Pay your taxes to Scale Up!
Startup adventure is fun. Entrepreneurs fantasize startup journey by looking at shining unicorns on the horizon but the path is never obvious. While some live the life of Riley, some may walk through an uphill climb throughout the odyssey. By the time when you are too busy cracking the funding code as an early-stage entrepreneur, you may have missed taking the taxes out and now you own FBR (tax authorities) big time.
When forming and running a startup, you may face some critical tax issues. Although taxes are one of the banal tasks that entrepreneurs try to nudge till the very last moment, however, subsequently it has to be done before it becomes a stumbling block for your startup growth.
Taxes are one of the imperative facets of startups if did not get to grips with, can turn into a bitter pill. Startups need to file tax returns even if they do not earn income in order to dodge a bullet. This is true primarily to startups that are registered as partnership firms, limited liability partnerships (LLP), or private limited companies. If your startup is a sole proprietorship, then you will need to file your income tax returns as an individual. While for other forms of legal entities, a separate tax return is required to be filed.
By paying attention to taxation and choosing the right strategy you are helping your startup grow. Not just the growth, but startups can also position themselves to gain an advantage of tax benefits announced by the government and tax authorities (FBR).
Start-ups and Income Tax: How Does it work?
A startup is assessed for taxation like a normal business entity; however, there are income tax exemptions available to tech-based startups subject to the following conditions:
· It has commenced its business on or after 1st July 2012.
· It is engaged in or intends to offer technology-driven products or services.
· It is registered with and duly certified by the Pakistan Software Export Board (PSEB); and
· The annual turnover should have been less than Rs. 100 Million (Approx. $622,000) during the last five years. (Reference: Section 2(62A) of the Income Tax Ordinance, 2001)
If a startup qualifies for the above four conditions, its income shall be exempt from income tax for three years (Clause 143 of Part 1 of Second Schedule of ITO, 2001) and tax shall not be withheld from its income by the clients (Clause 43F of Part IV of Second Schedule of ITO, 2001).
For other startups, not qualifying for exemption, tax rates depend on their legal status. If these are the sole proprietor and partnership firms, they can enjoy exemption up to Rs. 400,000 of their profits, after which slab rates are applied to their income, which starts from 5% and goes up to 35% for income above Rs. 6 Million.
However, for companies, there is no exemption limit. They would have to pay income tax on any income that is earned and the tax rate on their profits is 23% for small companies and 29% for Medium and large enterprises.
Essentials for Startups
Entrepreneurs need to learn the ropes. There are several things that every startup needs to consider to mature their idea with flying colors. Some of the techniques are narrowed below:
· Accounting & Bookkeeping: It is imperative to always maintain a record of every business transaction ever made from the company’s account or the directors’ account. These records shall act as proof to support your claims in your financial statements and tax returns. Payments made to suppliers and salaries of employees working in your start-ups are the most crucial ones for which an up-to-date record must be maintained. Further, if an owner is personally incurring any expense on behalf of the company, it should be recorded in the company’s books and can be claimed back by the owner.
· Audit: As per the Companies Act, 2017, the appointment of an auditor within 3 months of company incorporation is mandatory. An auditor reviews the financial statements of a company and gives his/her opinion on whether these financial statements are presented a true and fair view of the company’s affairs. An audited financial statement of a company is also required to be submitted with an annual income tax return.
· Income tax filing: Always file your income tax return on time, if not before. In case of non-compliance or late filing of the return, the start-up might be subject to a penalty of 0.1% tax payable or Rs. 40,000 if there is no tax payable.
· Corporate filing: Companies are also required to conduct an annual general meeting and file their minutes along with statutory returns with SECP within four months from the closing of their financial statements.
Due date for filing of Tax Return.
The due date for filing of return for individuals and partnership firms has already been passed. However, the deadline for the companies is fast approaching, which is 31st December 2020.
If you have any doubts about taxation and declaration of your income, we recommend that you consult with specialists, since the Tax law of Pakistan establishes penalties for failure to submit a return of income, as well as for a surcharge on late payment of income tax.
In the end, let us take a moment to wish everyone a successful and profitable 2021 and beyond. Happy New Year!
Thank you to Hina Shahrukh Co. and the NIC Finance team for co-writing this blog, to facilitate startups.