Accounting & Taxation

All of us think the same when we plan to start our business. We must register our business to be safe but how can we have NTN (National Tax Number) ?

When I was a university student and planning to start my business after completion, I had the same confusion with very little information regarding Business Registration in Pakistan (expect basics studied in university). 

Somehow, people manage to run an unregistered business but in the broader sense, non registered businesses and people running those businesses are cheating their homeland. After being registered, you pay monthly and annual taxes on sales and profits depending upon your form of business. These collected amounts are reinvested for country’s betterment.

Which Business to register?

There are multiple types of businesses including individual, partnership, public and private limited companies. Each of them have different features and benefits and entirely different from each other in various manners

How to Register a Business & Get NTN

There is some basic information you need to provide to the registrar at FBR or registration authority for giving you a legal authority of running a business in a proper way.

Your preferred Company Name i.e, Al Haq Traders, XYZ Enterprises

Location of the business, principal office, and branch office with their complete address and contact details.

Business Nature or Principal Activity (Manufacturing, Trading, Retail, Wholesale, Services, etc)

Contact details of Partners (if partnership company)

An Active Bank Account

As we are in Pakistan, I shall force you to get Get NTN & GST. There are two stages of registration of a Business under FBR.

The 1st one is the National Tax Number (in short NTN)

and

The 2nd is the Indirect Tax type, called Sales Tax Registration (in short STRn or STR)

It is simple to get NTN but a little harder to register for STRn. By registering for NTN, you need to pay annual taxes on the income; as it is Income Tax Registration but after registering you are bound to pay Sales Tax every month on the sales amount. Which is 17% of the product value.

Let’s say, Product price is 100 PKRs, you will make a bill of 100 Rupees and add 17 Rupee Sales Tax. The customer will pay you 117 and the above 117 will be deposited to FBR account at the end of the month during submitting the sales tax return. The remaining 100 is yours but at the end of the fiscal year, you are bound to pay Income tax from amounts collected from these 100 rupee sales.

This is known as Income Tax Returns

You need to get your NTN first and if you are interested in acquiring your Sales Tax Registration but NTN you just need to have the above details and your National Identity Card (in Pakistan issued by Nadra).

While you are applying, keep it in mind to choose the right business category from Sole-Proprietorship, Partnership, Joint Stock, Public Limited or you are a salaried person. You are also able to register NGOs, Trusts, and others

Required Information

Business Category: Individual / Proprietorship; the Individual must

A. personally go to any Facilitation Counter of any Tax House

B. Bring the following

Original CNIC

Cell phone with SIM registered against own CNIC

Personal Email address belonging to him

Original certificate of maintenance of personal bank account in his own name

Original ownership evidence of business premises

Original paid utility bill of business premises not older than 3 months

To Register An AOP, any one of the Members / Partners Must

A. personally go to any Facilitation Counter of any Tax House

B. Bring the following

Original partnership deed, in case of Firm

Original registration certificate from Registrar of Firms, in case of Firm

CNICs of all Members / Partners

Original letter on letterhead of the AOP signed by all Members / Partners, authorizing anyone of the Members / Partners for Income / Sales Tax Registration

Cell phone with SIM registered against his own CNIC but not already registered with the FBR

Email address belonging to the AOP

Original certificate of maintenance of bank account in AOP’s name

Original evidence of tenancy/ownership of business premises, if having a business

Original paid utility bill of business premises not older than 3 months, if having a business.

For Company Registration, the Principal Officer must

A. personally go to any Facilitation Counter of any Tax House

B. Bring the following

Incorporation Certificate of the Company

CNICs of all Director

Original letter on letterhead of the company signed by all Directors, verifying the Principal Officer and authorizing him for Income Tax / Sales Tax Registration;

Cell phone with SIM registered against his own CNIC but not already registered with the FBR

Email address belonging to the Company

Original certificate of maintenance of bank account in Company’s name;

Original evidence of tenancy/ownership of business premises, if having a business

Original paid utility bill of business premises not older than 3 months, if having a business.

After collection of above-mentioned documents

Sign the form: The statement of the prescribed form shall be signed by all the partners and duly verified by them.

