Al-Muhasib & Co. Corporate Consultant

How many transactions should be in your bank account?

A very common question among business people is how much amount should be deposited in the bank account in a year.

The simple answer is that if you are registered for sales tax, then first of all, see how many sales you are declaring in your 12-sales tax return and in the annual income tax return.

The amount credited into your bank account throughout the year should also be approximately the same.

A slight difference can be acceptable, as there may be reasons like advance payment from a customer or recovery of previous dues.

For example, if you have declared annual sales of Rs. 10 million then it is understandable that the amount deposited should be 1o million or more.

But if the bank credits are 30 million then it is very risky.

FBR has to access your bank data.

If there are significant differences between bank transactions and returns, an audit or investigation may be conducted, where you may be required to explain each additional transaction.

If the amount related to non-business transactions like, loan, advances etc. and you must have supporting documents,

But if the difference is due to hidden sales, then you to pay additional taxes and penalties.

One practical solution is to use cash transactions instead of your business bank account.

If your sales and bank deposits don’t match, it’s time to review your books not ignore them.

Your gold and property information in tax return might be incorrect.
Whenever tax returns are filed, a very common problem faced by taxpayers is that at what value should assets, such as property and gold, be declared.
Should their market value be written instead of their cost, when the tax returns are filed?
So, the principle is that you have to enter the price at which the that asset was brought.
If you have bought it yourself, then you will enter the price at which you bought the property or jewelry.
If you have inherited that property, then its value will be written at the price at which it was originally purchased.
Similarly, if you receive some jewelry as a gift, like jewelry is usually given on the occasion of marriage, then in that case too you have to enter the same price at which the original owner bought the jewelry, and not its market value.
Now the question arises, why should the purchase price be recorded?
The answer is that there are many assets on which capital gains tax is applied on the profit made from their sale.
The formula for calculating capital gains tax is the difference between the sale price and the purchase price.
The higher the purchase price, the lower the capital gain, and thus the government will get less tax.
For example, if 10 tolas of jewellery was purchased 15 years ago for 500,000 and its market value in 2024 is 4 million, and it is later sold for 4.5 million, then the capital gain would be:
4,500,000 − 4,000,000 = 500,000
However, if the original purchase price is used, the capital gain would be:
4,500,000 − 500,000 = 4,000,000, and the tax payable would be 1,600,000.
Therefore, market value is not acceptable for this purpose and cannot be used.
Are you making this mistake while filing your tax return?

Declaring a foreign remittance? One wrong entry can turn into an FBR notice you can’t easily defend.

A few days ago, I had a client who had received a notice from the FBR.

The notice stated that he had declared foreign remittances in his tax return, so the PRC should be provided as proof.

The case was that his son was based in Dubai and used to send money to his father.

But when the bank statement was reviewed, it was found that the amount not remitted from abroad, instead the son has transferred his salary from Dubai to his personal bank account in Pakistan, and then transfer from there to his father’s account.

A PRC could only be issued to the person who had received the money in his account from abroad.

The correct declaration in the tax return should have been that the father would have declared this amount as a gift received from his son instead of foreign remittance.

The FBR’s position was also correct that when you declare foreign remittance, it is necessary to provide proof of it.

If you cannot provide proof, then that amount can be considered as your income.

The solution to this problem was that both the father and the son should revise their respective tax returns.

The father should declare this amount as a gift instead of foreign remittance in his return, while the son should declare the same amount as a gift in his tax return.

After submitting all the relevant documents and providing the necessary clarification, the FBR’s notice was withdrawn.

Whatever information you declare in your tax return, you should also have proof of it.

Therefore, before filing your return, make sure that you have the supporting documents as evidence.

If there is no proper proof then first find an alternative way and then file the return so that later if you revive any notice from the FBR, you can give a timely reply.

# foreignremittance

If Direct Method is more transparent, why do companies avoid it?
The answer has nothing to do with accounting quality.

As we all know, there are two methods of preparing Statement of Cash Flow: one is Direct Method and the other is Indirect Method.

If you compare Operating, Investing and Financing Activities, then Investing and Financing Activities remain almost the same in both methods, because only actual cash inflows and outflows are reported in them.

