What books of account and records must a sole proprietor keep, for how long, and what happens if I do not?

A sole proprietor must keep records of what the business receives, spends, buys, sells, owns and owes. The Income Tax Ordinance, 2001 sets the duty and the consequences. The Income Tax Rules, 2002 say exactly what to keep, with a lighter list for small businesses and a fuller one for larger traders and manufacturers.

What does the law say?

Section 174(1) requires every taxpayer, unless the Commissioner authorises otherwise, to maintain in Pakistan such accounts, documents and records as may be prescribed. The Income Tax Rules, 2002 prescribe the minimum level in their chapter on books of account.

Rule 29(1) requires every taxpayer with income under the head Income from Business to keep proper books, documents and records of:

• all sums of money received and spent, and what they were for;
• all sales and purchases of goods and all services provided and obtained;
• all assets;
• all liabilities; and
• for manufacturing, assembly, processing, mining and similar activities, all items of cost for materials, labour and other inputs.

Rule 29(3) adds that duplicate copies and electronic records of cash memos, invoices and receipts form part of the records.

How long: section 174(3) and rule 29(4) both say six years after the end of the tax year to which the records relate. Where a proceeding is pending before any authority or court, the records are kept until it is finally decided. The explanation to section 174(3) lists assessment, amendment of assessment, appeal, revision, reference, petition, prosecution and Alternative Dispute Resolution proceedings.

What minimum records apply to my business?

Rule 30 applies to every taxpayer other than a company. It is printed under the rule 29 heading in the site file.

Category in rule 30	Minimum records
(1) Business income up to Rs. 500,000, and new business taxpayers	Serially numbered, dated cash memo, invoice or receipt for each sale; daily record of receipts, sales, payments, purchases and expenses; vouchers of purchases and expenses
(2) Business income over Rs. 500,000, and all wholesalers, distributors, dealers and commission agents	The above, plus cash book or bank book, general ledger or annual summary, payee name and address on vouchers over Rs. 10,000, and a quarterly stock inventory if you trade in goods. Wholesalers, distributors, dealers and commission agents also record the customer’s name and address on sales over Rs. 10,000
(3) Professionals such as doctors, lawyers, accountants, engineers	Numbered patient slip, invoice or receipt with client details, daily appointment diary, daily record, vouchers
(4) Manufacturers with turnover over Rs. 2.5 million	Cash book or bank book, sales and purchase day books and ledgers, general ledger, vouchers, and a stock register with gate inward and outward records and quarterly inventory

Each cash memo carries your name or business name, address, national tax number or CNIC, sales tax registration number if any, and the description, quantity and value of what was sold. Where each transaction is Rs. 100 or less, one or more cash memos per day may cover all of them.

Rule 32(1) allows all of these to be kept on electronic media, provided sufficient steps are taken to ensure their sanctity and safe keeping.

What happens if I do not keep them?

• Deductions can be cut. Section 174(2) lets the Commissioner disallow or reduce a deduction where you cannot, without reasonable cause, produce a receipt or other evidence. Section 174(4) defines a deduction as any amount debited to the trading, manufacturing, receipts and expenses, or profit and loss account.
• Cash memo penalty. S. No. 2 of the Table in section 182(1): failing to issue a cash memo, invoice or receipt when required costs five thousand rupees or three per cent of the tax involved, whichever is higher.
• Record-keeping penalty. S. No. 7: failing to maintain records required under the Ordinance or rules costs ten thousand rupees or five per cent of the amount of tax on the income, whichever is higher.
• Prosecution. Section 193 makes failure to maintain records an offence. Where the failure was deliberate, the punishment on conviction is a fine not exceeding fifty thousand rupees, imprisonment up to two years, or both. In any other case, a fine not exceeding fifty thousand rupees.

Worked example (illustrative figures)

Kashif runs a paint and hardware shop in Gujranwala as a sole proprietor. His business income for the year is Rs. 1,800,000, so rule 30(2) applies to him, not rule 30(1).

He claims these expenses: shop rent Rs. 480,000, a helper’s wages Rs. 360,000, and electricity Rs. 150,000. He has a rent agreement and bank transfers for the rent and the bills for electricity, but no vouchers or payment record for the wages.

1. Total expenses claimed: Rs. 480,000 + Rs. 360,000 + Rs. 150,000 = Rs. 990,000.
2. If the Commissioner uses section 174(2) to disallow the unsupported wages, allowed expenses become Rs. 990,000 minus Rs. 360,000 = Rs. 630,000.
3. His income for tax purposes rises by Rs. 360,000.

Section 174(2) is discretionary (“may disallow or reduce”) and applies where the failure is without reasonable cause, so the outcome depends on the facts.

Common mistakes

• Thinking a small shop needs no records. Rule 30(1) applies even at the lowest band and to every new business.
• Keeping records for five years. The period became six years; both section 174(3) and rule 29(4) now say six.
• Discarding records during an appeal. The six-year limit gives way to any pending proceeding.
• Overlooking foreign items. The last proviso to section 174(3) removes the six-year limit for records of certain income, assets, expenses or transactions situated, incurred or sourced outside Pakistan. Read that proviso if any of your records relate to foreign items.

What to check in the official text

Read section 174 in full, including sub-section (5), which lets the Board require a person or class of persons to install and use a prescribed electronic resource. S. No. 2A of the section 182 Table penalises failure to comply. Read rules 28 to 33 of the Income Tax Rules, 2002, which also cover where records are kept. The rules in this corpus are amended to 24 November 2023, so check for later amendments. The penalty amounts are in the Table under section 182(1).