Question

Case Study: 2

Looking at the following conversation between two friends, file the tax returns of Mr. Ahmed with correct taxable income and tax liabilities:

Mr. Abdullah: Good morning Mr. Ahmed. After a very long time. How are you? How is your Family?.....

Mr. Ahmed: Good morning brother, everyone is fit and fine except me…..

Mr. Abdullah: What happened Ahmed? You are looking so worried

Mr. Ahmed: I have to file my tax returns and my accountant has left it incomplete and gone sick. Please help me in understanding this tax returns calculation. I have done to the best of my knowledge. Here is my incomplete income statement and tax calculations.

Mr. Abdullah: This is quite simple task. Don’t worry. Let me see your calculation. Meanwhile, sit and enjoy dates & khawa……..

After a while …….

Mr. Abdullah: Ya this is an incomplete work from your accountant, I appreciate the way you tried to prepare these statement with your engineering knowledge. Still you need to polished your knowledge on Oman Tax Laws. As per your Income statement, you have calculated a gross profit of OR 52,000 from sales of OR 96,000 which seems ok to me. You have done some mistakes in calculating net profit which is currently at OR 24,000. Unnecessarily, you expensed the purchase of pick-up vehicle worth OR 9,000 and created a provision for bad debts worth OR 3,000. As per Oman Tax Laws, no provision is allowed for your vegetable trading business. Donation of OR 5,000, clearly exceeding the 5% limit on the given gross profit. Apart from these items, everything seems to be okay for me. But wait a minute, why these travelling expenses are so high (i.e., 6,500) in the current year. Did you travel a lot in this tax year?

Mr. Ahmed: Not exactly, I need to travel a lot to Muscat, Dubai, Saudi and so on. These expenses usually be around OR 2,000. But this year, my family forced me to take them with me to Dubai and resulted to this amount. I am having all documental proof for this visit.

Mr. Abdullah: No … no… such additional cost is not permitted. We need to deduct only the regular travelling expenses, not this additional cost of your family’s travel worth OR 4,500 from your calculated net profit. Do you need to clarify any other information with me?

Mr. Ahmed: Yes, I usually under valuate my opening inventories every year. I feel, such practice will fortune me profits in my business. If I don’t do that, I may suffer losses, as I did in the year 2011 and 2015 with OR 1,500 and OR 3,000 respectively. This year I undervalued opening inventory by OR 1,500.

Mr. Abdullah: Ha …. Ha… I will not comment on yours believes, still you are not allowed to overvalue or undervalue your inventory as per Oman tax laws. Now it seems we need to alter the values of inventories while calculating correct donations. Okay, you said you suffered losses in the year 2011 and 2015. Did you recover them from subsequent 5 year’s profits?

Mr. Ahmed: no, I was not aware of this privilege from tax laws. Can I recover these losses now?

Mr. Abdullah: not both, only 2015 loss. Don’t worry I will prepare the correct tax returns for you. Meanwhile let’s enjoy the hot biryani. I will prepare the correct tax returns after the lunch. Please proceed to wash your hands…..

Answer 1

Explanations:

1. Pickup vehicle is an asset and not an expense , therefore depreciation will be charged @ 15% on the same.

2. Provision for bad debts are not allowed as an expense under tax laws.

3. donation of 5000 is higher then the limit of 5% of gross profit prescribed.

4. personal expenses are not allowed as a business expenses and therefore 4500 travelling expense of family is added back.

5. under valuation of opening inventory result in higher gross profit and therefore deducted from the net earnings.

6. Loss from previous year can be carried forward upto 5 years and therefore adjusted with the income of this year.