LEGAL ENVIRONMENT FOR
BUSINESSES IN PAKISTAN
WITH SPECIFIC REFERENCE
TO TAX LAWS
Types of businesses
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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%
Tax Laws
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Income Tax (Direct taxes Collection for
2009 389.5 billion and indirect taxes
collection at 636.1 billion
Sales tax (416 billion)
Customs (125 billion)
Central Excise (dwindling) 94.3 billion
Low tax to GDP ratio hovering between 910%
Belgium and Austria have a tax to GDP
ratio of around 45% while in India it is
12.9% and in India it is 14.5%
Income Tax policy over past ten
years
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Legal reforms
From assessment system to
Universal Self Assessment scheme
Section 61
Tax Officer
Taxpayer
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)
Current system
Returns
Notice u/s 114
Taxpayer
Tax officer
Files return
Must accept the filed version unless
There is definite information to the contrary
Utility bills, confirmed purchase/sale receipts etc
Appellate system
Administrative reforms
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Old system
Regional Commissioner
Commissioners
Additional Commissioners
Assistant/Deputy Commissioners
Old system
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Region, zones, ranges and circles
No specialization since each officer
was dealing with audit, enforcement,
record maintenance etc
Officers were given jurisdiction as
per the region being looked after by
them
Systems reform
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Chief Commissioner
Commissioners
Information processing
Audit
Enforcement
Legal
HRM
Specialization and central record room
Lack of coordination amongst wings
Regarding sales tax and
customs
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Number of exemptions in sales tax over
the years have increased. Most of the
exemptions 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 tax
services
Slashing customs duties
Principle of cascading tariff
Abolition of Wealth Tax
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Wealth tax which was a progressive
tax was abolished in 2001 with
introduction of new tax law namely
Income Tax Ordinance 2001.
It is estimated that approximately
300 billion can be collected from this
tax if levied today
Tax exemptions
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Income Tax: pension/gratuity/income of
IPPs, Income of duly approved educational
institutions, income of approved charitable
institutions, capital gains (recently done
away with)
Sales tax: Pharmaceuticals, fertilizers,
tractors etc
Customs duty: energy projects, E & P
companies etc
Estimated cost of exemptions: 147 billion
rupees
Agriculture
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Federal tax laws for all sectors
except
the
agricultural
sector.
Agriculture is a provincial subject
under 1973 constitution. Provinces
have been slowly in promulgating tax
laws on the basis of produce index
unit. In 2009 total tax collection
stood at 1380 billion rupees while
collection from agricultural income
tax stood at around 1.8 billion only.
Dangerous trends/Performance
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Indirect taxation which is regressive in
nature
Persistently low tax to GDP ratio
Taxpayers staying stubbornly at 3 million
a major component of which is that of
salaried taxpayers. Poor enforcement
regarding filing of returns and with holding
statements
Poorly trained tax machinery and immense
interference.
Important sectors staying out of tax net
Corruption
Corporate Sector Laws
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Laws governing the corporate sector specifically
form a part of corporate law. Companies
Ordinance 1984 administered by SECP.
Company
law
division
(registration
and
enforcement divisions)
Securities Market Division (to check fair working
of
capital
markets
and
effective
risk
management)
Specialized companies division (NBFCs, Mutual
funds, private equity funds, pension funds, real
estate investment trusts)
Insurance division
Performance
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Section
282K
of
Companies
Ordinance 1984 empowers SECP to
impose fines not exceeding a
hundred
thousand
rupees
and
institute prosecution which might
result in imprisonment up to 3 years.
Stock market crashes of 2005 and
2008?
Intellectual property laws
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Intellectual
property
rights
organization
Patents Ordinance, 2000, Designs
Ordinance, 2000 and Layout-Designs
of
Integrated
Circuits
Ordinance,
2000,
copyrights
ordinance 1962, trademarks etc
Performance
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Recently actions have been initiated
regarding trademarks and patents as
well as copyrights.
Notices by Burger King, Sabro etc
are recent examples
Performance is likely to improve
since parties would be interested in
enforcing
their
rights
against
infringers
Anti monopoly laws
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Competition act 2010
Not to abuse dominant position
Fixation of prices and formation of
cartels or other deceptive marketing
practices
Mergers to be approved by CCP
Fines up to fifty million or 15% or
turn over
Anti monopoly laws
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In the first ever case of cartelization, the
Commission fined an association of the banks
PKR 30 million as a lesser penalty keeping in
mind the fact that competition regime was new in
Pakistan
and
that
cooperation
between
competitors was a norm in Pakistan. In case of
cartelization
in the LPG industry, an LPG association was fined
PKR 40 million for collusively setting prices.
However, in the case of the cement cartel, the
cement association was fined the maximum of
PKR 50 million for playing a decisive and lead role
in the cartelization of the industry for past many
years
So, the legal environment?
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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 is
problematic
The attitude of small businesses?
Are
other
factors
assuming
prime
importance?
Conclusion
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Fewer laws
Stringent administration
A trained and responsive
bureaucracy
Compliance culture
Facilitation
Coordination