::SETTING UP A BUSINESS IN PAKISTAN

LICENSE REQUIREMENTS

Specialized businesses

In Pakistan, certain businesses have been declared specialized and in addition to corporate and tax requirements, a specific license is required to commence such businesses. Such businesses are Banking Companies, Non-Bank Finance Companies, Security Service Providing Companies, Corporate Brokerage Houses, Money Exchange Companies, a Company which invests in Arms and Ammunition, Security Printing, Currency and Mint., High Explosives and Radio Active Substances. Certain conditions e.g. as to minimum capital, qualification of directors, corporate structure and area of operations etc. are required to be complied with to obtain these licenses. However, the conditions for grant of license vary from business to business.

Generalized businesses

For other businesses some procedural approvals etc. may be required but no specific licence is necessary.

TYPES OF BUSINESSES ORGANISATIONS

Complying with the requirements of licence, a business can be established in any of the following forms:

Sole proprietorship

An individual may set up the business as sole proprietorship without any registration except with tax authorities.

Partnership firm

A partnership firm can be established by executing a partnership deed on a stamp paper of Rs. 500/- and getting the same Notarized by the authorised Notary Public Magistrate. The Partnership Act, 1932 is the legal framework for partnership firms and a firm may or may not be registered with the Registrar of Firms.

Companies

The Companies Ordinance, 1984 (the Ordinance) and The Companies (General Provisions and Forms) Rules, 1985 provide the legal framework for operations of companies in Pakistan and the Securities and Exchange Commission of Pakistan (the Commission) is the regulatory authority in this regard. In Pakistan, a company may be formed with or without limited liability and the Ordinance provides for the following categories of the companies:

a.            A company limited by shares; or

b.            A company limited by guarantee; or

c.            An unlimited company

Companies formed in any of the above categories can further be classified in two types:

a.            Private company

b.            Public company

c.            Single Member Company

Any three or more persons associated for any lawful purpose may, by subscribing their names to the Memorandum of Association (document that defines the objectives of the company) and complying with the registration requirements, form a public company. There is no limitation as to the maximum number of members of such a company and after complying with the prescribed requirements; it may offer its shares and other securities to the general public. The public company may get its shares and other securities listed on the stock exchange(s).

A private company can be established by any one or more persons associated in such manner as specified in the case of a public company and means a company which by its articles of association (document that defines the standard operating procedures of the company),

a.            Restricts the right to transfer its shares, if any;

b.            Limits the number of its members to fifty;

c.            Prohibits any invitation to the public to subscribe for the shares, if any, or debentures of the company.

The name of every public limited company should include the word “Limited” as the last word of the name. And the name of every private company and a company limited by guarantee should respectively include the parenthesis and word “Private” and “Guarantee” before the last word “Limited”. The Commission may grant licence to a non-profit association for the promotion of commerce, art, science, religion, sports, social services, charity or any other useful object to be registered as a company with limited liability without the addition of the words “Limited”, “(Private) Limited” or “(Guarantee) Limited” as the case may be, to its name.

The schedule of fees for registration of a company is as following:

a.            For registration of a company whose nominal share capital does not exceed Rs. 100,000 the fee shall be Rs. 2,500.

b.            For registration of a company whose nominal share capital exceeds Rs. 100,000, a fee of Rs. 2,500 is payable along with an additional fee to determine according to the amount of nominal share capital as follows.

i.             For every 100,000 rupees of nominal share capital or part of 100,000 rupees, after the first 100,000 rupees, up to 5,000,000 rupees, a fee of Rs. 500.

ii.            For every 100,000 rupees of nominal share capital or part of 100,000 rupees, after the first 5,000,000 rupees, a fee of Rs. 250.

Provided that for registration of a company the total amount of fee to be paid shall not exceed ten million rupees

A single person may form a single member company on fulfilment of certain legal conditions.

Modaraba

Pakistan’s commitment to promote an “Interest (Riba) free” economic system was carried forward with the promulgation of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980. Its primary aim was to accelerate capital formation and economic development in accordance with the tenets of Islam.  It is a distinct form of business and its general concept is that investment comes from the one partner while the management and work is an exclusive responsibility of the other, and the profits generated are shared in a predetermined ratio. The corporate formation is arranged in such a way that a Management Company is formed which is responsible for the management of Modaraba and business is executed by the Modaraba itself. For all legal and practical purposes both the Management Company and Modaraba are separate entities. A management company may operate more than one Modarabas. The Modaraba pays a fee to the Management Company. Like Shares of a company, Modaraba certificates are issued to the equity holders of the Modaraba. The certificates can also be offered to the general public.

Modaraba has established itself as a well understood Shariah compliant form of business and has been practiced for the last 22 years. It also enjoys certain tax benefits which are discussed in the relevant section.

LISTING OF COMPANIES AND SECURITIES

There are three stock exchanges in the country, namely:

             Karachi stock exchange,

             Lahore stock exchange, and

             Islamabad stock exchange.

