LEGAL ENVIRONMENT FOR BUSINESSES IN PAKISTAN WITH SPECIFIC REFERENCE TO TAX LAWS

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%

Tax Laws

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

Legal reforms From assessment system to Universal Self Assessment scheme

Section 61 Tax Officer Files Return Taxpayer

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
Tax officer Files return Taxpayer

Must accept the filed version unless There is definite information to the contrary Utility bills, confirmed purchase/sale receipts etc Appellate system

Administrative reforms

Old system

Regional Commissioner

Commissioners

Additional Commissioners

Assistant/Deputy Commissioners

Old system

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

Chief Commissioner Commissioners Information processing Audit Enforcement Legal HRM Specialization and central record room Lack of coordination amongst wings

Regarding sales tax and customs

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

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

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

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

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

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

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

Intellectual property rights organization Patents Ordinance, 2000, Designs Ordinance, 2000 and Layout-Designs of Integrated Circuits Ordinance, 2000, copyrights ordinance 1962, trademarks etc

Performance

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

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

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?

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

Fewer laws Stringent administration A trained and responsive bureaucracy Compliance culture Facilitation Coordination