Aneel Peter: How Accounts, Finances, and Taxation Are “Scaring” SMEs!

Author:
Safwa Mir
|
Publish Date:
December 17, 2020

Disclaimer: This article is from the Live Session of Mr. Aneel Peter as our Expert Guest Post Initiative.


Established entities have to re-structure many times.

 

As you read the title of the article, touch your forehead and you will feel a frown already forming. This is what the terms “taxation” and “finance” result in. For all types of business owners, whether small, medium, or large, managing the accounts and finances is cumbersome. However, ensuring that you file your taxes is equally nerve wrecking. Moreover, the daunting feeling of having filed them incorrectly also lingers on.

 

How to keep your accounts?

What metrics to record to tab your finances?

Any digital tools that can help you record your financial statements?

How important is it to file your taxes?

 

All these questions are painful and tough to figure out on your own! Because we, at Startup.pk, know how important it is for you to navigate your financial management and file taxes based on the laws, we arranged a webinar with an expert to guide you about the legal requirements, taxation policies, and digital tools to manage your accounts as an SME. Not only this, but we have added a checklist for you to download that will help you in managing financial accounts.

The live webinar session was attended by tech startups, cybersecurity service providers, e-commerce management providers, entrepreneurial conference organizers, and advertising companies to name a few. Here are some chunks from the exclusive webinar with Aneel Peter. See if you are following any of his tips and tricks like we are?

 


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Who is Aneel Peter anyway?

Aneel is a Chartered Accountant from the Institute of Chartered Accountants of Pakistan and Certified Internal Auditor from the Institute of Internal Auditors, USA. He is a Partner in Peter & Co. Chartered Accountants with clientele ranging from individual owners to small, medium, and some of the largest businesses in Pakistan.

He has an extensive experience of about 17+ years of advisory, assurance, and tax experience across regions. He has headed multi-million-dollar projects, managed, and led internal/external audits along with the process improvements, enterprise risk assessments, fraud and money laundering investigations, dispute resolution and claim verification assignments.

Aneel is also an Independent Board member of 2 major non-profits and a public company. He is a member of the Rawalpindi-Islamabad Tax Bar Association and President of the ICAP Toastmasters Club Islamabad.

Despite all of these duties, Aneel took the time out to help out our SME business owners and startups with their financial and accounting issues.

 


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Many tech startups and companies that provide digital marketing, certifications, advertisings not necessarily are tech savvy in using latest technologies. Majority of the Business Development Service Providers [BDSP] don’t have enough resources to share with their clients and/or offer any relevant services to them in terms of taxation and financial management. Therefore, it is paramount for SMEs to have a basic understanding of keeping accounts, managing financial statements, and filing taxes.

But not all IT Service Providers have to pay taxes. Some are exempted from paying taxes on their profits and income.

Aneel thoroughly yet simply explained the taxation viewpoint. He emphasized that entities may have to sometimes re-structure by establishing further entities and forming a group.

There are only 3 types of entities classified under taxation law of Pakistan:

  • Individual, which is referred to as a Sole P
  • Partnership firm, which is also referred to as Association of Persons.

All 3 are legal entities and all 3 businesses are allowed to provide IT & IT Enabled Services, product exportation and/or brand development.

Whose income is exempt from tax?

Any business that provides IT or IT enabled services to a client outside of Pakistan does not have to pay taxes on the profit earned or charge sales tax on the fees if:

  • They have a contract with the client abroad for provision of IT or IT enabled services;
  • The services are exported from Pakistan; and
  • They receive at least 80% of the billed amount in a Pakistani rupee account in Pakistan.

Please note that if you receive the income in your foreign currency account here in Pakistan, then tax will still be applicable. This is because when you receive the income in Pakistani rupee account, the government is able to get the foreign exchange on that amount.

