LEGAL ENVIRONMENT FOR

BUSINESSES IN PAKISTAN
WITH SPECIFIC REFERENCE
TO TAX LAWS

By: Arsalan Khan BS546301

 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 9-
10%
 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 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
Tax officer Taxpayer
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
 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