Legal Environment for Business in Pakistan

7/28/2019 Legal Environment for Business in Pakistan

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LEGAL ENVIRONMENT FOR

BUSINESSES IN PAKISTAN

WITH SPECIFIC REFERENCETO TAX LAWS


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Types of businesses

Retail sector

Manufacturing sector

Services sector Agricultural sector

GDP growth rate for previous year

4.1% Agricultural sector grew at 2%,

industrial sector by 4.9% and

services sector by 1.6%


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Tax Laws

Income Tax (Direct taxes Collection for2009 389.5 billion and indirect taxescollection at 636.1 billion

Sales tax (416 billion) Customs (125 billion)

Central Excise (dwindling) 94.3 billion

Low tax to GDP ratio hovering between 9-

10% Belgium and Austria have a tax to GDP

ratio of around 45% while in India it is12.9% and in India it is 14.5%


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Income Tax policy over past ten

years Legal reforms

From assessment system toUniversal Self Assessment scheme

Tax Officer TaxpayerSection 61

Files Return

Might accept May not accept

Would issue notice under section 62

May finalize under section 62 if reply received or under

Section 63 (appellate system)


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Current system

Returns

Tax officer Taxpayer

Notice u/s 114

Files return

Must accept the filed version unless

There is definite information to the contraryUtility bills, confirmed purchase/sale receipts etc

Appellate system


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Administrative reforms

Old system Regional Commissioner

Commissioners

Additional Commissioners

Assistant/Deputy Commissioners


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Old system

Region, zones, ranges and circles

No specialization since each officerwas dealing with audit, enforcement,record maintenance etc

Officers were given jurisdiction asper the region being looked after bythem


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Systems reform

Chief Commissioner

Commissioners

Information processing

Audit

Enforcement

Legal

HRM

Specialization and central record room

Lack of coordination amongst wings


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Regarding sales tax and

customs Number of exemptions in sales tax over

the years have increased. Most of theexemptions are on the basis of on going

survey and keep on changing The main purpose of new GST regime is to

do away with exemptions and to taxservices

Slashing customs duties

Principle of cascading tariff


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Abolition of Wealth Tax

Wealth tax which was a progressivetax was abolished in 2001 withintroduction of new tax law namely

Income Tax Ordinance 2001.

It is estimated that approximately300 billion can be collected from this

tax if levied today


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Tax exemptions

Income Tax: pension/gratuity/income ofIPPs, Income of duly approved educationalinstitutions, income of approved charitableinstitutions, capital gains (recently doneaway with)

Sales tax: Pharmaceuticals, fertilizers,tractors etc

Customs duty: energy projects, E & Pcompanies etc

Estimated cost of exemptions: 147 billionrupees


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Agriculture

Federal tax laws for all sectorsexcept the agricultural sector.Agriculture is a provincial subject

under 1973 constitution. Provinceshave been slowly in promulgating taxlaws on the basis of produce index

unit. In 2009 total tax collectionstood at 1380 billion rupees whilecollection from agricultural income

tax stood at around 1.8 billion only.


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Dangerous trends/Performance

Indirect taxation which is regressive innature

Persistently low tax to GDP ratio

Taxpayers staying stubbornly at 3 million

a major component of which is that ofsalaried taxpayers. Poor enforcementregarding filing of returns and with holdingstatements

Poorly trained tax machinery andimmense interference.

Important sectors staying out of tax net

Corruption


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Corporate Sector Laws

Laws governing the corporate sector specificallyform a part of corporate law. CompaniesOrdinance 1984 administered by SECP.

Company law division (registration and

enforcement divisions) Securities Market Division (to check fair working

of capital markets and effective riskmanagement)

Specialized companies division (NBFCs, Mutualfunds, private equity funds, pension funds, realestate investment trusts)

Insurance division


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Performance

Section 282K of CompaniesOrdinance 1984 empowers SECP toimpose fines not exceeding a

hundred thousand rupees andinstitute prosecution which mightresult in imprisonment up to 3 years.

Stock market crashes of 2005 and2008?


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Intellectual property laws

Intellectual property rightsorganization

Patents Ordinance, 2000, DesignsOrdinance, 2000 and Layout-Designsof Integrated CircuitsOrdinance, 2000, copyrights

ordinance 1962, trademarks etc


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Performance

Recently actions have been initiatedregarding trademarks and patents aswell as copyrights.

Notices by Burger King, Sabro etcare recent examples

Performance is likely to improve

since parties would be interested inenforcing their rights againstinfringers


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Anti monopoly laws

Competition act 2010

Not to abuse dominant position

Fixation of prices and formation ofcartels or other deceptive marketingpractices

Mergers to be approved by CCP Fines up to fifty million or 15% or

turn over


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Anti monopoly laws

In the first ever case of cartelization, theCommission fined an association of the banksPKR 30 million as a lesser penalty keeping inmind the fact that competition regime was new inPakistan and that cooperation between

competitors was a norm in Pakistan. In case ofcartelization

in the LPG industry, an LPG association was finedPKR 40 million for collusively setting prices.However, in the case of the cement cartel, the

cement association was fined the maximum ofPKR 50 million for playing a decisive and lead rolein the cartelization of the industry for past manyyears


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So, the legal environment?

Plethora of laws

But most are evaded

Yet, hassle and harassment are hallmark

of this regime For example, tax rates are not high but

the attitude of collecting authorities isproblematic

The attitude of small businesses? Are other factors assuming prime

importance?


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Conclusion

Fewer laws

Stringent administration

A trained and responsivebureaucracy

Compliance culture

Facilitation Coordination

Legal Environment for Business in Pakistan

Documents

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