SEC-S20W4 | My Business Ideas | Registration, License, and Taxes
Hello everyone! I hope you will be good. Today I am here to participate in the contest of @dove11 about the Registration, License, and Taxes. It is really an interesting and knowledgeable contest. There is a lot to explore. If you want to join then:
As in the previous contest I assumed to have a software applications development company so I will answer all the questions here again using that business.
Section 1- We are interested to know about the registration procedure of your business in your country and how you manage it.
In order to register a software development company in Pakistan we need to follow a structured process. It ensures the compliance of the business with local regulations. **Here is the breakdown of all the steps and departments which are involved in the registration and clearance procedure. I will also highlight the licensing, taxation and government rules for the business.
Business Registration
In order to formally register software development company in Pakistan we must choose a legal structure. The most common legal options for the business registration in Pakistan are given below:
- Sole Proprietorship
- Partnership
- Private Limited Company (Pvt. Ltd.)
Each legal option has its advantages. And these advantages depend on the size and scope of the business.
Sole Proprietorship:
- We need to register the business with FBR. It is a Federal Board of Revenue. It assigns a National Tax Number (NTN) to the business.
- If we are using a trade name then we have to register it with the Registrar of Firms. Each province has its own Registrar of firms. And we have to register the business from the respective province.
Private Limited Company:
- SECP (Securities and Exchange Commission of Pakistan): We need to register our company with SECP. For this purpose we have need to:
- Choose a company name. We have to verify its availability through the SECP portal. So the company name should be unique.
- We have to submit incorporation documents. These documents may be the Memorandum and Articles of Association.
- We have to get a certificate of incorporation.
- SECP (Securities and Exchange Commission of Pakistan): We need to register our company with SECP. For this purpose we have need to:
My business is sole proprietorship so I will follow the rules of the sole proprietorship for the registration my software development company.
Departments for Clearance & Licenses
FBR (Federal Board of Revenue): Once registered we have to apply for an NTN (National Tax Number). It is required for the tax compliance, income tax filing as well as sales tax if applicable. As a software company we also need to register for Sales Tax. It will help us to use it in future if we start providing taxable services.
EOBI (Employees Old Age Benefits Institution): As my software development company will have employees so I will need to register my business with EOBI. It will ensure that the workers will be given a social security benefits.
PSSD (Provincial Social Security Departments): It is necessary for my software development company to get registered with the provincial social security department. It will ensure welfare and medical benefits for the employees.
Provincial Excise and Taxation Department: As taxes are important in each country and for each business so initially my company will not have its own property for the office building. So my business will pay property taxes and other local taxes for the smooth running without any allegations and problems.
IT and Technology Specific Requirements
As my software development company has a plan to offer software applications in different sectors so it will need approval from specific departments of government to ensure the quality and transparency. So for this purpose I will need specific clearances from regulatory authorities. These are given below:
PTA (Pakistan Telecommunication Authority): This department in Pakistan controls all the networks, communications and transmissions. So for the development of software related to communications I will need approval from this department.
SBP (State Bank of Pakistan): Similar if my company will develop software applications related to fintech and payment systems then I will need approval from State Bank of Pakistan. It will ensure that the applications developed from my company will follow all the rules and regulations of the government while ensuring transparency. It will be very useful for my business.
Licensing and Taxation Strategies
Software Export Registration: If my business exports software or IT services then I should register with the Pakistan Software Export Board (PSEB). This allows business to take advantage of tax incentives offered by the government for IT exporters. PSEB registration may also help to gain access to networking opportunities and government grants.
Sales Tax Exemptions: The government offers several tax incentives for the IT industry, particularly exports of software and services, which may qualify for zero sales tax under certain conditions. So I will stay updated with tax regulations to maximize these benefits.
Income Tax Compliance: As my business is already registered with FBR so I need to take care about the annual tax. I will need to have compliance with the FBR. It will help my business to avoid penalties and audits. And for this I will also make it sure that my company has all the documentation of all the financials, salaries and service revenue.
Trademark Registration: As my business is a unique I will register the trademark of my company from Intellectual Property Organization of Pakistan (IPO-Pakistan). It will protect the business and software names of my software development company.