80% mentioned above refers to the amount out of the total billing/invoicing of services that you exported which should be received in a Pakistani rupee account. The remaining 20% of that total amount can be received anywhere outside or in the country and in any account type. So assuming the above conditions are satisfied by a business, tax will be applicable only on the local revenue, if there is any

Calculating local revenue tax

Any tax withheld at source by your client on your local revenue is your minimum tax which needs to be recorded. Then you have pro-rate the local revenue related expenses of the company. After calculating your local expenses, you can calculate the profit on local revenue and then the applicable tax on that profit. Further, you will then have to see if the tax withheld was more or less then the tax calculated at year end. If the tax calculated is more than tax withheld, the difference has to be paid with the income tax return. If the tax calculated is less than tax withheld, no additional tax is to be paid.

Currently, IT & IT enabled services have a withholding tax rate of 3%. Simply put, any service you provide to a client locally under the IT & IT enabled services category will be subject to 3% withholding tax, from the amount payable to you. This tax which is cut at the source is the Minimum Tax which you have to pay.

Sales tax on services

IT and IT enabled services are exempt from sales tax, if exported. If you are locally providing the same services, you will have to charge sales tax on them. The sales tax rate is subject to the province you operate in or provide the services in.


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Case Study

Let’s assume that you have sales of Rs. 1,000 and profit of Rs. 200 by the end of the year. The tax on the profit is calculated as Rs. 58. Tax deducted at source is Rs. 30. You then have to pay Rs. 28 more with the annual income tax return on.

Now, if your tax deducted at source is Rs. 60,then no additional tax is to be paid with the annual income tax return as Rs. 60 will be the minimum tax that you have to pay. Hence, the Government will not return Rs. 2 to youbut you also don’t have to pay anything on top of that to the Government.

IT & IT Enabled Services as defined by Income Tax Ordinance, 2001

As per the law, IT & IT enabled services include the following:

IT Services:

  • Software development
  • Software maintenance
  • System integration
  • Web design
  • Web development
  • Web hosting
  • Network design

IT Enabled:

  • In bound and out-bound call centres
  • Medical transcription
  • Graphics design
  • Accounting services
  • Remote monitoring
  • HR services
  • Telemedicine centres
  • Data Entry Operations
  • Insurance claims processing
  • Locally produced TV programs

Full PDF of Income Tax Ordinance 2001 Amended up to 2019


Essential financial management and processes

Whether you are a company or not, all entities have to fulfil certain compliance requirements. Any business that wants to enjoy tax exemption mentioned above, needs to make sure that they are compliant with the requirements of SECP and FBR so that the tax exemption is not .

If you are a company, make sure you are doing your annual filing to SECP and FBR. In addition, also make sure that you are filing your quarterly withholding statements with FBR, even if there is no business activity.

If you are a registered firm, make sure you are doing your annual filing to sub-registrar of firms and FBR, even if there is no business activity.

If you are a AoP or sole proprietor, make sure you are doing your annual filing to FBR, even if there is no business activity.

So, remember the 2 things about financial management:

  • Filings with SECP, FBR or Sub-Registrar of Firms (as the case may be)
  • Maintaining books of accounts

Ways of financial management

People not having the expertise can’t handle their own finances so they look up various hacks and easy way out. This is not recommended. Some people also don’t have the right man for the right job, and so, it also leads to the integrity of that person being compromised.

Some SMEs are quick to make mistakes in handling their finances. They get excited by observing monetary activity in their banks, fail to calculate their actual profit and receivables, and don’t invest on structure and processes of their organizations. This needs to be avoided.

There are 3 ways to go about making sure that you do you compliances and manage your finances effectively:.

Get the right man for the right job through reference or recruitment – invest on the right Accountant because it can go a long way for your business’ financial health.

  • Outsource all your work and get a financial services firm. You will still need a person to feed data to the firm but the experience and qualification of that person can be much lower enabling you to save salary and spend those savings on the fee of the It will also keep a check and balance between the accountant and consultant.
  • Doing it yourself..