Fee Submission (if any, like NTN and STR is has no fee but Chamber registration, trademark authority, logo, etc have their fee)

The necessary prescribed fee will be paid and the form will be submitted to the local registrar’s office or advised bank branch.

After the registrar satisfaction, that the requirements of registration have been duly complied with, he/she shall issue you a Certificate (NTN or GST)

Benefits of NTN Number in Pakistan

Having a registered business adds so much value to your business in the following domains

General Benefits of Business Registration

Businesses are commonly unaware of the Benefits of Business Registration and that has been a major cause in less number of registered businesses. The second main reason could be that very few of us know How to Register a Business in Pakistan?

Government Facilitation

The government in every country is always focusing on facilitating business for more productivity and economic growth. Many facilities and privileges to registered firms are provided like protection of business and production, which makes it more profitable

Public’s Confidence

Registered businesses are always prioritized to non-registered from the General public. They have confidence in registered firms because registered companies are working under Government supervision and authorities. Customers can take legal action against fraud or misrepresentation. Thus They make business contracts with them without any fear.

Business Repute

Have you ever bought a small pack of snacks or biscuits compared to other company’s same product because you know the first one? The same case is here. Registered businesses are reputed and their products or services are trustworthy. Their patents, trademarks can not be copied.

Bank Facilities

Nowadays, in Pakistan, it has been compulsory to have NTN if you are willing to open a bank account with your business name and you get NTN after you get register under fbr. Banks facilitate in the way to offer less interest rate on loans, offers free banking services like checkbooks, atm cards, statements, pay orders, and many more.

Claims

Often we hear that people had lost, their creditors are not paying dues. Ever thought why? because of no registration. A registered business can file a lawsuit to creditors for nonpayments, authorities protect their rights and help in settlements of claims.

Partnership Benefits

The rights and privileges of a new partner are also protected in the registered firm, therefore people can easily invest in your business. More Capital means more Growth.

Debtors and Creditors Protection

All of the registered businesses maintain their records, they have to book-keeping. Debtors & Creditors trust registered businesses for their rights, liabilities, and debts. Investors trust easily to registered companies & invest in shares. Whole sellers and retailers can pay in advance for their next orders.

International Market

If you are planning to offer your product to the international market, how will you offer it if you are not registered under related local authorities? International buyers can easily be targeted by showing them your registration or certificates like ISO, Food Safety etc.

The only reason for the importance of Zakat is that it is an important pillar of Islam. Different scholars may have different definitions of Zakat but in simple words, “Zakat is the Purification of money”. Zakat is due after 1 year of keeping the asset. These assets include everything excess from your needs.

Zakat is totally different as the tax is imposed by National Govt but Zakat is part of the belief in Islam. Every country imposes different types of taxes depending upon the economic condition whereas Zakat is Universal law applicable to all Muslims

Zakat and Tax difference is also observed that Zakat is for deserving people and must be delivered by the one who is deducting it but Tax is paid to Govt and they utilize the amount as they want to.

“Zakat is a transfer payment which Sahib –e – Nisab Muslims make at given rates by themselves or through the Islamic state to the poor and the needy in or after the month of Rajab.

Difference between Zakat and Tax

Zakat is absolutely different from tax which is imposed by the Govt. the main differences are as under

