Complete Guide to Maintaining Tax Records Under Income Tax Rules, 2002 (Amendments up to 2023)

Income Tax Record-Keeping Requirements

Tax compliance in any country demands careful documentation, and Pakistan’s Income Tax Rules, 2002 mandate specific records and books of accounts to ensure transparency in income reporting. For both small business owners and large corporations, understanding the intricacies of these requirements can feel overwhelming. In this guide, we break down the essentials so that anyone can set up a compliant accounting system, saving time and stress during tax season.

Overview of Income Tax Rules, 2002 (Updated to 2023)

The Income Tax Rules, 2002 lay out the requirements for maintaining proper tax records across various income types and business structures. With amendments up to November 2023, these rules outline minimum standards for documentation to ensure that taxpayers are equipped to justify their reported incomes and expenditures.

Chapter VII: Key Guidelines on Records and Books of Accounts

Chapter VII of the Income Tax Rules specifically focuses on what kinds of records and books of accounts taxpayers are expected to keep. Broken into parts, this chapter provides guidelines that cover everything from basic definitions to specific requirements for different business structures and income types.

Part I: Preliminary Rules and Scope of Record-Keeping

Understanding Section 174 Compliance

The guidelines in Chapter VII align with Section 174 of Pakistan’s tax ordinance, detailing minimum standards for bookkeeping. Whether you are a salaried employee, a business owner, or a professional service provider, these rules outline the records necessary for tax compliance.

Who Must Maintain Books of Accounts?

The mandate to maintain books of accounts applies primarily to those reporting income under the “Income from Business” category. However, individuals with rental income, capital gains, and other income sources are also subject to certain requirements. Importantly, taxpayers can add supplementary records beyond these requirements to suit their business needs.

Part II: Essential Books of Account and Documentation

General Books of Accounts Requirements

Every taxpayer must maintain books of accounts and records that capture:

• All money received and spent, along with supporting receipts.
• Sales, purchases, services provided, and services obtained.
• Business assets and liabilities.
• Costs related to production, labor, and materials for those in manufacturing.

The standard retention period for these records is six years after the relevant tax year ends. However, if any tax-related court or authority proceeding is ongoing, records must be retained until the conclusion of the case.

Specific Requirements for Different Types of Taxpayers

The Income Tax Rules categorize taxpayers based on income levels and business activities, each with tailored record-keeping requirements.

Taxpayers with Income up to Rs. 500,000

Taxpayers earning up to Rs. 500,000 in business income must maintain:

• Sales and Receipts Records: Serially numbered invoices and receipts for each transaction, noting the taxpayer’s name, address, National Tax Number (NTN) or CNIC, sales tax registration (if any), transaction details, and value.
• Daily Transaction Logs: A simple daily record of all receipts, sales, purchases, and expenses.
• Expense Vouchers: Supporting vouchers for purchases and expenses to verify expenditures.

Taxpayers with Income Above Rs. 500,000

For those exceeding Rs. 500,000, additional records are required, including:

• Detailed Sales Receipts: Invoices for each sale, including customer details for transactions above Rs. 10,000.
• Cash and Bank Books: Records detailing daily receipts, payments, sales, and expenses.
• Annual Financial Summaries: A ledger summarizing all receipts, payments, and expenses.
• Quarterly Inventory for Traders: Quarterly stock-in-trade records, with descriptions, quantities, and values.

Guidelines for Professionals (Doctors, Lawyers, Accountants)

Professionals such as doctors, lawyers, accountants, and engineers are required to maintain records that cater to their unique client-service interactions:

• Client Slips or Invoices: A numbered slip for each transaction, noting the taxpayer’s information and the nature of services provided.
• Appointment Diary: A daily record of appointments (except for general practitioners).
• Daily Financial Records: A record of receipts, payments, and expenses.

Requirements for Manufacturers

Manufacturers, especially those with annual turnovers exceeding Rs. 2.5 million, have more complex record-keeping requirements:

• Comprehensive Sales Receipts: Including customer details for large transactions.
• Bank and Cash Books: Documenting daily business finances.
• Stock Records and Gate Entry Logs: Inventory tracking, with quarterly checks on stock levels.
• Production Costs: Details on costs of materials, labor, and other inputs.

Electronic Tax Registers: What You Need to Know

Taxpayers using Electronic Tax Registers (ETRs) are expected to:

• Install ETRs within seven days of approval.
• Ensure all sales are recorded through the ETR, with receipts given for every transaction.
• Prepare daily and monthly reports.
• Retain all ETR-related reports for five years and produce them on request.

Record-Keeping for Different Income Sources

For income types other than business income, specific documentation is required:

Salary Income

• Salary Certificate: Including salary details and tax deductions.

Property Income

• Rental Agreements: Including rent receipts and documentation of deductions for allowable expenses like insurance and legal fees.

Capital Gains

• Cost and Sale Evidence: Records showing the acquisition cost, sale price, and any related deductions.

Other Sources

For income from dividends, royalties, loans, and prizes:

• Relevant Documents: Dividend warrants, loan agreements, certificates of tax withheld, and transaction evidence.

General Record-Keeping Instructions

Books and records can be kept electronically, as long as proper measures are in place to prevent data loss. Businesses must adhere to both local and international accounting standards, ensuring transparency and accuracy in their financial reporting.

Location and Storage of Books of Accounts

Taxpayers must store their books at their principal place of business or residence. Multiple business locations require either separate sets of records or centralized storage at the main office. The storage location must be disclosed on the annual tax return.