Softwares for Financial Accounting

  • Quickbooks (Single user license is available in about Rs. 65,000)
  • Locally made ERPs (Can be obtained in 100,000 – Rs. 300,000) with extra functionalities.
  • Sage (Higher grade software in 250,000 plus)
  • Microsoft Excel

Whether your organizations are of 10 or 20 or 50 people, they are all SME. So, have a proper structure and process to ensure that you will grow in a systematic and proper way and avoid problems when you grow to a medium or large sized company.

In addition, it is better to adopt the Accrual Basis of accounting for financial accounting so that you have a better view of your assets and liabilities.

Hiring Auditors

A disconnect arises between SECP and FBR in terms of the audit requirements from companies. Companies Act, 2017 requires that audit is not compulsory for any company having paid up capital of less than Rs. 1 million however, the Income Tax Ordinance, 2001 and the rules made thereunder require that irrespective of the paid up capital, audited accounts must be attached with the annual income tax return of a company.

Aneel, as an expert suggested that get an annual audit done irrespective of the requirement or not. This will help in:

  • Fulfilling FBR requirement;
  • Keeping a check and balance on the financial accounts; and
  • Insight into any tax issues, business operations, risks by the auditor.

Do ensure that the auditors you hire should be from a credible and competent firm through a proper hiring and screening process. You can access the list of firms near you from Institute of Chartered Accountants of Pakistan’s (ICAP). When screening auditors, you may:

  • Ask for their client portfolios;
  • Assess their integrity and reputation; and
  • Evaluate the business and overall knowledge rather than just the accounting knowledge.

Ensure that proper legal documentation is carried out with your auditors as well. After a proper agreement, auditors cannot disclose your business’ private and confidential information with anyone. Once, you have engaged an auditor then you should also not keep anything from the auditor. Be as honest as possible, so that any financial mishaps could be avoided.

In case of any breach of privacy or disclosure of sensitive information, you can complain about the auditor to ICAP, fire him, or take legal action against the auditor.

Filing wrong income returns

A plus point about filing income returns is that it is an annual process that is independent of your previous year’s filing history. So, if somebody has filed wrong return for a tax yearthen, by law, they have 60 days from the date of filing to revise itIf 60 days have passed then you can file an application to the Commissioner Inland Revenue having relevant jurisdiction and explain to them that you have made a mistake and want to rectify it.


Finance Bill 2020 PDF


Disbursement Policy and Signing Authority

Irrespective of the size of company you have, your key functions should be separated. Such as, your Finance, HR, Sales/ Operations, etc. should belong to separate departments even if there is one person in that entire department. This will reduce the load from you and help you focus on the expansion of your business. This is also known as the segregation of duties for best internal control.

Control the duties that you can do and let go of other things. However, the signatory of cheques should always be the business owner(s) in case of sole proprietorship and AoPs or top management in case of companies. It is also recommended to have joint signatories for cheques unless you are the only owner.

Lack of co-ordination in departments

Try to have policies and procedures in place to ensure consistency and to avoid any miscommunication. Also, take internal politices issues head one and discuss with all stakeholders to address the issues.

Financial metrics that SME owners need to check

A useful tip that Aneel shared was for every business owner to have a short checklist regarding their compliance and filing requirements that they should keep on their desks to observe and eventually have a buffer period to prevent major delays in the processes. The checklist may contain:

  • Annual organization’s compliance and filing paperwork with deadlines;
  • Annual return filing with deadlines;
  • Weekly and Monthly compliances of withholding taxes and sales tax;
  • Monthly bank reconciliation and financial accounts; and
  • Weekly summary of your cashflows.

Also, always keep atleast 3 months’ worth of cash in terms of rent and salaries as a reserve. Businesses who did this were easily able to survive COVID-19 and even grow during the crisis.

Conclusion

To ensure the financial health of your business and avoid any inconvenience while filing compliances, it is good practice to indulge in your financial management and account keeping processes irrespective of the size of the business you own. Even for individual owners, financial management is necessary.

 

We tried some of his tips and tricks and they worked great. So, will you too?

 


Watch the full webinar on Taxation, Accounts, and Finances by Aneel Peter.


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