startup tax strategies

Startup Tax Strategies

National Association of Pakistani Entrepreneurs

Presentation overview• What does tax mean to a Startup?

• Which tax filings are due and when?• Under the Income Tax Laws.• Under the Sales Tax Laws.

• What do I need to do to get ready?


What does tax mean to a start up?

• Everything including:

• Whether to enter the market or not?

• Payment structuring

• Profitability

• Compliances


Which tax filings are due and when?

• Tax filings and due dates are driven by:

• Business entity type (Sole Proprietorship, AOP & Company)

• Where the business was formed and where it’s operating

• The fiscal or calendar year end chosen for tax reporting


First things first

• What is the first thing that a Startup needs to do?

• Set up a legal entity and get it self registered with both Federal and Provincial Tax Authorities

• Before you register the entity it is mandatory to get yourself registered with the Federal Board of Revenue


Requirements for national/ provincial tax numbers

• Application form.

• Copy of CNIC of Proprietor/ Partners/ Directors.

• Copy of Partnership deed/ Incorporation Certificate.

• Copy of last paid Electricity Bill.

• Account Maintenance Certificate from Bank.

• Rent Agreement, if premises is on rent.


Income tax

• Tax on individuals income and income of the legal entity are governed by the Income Tax Ordinance, 2001 and Income Tax Rules, 2002

• ITO, 2001 and ITR, 2002 provide a mechanism on how to compute tax on income of persons, how to deposit tax and how to file monthly and annual returns.


Who is required to file income tax returns?

• Every Company.

• Every person whose income exceeds Rs. 300,000/-.

• Every person who owns an immovable property with a land area of 250 yards or more.

• Every person who owns a motor vehicle having engine capacity above 1000CC.

• Every person who has a National Tax Number.


Basic tax compliance for all entities

• Any salary more than Rs. 15,000/- to be paid through cross cheque.

• Deduct tax on any salary of more than Rs. 33,333/- per month.

• All payments of more than Rs. 10,000/- should be made through cross cheque.

• Filing of Monthly and Annual Salary Withholding Statements.

• Filing of Income Tax Returns and Wealth Statements.


Additional tax compliances

• Sole Proprietorships and AoP’s having Annual Turnover of more than Rs. 50 million and Companies have to:

• Deduct tax when making payments for services or supplies received.

• Filing of monthly and annual withholding statements.


Tax year and Tax rates

• Tax Year is mostly from 1st July to 30th June unless a person opts for a Special Tax Year.

• Progressive Tax Rates:

• Salaried Individual: Between 0% and 30%• Sole Proprietorship: Between 0% and 35%• Association of Persons: Between 0% and 35%• Small Company: 25%• Company: 33%

(Income of Individuals and AoP if it is equal or less than Rs. 400,000/- is not chargeable to tax)


Tax on Sole Proprietorship

• Sole Proprietorship is taxed at a progressive rate on its taxable income i.e. total income of the person for the year reduced by the total of any deductible allowances.

• The drawing of the Sole Proprietor during the tax year is not taxable.

• Tax Rate: 0% to 35%


Tax on an AOP

• An AOP is taxed at a progressive rate on its taxable income i.e. total income of the person for the year reduced by the total of any deductible allowances.

• The drawings of the Partners of an AOP during the tax year are not taxable.

• Tax Rate: 0% to 35%


Tax on a Company

• A Company is taxed at a flat rate on its taxable income i.e. total income of the person for the year reduced by the total of any deductible allowances.

• The Directors of the Company who are also the Shareholders of the Company may receive a salary/ remuneration which is taxed at a progressive rate.

• The Directors/ Shareholders of the Company also receive Dividend payments for the shares they hold of the Company which are taxed at:

• Filers: 12.5%• Non Filers: 17.5%


Important dates

• Deposit of tax deducted with 7 days of such deduction.

• Monthly Statements relating to deductions pertaining to last month to be filed before 15th of the next month.

• Income Tax Returns along with Wealth Statements of Salaried Individuals to be filed before 31st August.

• Income Tax Returns along with Wealth Statements of Sole Proprietorships and Association of Persons to be filed before 30th September.

• Income Tax Returns of a Company to be filed before 31st December.


Penalties

• Failure to register the entity with FBR attracts a penalty of Rs.5,000/-

• Failure to collect ,deduct or deposit tax attracts a minimum penalty of Rs. 25,000/-

• Non filing of monthly and annual statements attracts a minimum penalty of Rs. 10,000/-.

• Failure to file Income Tax Returns and Wealth Statements on time attracts a minimum penalty of Rs. 20,000/-.

• Failure to deposit tax due at the time of filing of Income Tax Return attracts a minimum penalty of 5% and a maximum of 50% of the tax deducted.


Sales tax

• Sales Tax on Goods is a Federal levy and is governed by

Sales Tax Act, 1990 and Sales Tax Rules, 2006.

• Sales Tax on Services is a Provincial levy and is governed by:

• Sindh Sales Tax on Services Act, 2011 & Sindh Sales Tax on Services Rules,

2011.

• Punjab Sales Tax on Services Act, 2012 & Punjab Sales Tax Rules, 2012.

• KPK Finance Act, 2013.

• Islamabad Capital Territory (Tax on Services) Ordinance, 2001


Basis Concept of Levying Sales Tax

• Income tax is charged on the “income” derived by a person.

• Sales Tax is charged on the “transaction” executed by the person.

• Sales Tax is charged on:

• Import of taxable goods; and

• Supply of taxable goods/services


Input and Output Tax

• When a person supplies goods or provide services, sales tax is

charged. This is called the “output tax”

• Sales Tax paid at purchase of goods or acquiring of services is called

“input tax”.

• The “output tax” is adjusted against the “input tax” to arrive at the

balance tax payable or refundable.


Rates of Sales Tax

• The general rate of Sales Tax on Goods is 17%.

• The general rate of Sales Tax on Services is:

• 14% in SRB

• 16 % in PRA

• 15% in KPK

• 16% in ICT


Important Dates

• Generally Tax Period in Sales Tax is one month.

• Payment of Tax has to be made by 15th of succeeding month.

• Sales Tax return has to be filed on monthly basis on 18th of every succeeding month.


Penalties

• Penalties are attracted for the following:

• Failure to make application for registration.

• Non – Furnishing of return within due date.

• Non Issuance of invoice.

• Unauthorized issuance of a taxable invoice.

• Failure to notify material changes in the particular of registration.

• Failure to deposit the amount of tax due or any part thereof.

• Failure to maintain the required records.


What do I need to do to get ready?

• Choose the right legal entity.

• Understand your tax obligations.

• Separate business and personal finances.

• Deducting business expenses.

• Using the right tools/ systems.

• Doing your taxes with professional tax help.