Government Rules for Small Scale Industries
Indeed in each field there are big as well as small scale businesses. In this area these are the basic key points or you can say rules and regulations for the small scale businesses:
Sales Tax Registration: If your annual revenue crosses the threshold set by the FBR then you have to register your small business as well for sales tax. Currently the minimum threshold for the sakes tax is around PKR 10 million for services.
Labor Laws Compliance: Labour laws are applied everywhere even the business is on small scale or large scale. So it is required to adhere to labor laws for the welfare of the employees. It will ensure the suitable wages and working conditions. And these laws compliance will depend upon the size of the business. The size is counted when you are running a small business.
Provincial Rules: Each province has specific rules for the registration of the business. Each has different criteria for the licensing or sector specific regulations. It is applicable if the business operates in industries like manufacturing or trade. Software development is also a kind of manufacturing which manufactures software applications.
Understanding the registration procedure, clearance requirements and tax strategies is crucial to running a software development business in Pakistan. So there is need to register with SECP, FBR, EOBI, PSEB, and potentially local authorities based on business structure and size. Licensing, employee benefits registration, and knowing the relevant taxation rules will help to business run smoothly and avoid any legal complications.
Section 2- Tell us all about the procedure to obtain any licence/permit etc. to run your business.
It is a complex procedure to get license and permits to run the businesses. But in order to get licenses and permits to run a software development business in Pakistan is generally not a complex or time consuming process compared to some other industries. But it needs some specific steps and requirements for the regulations of the business.
Does your business need any permission/licence, or does your company fall under free trade?
Pakistan supports IT business and gives incentives related to taxation and import and export. But in general software development business comes in both categories. And it depends upon the types of services a company is offering. So the businesses at large scale need permissions.
Software companies which focus on general IT solutions, app development or services usually do not require specific license related to the industries. But on the other hand all those software development businesses and companies which develop sensitive applications related to health, fintech and payment systems require registration with the government authorities.
My proposed software development company will offer these services such as fintech, telecommunications and healthtech. So it will need additional licenses and permissions from the government.
Here is the overview of the complete procedure and the challenges which software development business can face while getting permission and license:
Fintech Companies: As my company offering digital payment systems and financial software services so it will need approval from the State Bank of Pakistan (SBP).
Telecommunications Software: For the communication related software applications my company will need licenses and approval from the Pakistan Telecommunication Authority (PTA).
Health Related Software: In order to develop those softwares which collect or processes medical data my company will need clearance from the Ministry of Health or similar regulatory authorities.
What problems do you face with your governments in running a business? If you wish to avoid the description of "under the table payment," you can do that but mention legal commissions if any, etc. at the time of registration.
While the registration process for a software development company is generally straightforward but there can be some challenges. These are given below:
Bureaucracy and Delays: Dealing with government departments such as the FBR and SECP can sometimes involve bureaucratic delays. Documents may need to be submitted multiple times if they are not correctly formatted. It can slow down the registration process.
Slow Online Systems: Government portals such as the SECP's portal for the company registration system sometimes experience downtime. It leads to slow processing and delays.
Corruption and Unofficial Payments (Bribes): I think these unofficial payments or you can say under the table payments and corruption is everywhere. While the IT sector may not face as much pressure in this regard as compared to other industries like construction or manufacturing. Businesses sometimes face demands for "facilitation payments" to speed up the processes. But if all the paperwork is complete and according to the requirements then these payments are not necessary because the work will be done automatically with quick response. Because when there are incomplete documents then facilitation payments are required.
Compliance Complexity for Small Businesses: For small software companies, compliance with labor laws, taxation, and employee benefits can sometimes be overwhelming due to the complex and sometimes unclear legal requirements.
What problems do you face or are there any obstacles to getting permits/licenses if any, or do you get them easily with the involvement of inspectors/officers?
For a software development company direct involvement of the inspectors and officers during the registration process is minimum as compared to other industries like food or construction. But if I am going to set up an office then I can face the problem to take permission from local authorities. This permission is required for the property related clearances such property tax, fire safety or zoning regulations.
There are some cases where inspectors or officers are involved such as for employee benefits registration (EOBI) or local government permits. In this regard delays may arise if the paperwork is not complete or officers request additional documentation for the verification.
EOBI Registration: I can face delays and problems for the registration of the EOBI. Because they require record and details of all the employees working in the company. They verify each employee with accurate record. And for me to build all the documentation for the employees can take time and ultimately the registration will also fall prey to delay. But as soon as I submit all the required documents in time then the process will be fast.
