Registered Partnership Firm

FINANCIAL ACCOUNTING

MBA (First Semester)-2010

NAME: JAWAAD HUSSAIN MALIK

Roll Number: AH-504043

Registered Partnership Firm Of Pakistan

And 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 is an arrangement where entities and/or individuals

agree to cooperate to advance their 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 example, may partner together to

increase the likelihood 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 governments, interest-based organizations,

schools, businesses, and individuals, or 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 may make the partnership problematic from the

standpoint of the public good. Developed countries often strongly

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regulate certain partnerships via anti-trust laws, so as to

inhibit monopolistic practices and foster free market

competition.

Among developed countries, business partnerships are often

favored over corporations in taxation policy, since 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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Topics Page No

Introduction To The Topic 6

Tax Circular For Registered Firm7

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

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Registered Partnership Firm

Introduction To The Topic:

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 there are arrangements where one partner brings in the land

and building while the other brings in machinery and working

capital. While there are partnerships where each individual

brings in a certain amount of money. In 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.

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Partnership in Pakistan (other than banking companies) are

generally limited in size to twenty partners. The interest of a

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 Circular No 07-2010 to explain the 0.3 percent advance

tax on different transactions in bank 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 adjustable advance tax at the rate

of 0.3 percent on sale of any instrument against cash including

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Registered Partnership Firm

the demand draft; pay order; CDR; SDR; STDR; RTC; or any other

instrument of bearer nature.

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 charged where total amount of payments for

transactions referred to above exceeds twenty five 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 above; and inter-bank and intra-bank transfers.

This tax shall not be applicable on transactions made by the

federal or provincial government; a foreign diplomat or a

diplomatic mission in Pakistan; and a person who 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 of any of the instrument referred above. Tax

deducted under this section shall be adjustable, and its

chargeability is effective from 1st July 2001

Similar to most countries, objectives of the taxation system in

Pakistan are not well-defined. The stated objectives include

resource generation, promoting area/sector-specific economic

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activities, discouraging undesired imports/production, and

encouraging savings and investment. These objectives have been

met through a variety of tax concessions and exemptions, rebates

and credits, and differentiated tax rates and tariffs. The

revenue short falls/leakages resulting from preferential tax

treatment of the desired activities were offset through

appropriate changes in various fiscal instruments, e.g. high tax

rates and tariffs, regulatory duties, extended withholding and

presumptive taxes, excise duties on services, and many more.

These measures, in turn, have complicated the taxation system and

adversely affected the equity, neutrality and progressivity

thereof.

Consequent to the pursuit of above conflicting objectives,

Pakistan's taxation system is characterized by 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.

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Case Study on Mayfair

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 Modern education and a broad western exposure,

assisted Mr. Jawed Iqbal in modernising and further expanding

business. His deep business insight and effective marketing

methodologies are his major strengths. His immense experience led

him to set up, He thought of setting up a spinning unit. The

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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

his vigor and knowledge of modern textiles/spinning has resulted

in an overall uplift of yarn's quality being manufactured at

Mayfair Limited.

Asian Foods Limited:

Asian Food Industries Limited (AFI) is the manufacturer of

‘Mayfair’ Brand confectionery products from Pakistan. The company

has been marketing its premier quality sugar confectionery

products in the domestic and export market for more than thirty

years. Setup in 1969, AFI was located in Karachi, commercial hub

& port city of Pakistan. With the diversification into textile

business, it was decided to consolidate Mayfair Group’s plant

locations. The production facility of AFI was relocated to

Raiwind 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.

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Registered Partnership Firm

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.

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 in appreciation towards its commitment to

quality, price and consistency of 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

Hosiery Yarn and also in Weaving Yarn

2. COMBED YARN

10/S, 12/S, 16/S, 18/S, 20/S, 30/S, 40/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

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Registered Partnership Firm

For the convenience of Yarn Dying Importers, we can supply

Yarn on Perforated Polypropylene Dye Tubes (cylindrical)

Confectionery

1. Deposited Candy

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:

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Registered Partnership Firm

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

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 methods of cost accounting, various expense costs

related to the manufacturing process are assigned 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 methods aren’t normally used for

inventory valuation. For this reason, assigning value is very

simplistic. With the exception of valuing inventory for income

tax purposes, the value assigned to raw materials in Mayfair.

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Conclusion:

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 most complex manufacturing processes and, because the

system understands the business logic of how activities,

materials and components are consumed, are accumulated and

profitability eroded by non value added activities during the

manufacturing, sale and distribution process of Mayfair.

Assigning inventory values to finished goods will 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 statement for income tax purposes. A CPA or tax

professional should be consulted before implementing the variable

costing method. Inventory costing methods will also have an

affect on asset valuation as reported on the balance sheet.

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Recommendations:

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 product and customer mix

Maximize Return On Investment and Return On Assets  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:

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Registered Partnership Firm

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