The real difference comes only in Operating Activities.

In the Direct Method, you disclose sales collections, purchases payments, wages payments and countless other cash flows separately in the financial statements.

The Direct Method is more useful for the shareholder because it clearly shows each cash block.

Whereas in the Indirect Method, the shareholder does not see actual cash collections from sales or specific cash payments.

Now, the question arises, why companies still use the Indirect Method?
What are the reasons?

Let me tell you the story of a client in this regard.

We had to prepare a cash flow statement of a company, so we decided to prepare it through the direct method.

The whole team worked, prepared all the details, and then took it to the company’s CFO.

He grabbed his head and said, "I just want a cash flow statement made by the indirect method, I will not approve the direct method."
That is why this senior said, “What answer will we give to the tax department by disclosing so much detail?

Now, if you disclose each major cash payment separately, many questions arise before the tax department, withholding tax may not have been properly deducted.

This will open a new Pandora’s box.

Then the cash flow was again prepared using the Indirect Method.

That is why most companies prefer the Indirect Method, even if the accounting standards encourage the Direct Method.

Have you ever been forced to switch methods just to “make it acceptable”? Comment your experience.

Your depreciation method is not an accounting detail it directly changes how “profitable” your business looks on paper.

Choosing the Right Depreciation Method: Straight-Line vs Reducing Balance
If you have any asset in your business, which method will be better for its depreciation:

Straight-Line
If the usage of any of your assets remains almost the same, then the Straight-line method will be used on it.

For example, your office has an AC, which is used for eight hours a day or from nine in the morning to five in the evening, then the Straight-line method will be better for it.

Reducing Balance
if you have any such asset, for example, you have installed a plant whose production capacity decreases over time, and initially its capacity is high, so its usage is also high.

But later its capacity decreases and the usage also decrease, then in such a case you will use the Reducing Balance Method, which will be better.
Which method are you currently using in your books and why?

Most business owners are violating FBR salary tax rules every month.

All the people who are doing business and who have employees usually pay salaries, but they often have the misconception that deducting the taxes on salaries is the responsibility of only large organizations/government departments/companies only.

While the fact is that this responsibility applies to every employer, whether it is it a company or a small business.

Every employer who pays salaries to his employees, if the annual salary is more than 600,000 then the employer is required to deduct tax and deposited it to the FBR.

This tax is deducted from the employee's income, but the employer is responsible for the deduction.

Many people wonder how the FBR will know if you have not deducted tax on your salary?

The simple answer is that when the employer/business filed their tax returns and declare all the salaries that have paid to the employees.

In this way, the FBR automatically gets information about how much salary have been paid.

FBR may then notices to explain how much tax was due on the salary of how many
employees and why you did not deduct and deposit that tax.

If the business who has not done this, a minimum fine of at least Rs 40,000 may be imposed.

A possible solution is to make the list of all employees whose annual salary is more than Rs 600,000, calculate the tax due and then deposit it with FBR voluntarily.

If you make this payment voluntarily before the issue notices from FBR then the penalty may be reduced or waived.

Don’t wait for a notice review your employee salaries now.

💼 If you are a salaried person and also run a small business, you may be paying thousands of rupees in extra tax unnecessarily.
🏪 For example, running a small shop or renting out a property, then even if the income from it is very small, it can affect your salary tax.
📈 Due to this, your tax slab may change and you may have to pay more tax.
💰 For example, if your annual salary is 22 lakhs, then the tax on this amount is 116,000, which your employer deducts from your salary.
🏠 But if you are also doing a small business from home and you make a profit of 30,000 rupees per month, then this profit will become 360,000 rupees per year.
📊 If this business income is seen separately, it may seem low, but in income tax, tax is always paid on total income.
➕ That is, your salary, business income, rent etc. are all added together.
📈 This will increase your total annual income from 22 lakh to 25 lakh 60 thousand, then the total tax will be 198,600.
⚠️ This means that you may have to pay an additional tax of around Rs. 82,000 for just 360,000 in additional income.
✅ One legal way to avoid this situation is to keep the business in the name of another family member.
🏦 Bank accounts, invoices, receipts, electricity bills, rent and all other business records should also be in his name.
🚫 There should be no business transactions in your name other than salary.