Provincial Taxes and Permits: As my business is in rented office space so it may need to navigate local excise and taxation rules. And it will also involve inspectors for the verification of the office premises. They will check property tax compliance.
How long does the procedure take before you get permission from the government authorities?
The timeline for registering a software development company and obtaining all necessary permits or licenses varies depending on the legal structure and regulatory authorities. It also depends upon the size of the company:
Sole Proprietorship/Partnership:
- FBR registration (NTN) can be completed within 2-3 business days if all documents are submitted online in time.
- Trade name registration with the provincial Registrar of Firms can take up to a week.
Private Limited Company:
- SECP registration certificate of incorporation typically takes 7-10 business days from the time all documents are submitted.
- Once SECP registration is complete, FBR registration (NTN) and any required sales tax registration usually take another 2-3 business days.
I have mentioned private limited company as well for additional information but as my company is purely sole proprietorship so I will follow that and it will take less time than private limited company procedure time.
Additional Licenses or Permits: For specialized software services such as fintech or communications approval from regulatory bodies like SBP or PTA may take several weeks to months. It depends on the complexity of the application and required documentation.
PSEB Registration (Optional): Registering with the Pakistan Software Export Board usually takes around 2 weeks. It is for those companies and businesses which focus on exports.
Running a software development business in Pakistan generally involves minimal regulatory hurdles as compared to other industries. The process is generally smooth and easy but delays can occur due to bureaucratic inefficiencies or slow online systems.
Section 3- What is the tax structure for traders/manufacturers
In Pakistan the tax structure for traders, manufacturers and service providers including software development companies is governed by a combination of income tax, sales tax and other taxes. It depends upon the nature and scale of the business. Below is a breakdown of the applicable taxes, slabs and rebates that may apply:
Sales Tax/Trade Tax Applicable to Your Business
For a software development company sales tax applicability depends on whether you are providing services to the domestic market or exporting IT services. My company is providing services to the domestic market. So the sales and trade taxes applicable to my business are given below:
Sales Tax on Services: My software business is primarily service based. It is providing services like app development and IT solutions. So I will likely fall under the Provincial Sales Tax on Services. Different provinces have varying rates, typically ranging between 13% to 16%. But I am a citizen of Punjab so the applicable tax in Punjab is given by the Punjab revenue authority. Sales tax in Punjab is around 16% for providing services to others.
Trade Tax: It depends on the location. So j will pay trade tax or professional tax to local authorities and excise department. These taxes are small and depend upon the size of the business or turn over.
What are other tax slabs if your sales are higher than your current sales?
Income tax in Pakistan is applied based on the taxable income of individuals or companies. The income tax rate structure for businesses and individuals is progressive. It means meaning that as your income or sales increases the tax ratio will also increase. Here's an overview of the tax slabs:
- Individual/Sole Proprietorship: For sole proprietorships, the income tax rate is based on the individual tax slabs for non salaried persons. The current slabs for the year 2023-2024 are as follows:
- Income up to PKR 600,000: No tax.
- Income from PKR 600,001 to PKR 1,200,000: 5%.
- Income from PKR 1,200,001 to PKR 2,400,000: 12.5%.
- Income from PKR 2,400,001 to PKR 3,600,000: 20%.
- Income from PKR 3,600,001 to PKR 6,000,000: 25%.
- Income above PKR 6,000,000: 35%.
Turnover Tax: If my business has a turnover that does not result in taxable income but still I have to pay a turnover tax. The current tax rate is 1.5% of annual turnover.
Eligibility for Tax Rebates
As a software development business my company may qualify for certain tax rebates or exemptions. It will be based on size and the nature of the operations.
Businesses providing software development, data processing and software exports are exempt from income tax on export earnings up to 2025. But they should be registered with PSEB (Pakistan Software Export Board). This exemption significantly reduces the tax burden for software exporters. My company is registered with PSEB and it has less burden of the taxes on it.
Filing Tax Return
Tax returns for businesses in Pakistan, including software companies need to be filed annually. Here’s the process for filing tax returns:
As my business is sole proprietorship so I will file income tax return as an individual taxpayer. I will do it through the IRIS portal of the Federal Board of Revenue (FBR). This includes:
- Income details.