Karachi Stock Exchange (the Exchange) is the biggest and most liquid exchange and has been declared as the “Best Performing Stock Market of The World For the year 2002”.

All exchanges have their own regulations which are largely similar. The Securities and Exchange Commission of Pakistan (Commission) grants the approval for the public offer and after such approval a company may obtain listing for its equity and/or debt securities according to the regulations of the Exchange.

The stock exchange regulations provide for certain reporting and other requirements. Some important regulations are in respect of notice of board and shareholders’ meetings, approval for date of annual general meeting of the company, reporting of the results and announcements of the dividends, payment of dividend at least once in five years and code of corporate governance. The code is a comprehensive set of rules for ensuring transparency and good governance in the management of the company.

For an application to the Commission seeking approval to issue, circulate and publish the prospectus for public offer, a non-refundable fee is payable in the following manner according to the size of total issue including all types of securities:

Up to Rs. 250 million                                     Rs.   25,000/-

More than Rs. 250 million and

upto Rs. 1,000 million                                    Rs.   50,000/-

More than Rs. 1,000 million                         Rs. 100,000/-

As per regulations of the Karachi stock exchange, the following fees are presently applicable:

•             Initial listing fee for the share capital is equivalent to one tenth of one percent of the paid-up capital subject to a maximum of one million and five hundred thousand rupees.

•             Listing fee for debt instruments and open-end mutual funds is equal to one twentieth of one percent of the amount of debt instrument/ seed capital of mutual fund subject to a maximum of five hundred thousand rupees.

•             Whenever a listed company increases the paid-up capital of any class or classes of its shares, or securities it shall pay a fee equivalent to one tenth of one percent of such increase.

Annual listing fee is payable as following:

Companies having paid-up capital    Fee per Annum

(Rupees)

Upto Rs. 50.00 million                                   15,000

Above Rs. 50.00 million and

upto Rs. 200.00 million                                 30,000

Above Rs. 200.00 million                                             60,000

Size of Instrument

Upto Rs. 50.00 million                                   15,000

Above Rs. 50.00 million and

upto Rs. 200.00 million                                 30,000

Above Rs. 200.00 million                                             35,000

FOREIGN INVESTOR IN PAKISTAN

A foreign investor may establish an independent business with any of above mentioned corporate structures. He can establish a sole proprietorship, can enter into partnership with any local person or foreigner and even can establish a company with or without participation of local shareholder(s) and director(s). If a foreign enterprise wishes to establish a business in Pakistan as a part of its international operations, in addition to the said corporate structures it also has following choices:

a.            It can obtain registration with Board of Investment – Government of Pakistan (the Board), for opening of a branch office, marketing office or liaison office. Regulations of the Board impose certain restriction on the operations of the enterprise.

b.            It can appoint an agent in Pakistan. Relevant provisions of the Contract Act, 1872 shall apply in such agency arrangements.

c.            It can enter into joint venture with other business entities. Relevant provisions of Contract Act, 1872 and Partnership Act 1932 are applicable to these ventures.

ACCOUNTING AND AUDITING

The financial year for all business enterprises (except as discussed in the section on Income Tax) is from 1st July to 30th June of every year. All listed companies are required to issue their financial statements for the year ending on 30th June at the latest by the last day of the immediately following October, while other Companies may submit their financial statements to Securities and Exchange Commission of Pakistan (SECP), at the latest by the last day of immediately following December.

All companies are required to get their financial statements audited by a Chartered Accountant who is a member of the Institute of Chartered Accountants of Pakistan (ICAP). However, a company that has share capital below three million rupees may get their financial statements audited by a Cost and Management Accountant who is a member of the Institute of Cost and Management Accountants of Pakistan (ICMAP).

Financial statements of listed companies are presented according to the requirements of the fourth schedule to the Companies Ordinance, 1984 while financial statements of all other companies are presented according to the fifth schedule to the Companies Ordinance, 1984. ICAP considers and adopts the International Accounting Standards (IASs) and SECP notifies their application in preparation of financial statements of companies. At present, all IASs issued by International Accounting Standards Board except IAS 15 and IAS 29 have been adopted and notified.

TAXATION

The Central Board of Revenue (the Board) is the regulatory authority which is responsible for the management of the Taxation System and is engaged in the collection of taxes under various structures. The taxes, duties and other levies can be classified in two categories i.e. direct taxes and indirect taxes.

DIRECT TAXES

Direct taxation consists of Income Tax and Capital Value Tax.

Income tax

The Income Tax Ordinance, 2001 and Income Tax Rules, 2002 provide the legal framework for the levy, collection and other matter related to income tax. The levy of income tax is an annual charge on the taxable income.

