Free Taxation MCQs with Answers
50 Taxation MCQs from Accounting, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
Taxation covers the principles used to assess and collect taxes from individuals, businesses and transactions, with emphasis on income tax and sales tax concepts in Pakistan. Questions involve taxable income, exemptions, deductions, tax liability, withholding, returns, assessment, tax avoidance versus evasion, and the distinction between direct and indirect taxes.
Last updated
50 questions · page 1 of 3
- A. Sales tax on retail purchases
- B. Customs duty on imported goods
- C. Income tax on taxable income
- D. Federal excise duty on products
Explanation: Income tax is imposed directly on the income of a person or entity, so the legal and economic burden usually rests with the taxpayer.
Correct answer: Income tax on taxable income- A. Tax collected at source
- B. Allowable deductible allowances
- C. Tax paid in a previous year
- D. Capital introduced into business
Explanation: Taxable income is generally determined by reducing total income by permitted deductions or deductible allowances.
Correct answer: Allowable deductible allowances- A. To postpone the filing of all returns
- B. To collect tax at the time of payment
- C. To exempt small businesses from taxation
- D. To replace every form of assessment
Explanation: Withholding tax collects tax when specified payments, such as salary, contracts or certain transactions, are made.
Correct answer: To collect tax at the time of payment- A. Claiming a deduction allowed by law
- B. Selecting a lawful business structure
- C. Concealing income from the tax authority
- D. Planning a transaction within legal rules
Explanation: Tax evasion involves illegal concealment, misrepresentation or suppression of taxable income to reduce tax.
Correct answer: Concealing income from the tax authority- A. Input tax
- B. Output tax
- C. Income tax credit
- D. Withholding allowance
Explanation: Sales tax charged by a registered supplier on taxable supplies is output tax.
Correct answer: Output tax- A. A private household expense of the owner
- B. An expense incurred wholly for business purposes
- C. A personal gift given by the proprietor
- D. A penalty imposed for breaking the law
Explanation: An expense incurred wholly and exclusively for business purposes is generally considered deductible, subject to the relevant tax law and…
Correct answer: An expense incurred wholly for business purposes- A. It is included and taxed at the highest rate
- B. It is excluded according to the exemption
- C. It is treated as a withholding payment
- D. It is converted into a tax credit
Explanation: Income specifically exempt under the applicable law is excluded from taxable income to the extent of that exemption.
Correct answer: It is excluded according to the exemption- A. They increase gross income
- B. They reduce the tax payable
- C. They increase taxable receipts
- D. They create an expense deduction
Explanation: A tax credit normally reduces the amount of tax payable after the relevant tax has been computed.
Correct answer: They reduce the tax payable- A. A return is filed by the taxpayer, while an assessment determines tax liability
- B. A return is imposed by court, while an assessment is a private estimate
- C. A return concerns only sales, while an assessment concerns only salaries
- D. A return cancels tax, while an assessment grants exemption
Explanation: A tax return is a declaration submitted by the taxpayer containing relevant income and tax information.
Correct answer: A return is filed by the taxpayer, while an assessment determines tax liability- A. Rs. 55,000
- B. Rs. 125,000
- C. Rs. 180,000
- D. Rs. 305,000
Explanation: Net sales tax payable is calculated by subtracting eligible input tax from output tax: Rs. 180,000 minus Rs. 125,000 equals Rs. 55,000.
Correct answer: Rs. 55,000- A. The tax rate rises as taxable income rises
- B. The tax rate remains fixed for every taxpayer
- C. The tax rate falls as taxable income rises
- D. The tax is charged only on imported goods
Explanation: A progressive tax applies higher rates to higher levels of taxable income.
Correct answer: The tax rate rises as taxable income rises- A. Sales tax charged on taxable supplies
- B. Income tax charged on an individual
- C. Tax on a company's taxable profit
- D. Tax on an employee's salary
Explanation: Sales tax is indirect because it is collected by the supplier but its economic burden is generally passed to the consumer.
Correct answer: Sales tax charged on taxable supplies- A. Tax avoidance
- B. Tax evasion
- C. Tax assessment
- D. Tax withholding
Explanation: Tax avoidance uses lawful provisions or planning to reduce tax liability.
Correct answer: Tax avoidance- A. It reduces taxable business income
- B. It increases gross business receipts
- C. It changes direct tax into indirect tax
- D. It converts a liability into an asset
Explanation: An allowable deduction is subtracted in determining taxable business income, subject to the relevant tax rules.
Correct answer: It reduces taxable business income15. Which item is normally treated as a capital expenditure rather than an ordinary revenue expense?
- A. Purchase of machinery for long-term business use
- B. Payment of monthly office electricity
- C. Purchase of stationery for immediate use
- D. Payment of routine equipment repairs
Explanation: Machinery acquired for continuing business use creates or improves a long-term asset and is therefore capital in nature.
Correct answer: Purchase of machinery for long-term business use- A. Rs. 75,000
- B. Rs. 95,000
- C. Rs. 115,000
- D. Rs. 20,000
Explanation: Tax deducted at source is generally credited against the taxpayer's gross tax liability. Therefore, Rs. 95,000 minus Rs. 20,000 leaves Rs.
Correct answer: Rs. 75,000- A. Income is excluded from tax under specified law
- B. Tax is collected later through withholding
- C. Tax is increased because income is undisclosed
- D. Tax is shifted from the buyer to the seller
Explanation: An exemption removes specified income, goods or transactions from tax under the applicable law.
Correct answer: Income is excluded from tax under specified law- A. Its eligible business purchases
- B. Its taxable sales to customers
- C. Its annual accounting profit
- D. Its employees' personal expenses
Explanation: Input tax is sales tax paid on eligible purchases or inputs used in making taxable supplies.
Correct answer: Its eligible business purchases- A. To substantiate figures reported in the tax return
- B. To guarantee exemption from every tax
- C. To replace the need to file a return
- D. To convert private expenses into business expenses
Explanation: Records provide evidence for receipts, expenses, assets and other amounts reported in a return.
Correct answer: To substantiate figures reported in the tax return- A. The tax takes a larger income share from poorer households
- B. The tax rate rises with each income bracket
- C. The tax burden is based only on company profit
- D. The tax is assessed after an annual audit
Explanation: A regressive tax takes a greater proportion of income from lower-income taxpayers than from higher-income taxpayers.
Correct answer: The tax takes a larger income share from poorer householdsTaxation MCQs: common questions
Are these Taxation MCQs free?
Yes. All Taxation MCQs from Accounting are free on TestUstad, with unlimited attempts and no account needed. Nothing on this page is a sample or a trial.
How many Taxation MCQs are on this page?
There are 50 Taxation MCQs in the Accounting bank, shown 20 to a page with the correct answer and an explanation on each.
Does every Taxation MCQ have an explanation?
Yes. Each Taxation question shows the correct option and a written explanation of why it is correct, so a wrong answer teaches you something rather than just being marked wrong.
Can I take a timed Taxation test?
Yes. The practice button on this page starts a free Taxation test drawn from the Accounting bank. It marks each answer instantly, gives you a score at the end, and can be retaken as many times as you like.