- Deductible expenses.
- Any applicable tax credits or rebates.
- I can also file my sales tax return on the same portal.
So in this way I can file an application for the tax rebate.
Section 4- What are the options in case you face any tax-related problems?
Options for Dealing with Tax Related Problems
If my business faces tax related problems then there are a number of options to manage and resolve them:
- Hire a Tax Consultant or Accountant: The most common approach for businesses in Pakistan is to hire a professional tax consultant, chartered accountant or a tax lawyer. These professionals have experience to deal with the complex tax matters, audits. They can solve these disputes with the Federal Board of Revenue (FBR) or provincial tax authorities in an effective way.
They can also help in:
Filing returns correctly.
Managing compliance issues.
Resolving disputes with tax authorities.
Resolve Issues with FBR Online or In-Person: Many minor tax issue, can be managed directly through the FBR’s IRIS portal or by visiting the local FBR office. FBR offers online complaint resolution and helplines where I can file applications and follow up on the status of returns or audits.
- Appeal to the Tax Ombudsman (FTO): If I am unable to resolve the problem with the FBR. Then I can escalate the issue to the Federal Tax Ombudsman (FTO). The FTO is an independent authority. It investigates taxpayer complaints related to unfair tax treatment and delays. It also monitors arbitrary decisions by tax authorities. The Ombudsman can interfere between my business and the FBR for the solution.
Tax Tribunal/Courts: If the issue is complex or involves a significant amount of money then I can take the case to the Appellate Tribunal Inland Revenue or High Court. These legal authorities allow to appeal against decisions made by tax authorities or the FBR.
Managing Tax Problems with Professionals or Independently?
Professional Help: In most cases as mentioned earlier businesses prefer to hire professionals to handle tax issues. Because tax laws and regulations in Pakistan are complex. So if I face more complex problems related to tax then I will surely get help from the professionals.
Solving Tax Problems Independently: Indeed my business is sole proprietorship. So I can handle simple tax issues on my own as well. I will solve the minor mistakes about the documentation or filling. I am talking about the minor issues but again for the complex issues I will hire a professional.
Consumer Courts in Pakistan
Pakistan has consumer protection laws and consumer courts in various provinces. These courts handle disputes between consumers and businesses. They talk over the defective products, services or unfair trade practices. Consumer courts provide quick solutions to disputes. They offer reliefs such as refunds, compensation or replacement of defective products.
Consumers can file complaints in consumer courts related to faulty goods or services. The courts usually follow a streamlined procedure for faster case resolution. Businesses like software development firms like mine can be held accountable for any breach of consumer rights.
Consumer courts follow the provincial laws such as the Punjab Consumer Protection Act 2005, Sindh Consumer Protection Ordinance 2003 and similar laws in other provinces.
Who Has the Upper Hand in Business and Consumer Disputes?
Consumer courts in Pakistan generally favor consumers in disputes. It is more focused when the case involves defective products or services. They favour the consumers if the business follows deceptive marketing practices or a violation of consumer rights. The legal framework tends to protect consumers. It offers them the ability to seek compensation, product replacement or a refund.
On the other hand businesses can defend themselves. They can prove that the issue arose due to consumer negligence or misuse. In service related industries such as software development prove that the terms and conditions of the contract were followed. It will strengthen the case in the favour of the business.
Fair Trade Policy in Pakistan
Pakistan does not have a specific "Fair Trade" policy in the same sense as some other countries. In Pakistan businesses are certified for following ethical trade practices such as the Fairtrade International certification. However Pakistan has rules and regulations that promote fair business practices and consumer rights.
These includes the following:
The Competition Act, 2010: The Competition Commission of Pakistan (CCP) ensures fair competition among businesses. It prohibits anti-competitive practices such as cartelization or abuse of market dominance. It also prohibits deceptive marketing strategies.
Consumer Protection Laws: As mentioned earlier, consumer protection laws aim to ensure that businesses engage in fair trade practices. It provides consumers with legal recourse in case of unfair treatment.
Labor and Employment Laws: Pakistan also has labor laws in place to protect the rights of the workers. It ensures fair treatment of employees in all the industries whether it is a software development industry or any else.
I invite @mostafajaman, @alejos7ven and @chant to join this contest to share their valuable views and thoughts.
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