Zakat	Tax
Zakat Payment is the Religious duty of Muslims	Paying Tax is the National Duty of all citizens
It is imposed on only Muslims who meet the requirements	Tax is payable by every citizen who has the ability
Zakat is a compulsory payment and not remitted	Tax is compulsory payment & remitted by Govt.
Zakat rates are fixed. They are mentioned in Holy Quran & can not be changed	It is changeable, Govt. may change it according to the economic condition of the country
It can be paid to individuals by individuals	It is to be paid by individuals to the Govt.
Beneficiaries of zakat are mentioned in Islam. They can spend it anywhere	Tax collection by govt is subjected to spending on where Govt. wants too
Zakat Nisab is fixed	Tax amount depends upon income/sales and can be changed
It is to be paid after the completion of a year	It can be paid anytime
Zakat is imposed on all goods like silver, animals, gold, property, agricultural income, and more	Imposition of tax is based upon income & sales
The objective behind paying Zakat is to please Almighty Allah by spending financial resources and helping poor	The tax collection objective is to spend collected amounts on developments and the welfare of society
Zakat purifies the wealth	Paying taxes doesn’t purify wealth. It saves from legal actions
It’s fixed and not variable	Tax is progressive
Zakat creates a feeling of being a Muslim society member irrespective of regional limits	The tax creates native feelings
Zakat payments don’t facilitate payer	Tax Payers are facilitated by the Govt.
Collected Zakat can be spent anywhere without any boundaries	Collected tax is subjected to be spent on collected region only
Zakat Imposition is based upon those who have the ability. There is nothing like indirect or direct zakat	The tax is imposed on everyone using direct and indirect tax patterns
NO corruption is observed in the zakat collection	A lot of corruption is observed in tax collection
Zakat Payment is the Religious duty of Muslims	Paying Tax is the National Duty of all citizens

CONCLUSION: Keeping in view the above whole difference in Zakat and Tax, We know that It is the main tool of fiscal policy of an Islamic state. It provides financial assistance to poor persons, raises the aggregate growth of the economy, plays a vital role to stabilize all the fiscal variables, and makes the country prosperous.

Zakat ASSESSMENT- Who should Give Zakat

For the assessment of Zakat, the following must be kept in view.

Sahib-e-nisaab Muslim

A Muslim who owns and keeps in his or her possession at least 7.5 tola gold or 52.5 tola silver or cash money to the equivalent value is considered a sahib e niqab Muslim. It is his compulsion to pay Zakat at its prescribed rates by Quran and Hadith.

Zakat on Exposed and Unexposed wealth

Exposed wealth is the wealth that is exposed to society e.g. agricultural goods, camels, sheep, minerals, etc. On the other hand, unexposed wealth is the wealth that remains unexposed to society e.g. gold, silver, cash, liquid assets, etc.

The rates of Zakat

Zakat is paid at the following fixed rates.

Gold, silver cash:

For at least 7.5 tola gold, 52.5 tola silver, or the equivalent value in terms of business inventories or commercial goods or cash money, the rate of Zakat is 2.5% of the total value of the goods or money.

Agriculture:

Zakat which is called usher is paid at the rate of 10% from the agricultural output of the land which is irrigated by natural sources and is paid at the rate of 5% from the output of the land which is irrigated by artificial sources like canals, tube wells, etc.

1. Animals:
2. Zakat is paid on the commercial animals at the following rates:
3. One goat from 40-120 goats. Two goats from 121-200 goats and three goats from 201-300 goats.
4. One cow from every 40 cows.
5. One camel from each 5 camel
6. Minerals

Zakat is paid on minerals e.g. coal, iron, salt, etc. at the rate of 20%.

BENEFICIARIES OF ZAKAT – Who can receive Zakat

The following can be beneficiaries of Zakat.

The poor

These are the people who cannot be treated as sahib-e-nisab.

The needy

These are the people who are unable to earn their living e.g. handicapped, disabled, orphans, etc.

Collectors of Zakat

These are the people who collect and distribute Zakat among the poor and the needy. Their salaries are paid from the Zakat fund.

The new Muslims

These are the people who have recently converted to Islam.

The Slaves

Zakat can be used to make free the slaves and prisoners of war from their masters and enemies.

The debtors

People who are heavily indebted can get Zakat to repay their debts provided that the debt is not taken for a sinful purpose.

The travelers

The travelers can get Zakat to complete their journey in case they fall in need of money.

Mujahideen

Zakat can also be given to Mujahideen to prepare them for jihad. Also, the dependents of the martyrs and the religious educational institutions can seek assistance from the Zakat fund.

Thus, Zakat is a source of financial assistance for poor and needy persons.

Importance of Zakat

ECONOMIC AND SOCIAL IMPORTANCE OF ZAKAT

The following facts reflect the Social and Economic Importance of Zakat.

Purification of the soul

Zakat purifies the soul of contributors from the evils of miser ness. It makes them humble and God-fearing. It also creates wealth discouraging love among people.

