Download - 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