single country for more than 182 days, and is not a tax resident of any other country. What is his residential status in Pakistan for the tax year 2026?
- A) A) Non-resident
- B) B) Resident individual
- C) C) Transitional resident
- D) D) Foreign resident
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Answer: B) B) Resident individual
A citizen of Pakistan who is not present in any other country for more than 182 days during the tax year, or is not a resident taxpayer of any other country, shall be treated as a resident individual in Pakistan, regardless of physical stay.
Question 8
For an Association of Persons (AOP) to be considered a resident in Pakistan for a tax year, the control and management of its affairs must be situated:
- A) A) Wholly in Pakistan at any time in the year.
- B) B) Wholly or partly in Pakistan at any time in the year.
- C) C) Wholly outside Pakistan.
- D) D) For at least 183 days in Pakistan.
Show answer & explanation
Answer: B) B) Wholly or partly in Pakistan at any time in the year.
An AOP shall be a resident association of persons for a tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year.
Question 9
Which of the following is a core characteristic of income falling under the Final Tax Regime (FTR)?
- A) A) Deductible allowances can be claimed against it.
- B) B) Losses from other business heads can be set off against it.
- C) C) The tax deducted at source is considered the final tax liability, and no expenses are allowed as deductions.
- D) D) It is added to the total income to calculate the applicable slab rate for normal tax.
Show answer & explanation
Answer: C) C) The tax deducted at source is considered the final tax liability, and no expenses are allowed as deductions.
Under the FTR (Gross income basis), expenses related to earning the income cannot be deducted, tax credits cannot be applied, and losses are not considered. The tax deducted at source is treated as the final tax liability.
Question 10
Omega (Pvt.) Limited extended a loan of Rs. 2.5 million to one of its shareholders on 30 June 2026. The company's accumulated profits on that date were Rs. 1.8 million. What amount will be treated as a "dividend" for the shareholder?
- A) A) Rs. 2.5 million
- B) B) Rs. 1.8 million
- C) C) Rs. 0.7 million
- D) D) Nil
Show answer & explanation
Answer: B) B) Rs. 1.8 million
Any advance or loan made to a shareholder by a private company is treated as a dividend to the extent to which the company possesses accumulated profits. Thus, Rs. 1.8 million will be treated as a dividend.
Question 11
ABC & Co., an AOP, has an annual turnover of Rs. 116 million and a computed tax liability under the normal tax regime (NTR) of Rs. 164,000 for tax year 2026. The minimum tax under section 113 (1.25% of turnover) calculates to Rs. 1,450,000. What is the tax payable by the AOP, and what is the treatment of the difference?
- A) A) Tax payable is Rs. 164,000; no difference is carried forward.
- B) B) Tax payable is Rs. 1,450,000; the difference of Rs. 1,286,000 is ignored.
- C) C) Tax payable is Rs. 1,450,000; the difference of Rs. 1,286,000 can be carried forward for adjustment against future tax liabilities for up to two tax years.
- D) D) Tax payable is Rs. 1,614,000.
Show answer & explanation
Answer: C) C) Tax payable is Rs. 1,450,000; the difference of Rs. 1,286,000 can be carried forward for adjustment against future tax liabilities for up to two tax years.
The AOP must pay the higher of the minimum tax or the normal tax (Rs. 1,450,000). The excess of minimum tax paid over the actual normal tax payable (Rs. 1,286,000) shall be carried forward for adjustment against tax liability for the two immediately succeeding tax years.
Question 12
A woman enterprise (a sole proprietorship owned by a woman) launched in August 2021 generates profits under the head 'Income from Business'. If the enterprise is unable to fulfill all the criteria required to claim the 100% start-up tax credit under Section 65F, what alternative tax relief is it entitled to?
- A) A) 100% exemption on all indirect taxes.
- B) B) A 50% tax reduction on its business income.
- C) C) A 25% tax reduction on the tax payable on its business income.
- D) D) No tax relief is available.
Show answer & explanation
Answer: C) C) A 25% tax reduction on the tax payable on its business income.
The tax payable by a woman enterprise on profits and gains chargeable under the head 'Income from Business' shall be reduced by 25% if the enterprise is unable to claim the 100% tax credit available under Section 65F.
Question 13
XYZ Ltd. sold a second-hand asset to an associated company. The written-down value of the asset was Rs. 350,000, and the sale price recorded in their internal books was Rs. 200,000. However, the open market value of the asset at the time of sale was determined to be Rs. 250,000. What value will be considered for tax purposes?
- A) A) Rs. 200,000
- B) B) Rs. 250,000
- C) C) Rs. 350,000
- D) D) Rs. 550,000
Show answer & explanation
Answer: B) B) Rs. 250,000
The Fair Market Value (FMV) of any property, asset, or service at a particular time shall be the price it would ordinarily fetch on sale or supply in the open market. Therefore, the FMV of Rs. 250,000 will be adopted.
Question 14
A debtor of Mr. Bashir directly paid Rs. 35,000 to Mr. Bashir's supplier to settle one of Mr. Bashir's business liabilities. The payment was made on Mr. Bashir's direct instructions. How will this Rs. 35,000 be treated under Section 69 of the Income Tax Ordinance, 2001?
- A) A) It will not be treated as a receipt since Bashir did not physically receive the cash.
- B) B) It will be treated as having been received by Bashir since it was applied on his behalf.
- C) C) It will be treated as a capital receipt and exempt from tax.
- D) D) It will be treated as a deductible allowance.
Show answer & explanation
Answer: B) B) It will be treated as having been received by Bashir since it was applied on his behalf.
Section 69 states that a person shall be treated as having received an amount if it is applied on behalf of the person or at the instruction of the person. Thus, it is treated as received by him.
Question 15
Mr. XYZ received a consultancy fee of US $500 on 14 April 2026. He held onto the dollars and later exchanged them into Pakistani Rupees on 20 April 2026. According to Section 71, which exchange rate must be used to convert the US $500 into Rupees for computing his taxable income?
- A) A) The exchange rate prevailing on the last day of the tax year (30 June 2026).
- B) B) The exchange rate on the date the dollars were physically exchanged at the bank (20 April 2026).
- C) C) The State Bank of Pakistan rate applying on the date the amount was taken into account/received (14 April 2026).
- D) D) The average State Bank exchange rate for the entire tax year.
Show answer & explanation
Answer: C) C) The State Bank of Pakistan rate applying on the date the amount was taken into account/received (14 April 2026).
If an amount is in a foreign currency, it shall be converted to the Rupee at the State Bank of Pakistan rate applying on the date the amount is taken into account for the purposes of the Ordinance (i.e., the date of receipt, 14 April 2026).