Healthy growth of the community

Zakat leads to the healthy growth of the economy and the community. It uplifts the less fortunate members of society.

Narrow Down the Economic Inequalities

Zakat narrows down the economic inequalities in the community to the minimum possible limit. The rich may not grow richer and the poor poorer.

Wider circulation of wealth

Zakat increases the speedy circulation of wealth. It discourages hoarding and provides an automatic mechanism for the flow of wealth from the rich to the poor thus, it widens the circulation of wealth in the community.

Main Source of Income

Zakat occupies a central position in the financial structure of a Muslim state because it contributes too much towards the national treasury and it provides sufficient funds to Govt.

Fair Distribution of Wealth

Zakat meets an important purpose for spreading and distributing wealth that becomes just and equitable. It guarantees that income is not centralized rather it moves very rapidly among different groups of society.

Minimizes Unemployment

Zakat is a very vital instrument for removing unemployment. The money received by the people can be used and the poor can start a business.

Economic Stability

The problem of instability does not take place in an Islamic economy due to the mechanism of Zakat. Zakat promotes the velocity of circulation of money due to which AD for goods and services rises. This determines the level of investment, income, and unemployment on a stable footing.

Self-reliance

Zakat eliminates poverty and diversity from society. It brings a number of prosperity. People can take care of each other and in such a way Zakat enables an economy to be self-reliant.

Capital accumulation

By Zakat, people can use their liquid assets to promote capital formation in the country. They invest their assets due to which the growth rate of the economy goes up and the country gets prosperity.

Mobilization of resources

Such individuals who get income in the shape of Zakat are in a position to utilize the available resources. In this way, the maximum use of resources becomes possible.

Social security

Zakat fund not only covers the poor and the disabled, but it also provides social security to unemployed individuals.

Social welfare

Hospitals, schools and handicrafts centers for the poor can be constructed by making use of the Zakat fund. This promotes social welfare in the country.

Anti-social activities

Zakat is paid obviously from rizq-e-halal. thus, the Muslims who pay Zakat refrain themselves from anti-social activities like hoarding, smuggling, etc.

Control of crimes

The major cause of crimes particularly theft is the poverty of people. The problem of poverty can be easily overcome by Zakat. In such a way, the crime rate can be controlled.

Importance of Zakat for Wealth Production

Higher Liquid Assets

Zakat discourages hoarding and people can make use of their liquid assets to promote saving, investment, and capital formation in the country. They invest in various sectors of the economy as a  result of aggregate production in the economy going up.

Higher Velocity of Circulation of Money

Zakat promotes the velocity of circulation of money due to which aggregate demand for goods and services increases. It increases the level of investment, income, and employment

Higher Capital Formation

Zakat is paid on saving which remains accumulated for at least one year. Therefore it brings down the absolute amount of saving with a person .to maintain his consumption standard, he gets stimulus to increase the level of saving. hence, marginal saving goes up which can be used to make additions to the existing capital stock of the country. This will certainly promote the production level in the economy.

Higher Efficiency

Since Zakat increases the aggregate demand for consumer goods, the consumption function of the community in a macro sense may shift upward. the economy would become more efficient.

Importance of Zakat for the Distribution of Wealth

Automatic and Fair Distribution

Since 2.5% of the wealth of the rich is transferred to the poor every year in the form of Zakat. It means the whole wealth of the rich is transferred to the poor section of the community in the forty years. This provides an automatic mechanism for the flow of wealth from the rich to the poor, due to which wealth is fairly distributed among different sections of society.

Better Allocation of Resources

Transfer of money from the rich to the poor in the form of Zakat would mean that demand for basic necessities of life will increase. This will encourage their production. Scarce resources would be drifted away from the production of luxuries to that of necessities. This is a better allocation and distribution of scarce resources.

Social Welfare

The construction of social welfare institutes with the Zakat fund ensures distributive justice in the economy.

Better Living Standard

Zakat provides a better quality of life to the poor through the process of re-distribution of income.

Wider Circulation of Wealth

Zakat curtails the ratio of wealth concentration in a few hands.