Did you know that a company must file annual returns even if it has never conducted any business?
There is a huge increase in the registration of companies in Pakistan.
Many people are forming companies, but are completely unaware of their legal compliance, tax and SECP requirements.
The result is that compliance is almost ignored.
Once a company is registered, it is necessary to regularly fulfill its legal requirements.
Even if the company does not carry out any business, its annual filing is mandatory.
This includes both Form A and Form 9.
In addition, along with the SECP filing, it is also necessary to file a separate tax return for the company with the FBR, it is also necessary to attached annual audit report while filing tax returns.
In addition, the company is also withholding agent and has to deducted tax when makes a payment to a supplier.
One important thing to note is that there is filing fee when file a form with SECP and when a form is filed late, then a late fee must be paid.
Now it is obvious that for this, both the consultant and SECP will have to be paid annual fees.
The fee may also vary because it depends on how much revenue your company is earned.
There is no fixed fee.
But keep in mind that you will have to pay an annual fee every year.
If your budget allows and you can afford it, then register the company, otherwise do not register.
Have you considered the annual compliance costs before registering your company?

If you are paying your suppliers in cash, you may not be aware that this one mistake can increase your tax from 100,000 to 600,000.

If the annual bill of a single vendor exceeds Rs 2.5 lakh, then you will have to make all payments from your business bank account, which is registered with the FBR.

If you do not do this, then any payment you have made to this vendor in cash will be disallowed in full, i.e. the amount you have paid in cash will be considered as your income instead of an expense.

For example, your annual sales are Rs 50 lakh in which your profit after deducting all expenses is Rs 16 lakh. You will have to pay tax on this approximately Rs. 170,000.

But if you make payments of Rs 16 lakh in cash, this amount will be included in your income instead of expenses.

Then your total income will become Rs 32 lakh instead of Rs 16 lakh, on which you will have to pay tax of 650,000.

That is, just because you made all the payments in cash, you may have to pay an additional tax of about Rs 480,000.

However, there are also some exemptions:
If a payment from a single vendor does not exceed Rs 250,000, then you can pay in cash.

If the amount of a single invoice does not exceed Rs 25 thousand, then that too can be paid in cash.

To avoid such penalties and additional taxes, try to make all payments through the bank.

Sometimes it happens that your vendor or supplier asks you to pay me in cash, then you can purchase from different vendors so that the annual payment to any one supplier does not exceed 250,000 rupees.

Would you rather transfer money through a bank or pay an extra in tax?

💰 Most business don’t get caught for hiding income instead they get caught through their own bank account data.

🏦 Banks share various financial information with the FBR. Here are some basic criteria for this:

💰 Cash withdrawals exceeding 50,000 in a day or one million or more during a month

💰 Deposits exceeding 10 million or more during a month

💳 If there is a payment of more than Rs 200,000 in a month through credit cards.

🏢 Details of business bank accounts are also shared with the FBR

📊 The FBR matches this data with tax records. For example, if a business bank account has transactions of Rs 12 million for the year, while only Rs 5 million has been declared as sales tax in the income tax return of the same person, then this is considered a clear mismatch.

⚠️ Then the FBR may issues a notice and asked for explanation.

If the taxpayer proves that this excess amount is not actually business sales but from other sources, for example loans, gifts, foreign remittances, then the evidence is required to be provided.

📁 If proper reconciliation or evidence is not provided, the FBR may consider this difference as taxable income and impose tax.

📉 FBR often calculate the income by applying an average profit margin, for example, if a profit margin of 15% is assumed for retailers, then the tax is calculated as follows.

Total annual credit transactions in a bank = 1,2000,000
Declared Sales = 5,000,000
Unexplained Amount = 7,000,000
profit margin 15% = 1,050,000
declared taxable income = 750,000
Added estimated amount = 1,050,000 + 750,000
Taxable Income = 1,800,000
Tax Payable = 230,000

📌 To avoid issues, always keep documentary evidence of all such banking transactions.