Classification of assessees

The nomenclature of corporate and non corporate structures for income tax purposes is as follows:

             Company

             Registered Firm

             Un-registered Firm

             Association of Persons (AOP)

             Individuals

The Income Tax Ordinance, 2001 provides a broader definition of the “Company” which includes:

             A company as defined in the Companies Ordinance, 1984

             A body corporate formed by or under any law in force in Pakistan

             A body incorporated by or under the law of a country outside Pakistan relating to incorporation of companies

             A trust, a co-operative society or a finance society or any other society established or constituted by or under any law for the time being in force.

             A foreign association, whether incorporated or not, which the Central Board of Revenue has, by general or special order, declared to be a company for the purposes of this Ordinance

             A foreign association, whether incorporated or not, which the Central Board of Revenue has, by general or special order, declared to be a company for the purposes of this Ordinance

Sources of income

The Income Tax Ordinance, 2001 classifies income into the following categories (called heads of income) and prescribes the allowable deductions against each head:

             Salary

             Income from Property

             Income from Business

             Capital Gains

             Income from Other Sources

Taxable income under a specific head means the income as reduced by allowable deductions. The net income from each head is added to arrive at the total income for the year, however, income from certain sources is subject to separate taxation, or is subject to presumptive tax. Under the presumptive tax regime, the income is subject to deduction of tax at source which becomes the discharge of final tax liability in respect of that income. The taxation of income from a certain source under the normal or presumptive tax regime is notified by the Government and such classification once advised may also change. At present income from following sources is taxed under the presumptive tax regime:

             Dividend received from a listed company

             Prize on a prize bond or winnings from raffle, lottery, quiz or crossword puzzle, or prize offered by companies for promotion of sale.

             Travelling agent’s commission

             Contracts other than service contracts

             Royalty and fee for technical services of non-residents

Scope of total income for tax purposes

The Residential status of an assessee is also an important concept as it determines the scope of total income for tax purposes. In the case of a resident assessee the total taxable income means income from all sources within and outside Pakistan subject to the provisions of double
taxation treaties, while in the case of a non-resident individual it is restricted to Pakistan source income only.

An individual is a “resident individual” if he is present in Pakistan for 182 days or more in a tax year or if he is an employee or official of the Federal or Provincial Government posted abroad.

A Company is considered to be resident when either it is incorporated or formed by or under any law enforceable in Pakistan or, the control or management of which is situated wholly in Pakistan at any time during the tax year.

A registered firm, un-registered firm and association of persons is considered resident when its management and control is situated (either wholly or partly) in Pakistan.

Tax year and filling of return

The tax year shall be a period of twelve months ending on 30th June of every year ‘hereinafter referred to as ‘normal tax year”. All assessees except companies are required to file their return of income for the tax year at the latest by 30th September immediately following the close of that tax year. Companies are required to file their return of income for the tax year at the latest by 31st December immediately following the close of that tax year.

Central Board of Revenue has prescribed different period of twelve months to be the “tax year” for various businesses. These different periods are called “Special Tax Year”. Accordingly the last date for filling the return of income is also different as prescribed for the normal tax year. Presently prescribed, special tax years and last date of filing the return are as following:

Business               Tax Period           Filling of

Return

(Year ending on)               (Latest by)

Companies

Manufacturing Sugar       30th September 31st March

All persons exporting Rice             31st December   30th June

All persons carrying on the

business of rice husking  31st August         28th or 29th February

All persons carrying on

the business of oil milling              31st August         28th or 29th February

All persons carrying on the

Business of manufacturing

and dealings in shawls     31st March          30th September

All Insurance Companies 31st December   30th June

A person may apply, in writing, to the Commissioner of Income Tax to allow him to use a twelve months’ period, other than the normal tax year, as a special tax year and the Commissioner may by an order, allow him to use such special tax year.

In case of a class of persons having a special tax year, the Central Board of Revenue may permit it, by a notification in the Official Gazette, to use the normal tax year as its tax year.

Tax rates

The rates of tax applicable to various assessees are provided as Annexure 1.

Special rules for taxation of certain businesses

The Income Tax Ordinance, 2001 provides for separate provisions for taxation of the following businesses:

             The fourth schedule to the Ordinance provides the rules for the taxation of profits and gains of Insurance Business.

             The fifth schedule to the Ordinance provides the rules for the taxation of profits and gains from the exploration and production of petroleum profits and gains from the exploration and extraction of mineral deposits (other than petroleum).

Withholding tax

Section 148 to Section 169 of The Income Tax Ordinance, 2001 provides for deduction of tax on certain payments. The ordinance provides for a complete procedure for the withholding tax system.

Nature of such payments and pertinent rate of tax deduction is provided as Annexure 2.

Exemptions, Rebates and other Benefits

The Second Schedule to the Income Tax Ordinance, 2001 deals with exemptions and rebates etc.

A.           Exemption from total income

Part I of the Second Schedule provides exemption from total income.

B.           Reduction in tax rates

Part II of the Second Schedule provides for reduction in tax Rates.

C.           Reduction in tax liability

Part III of the Second Schedule provides for reduction in net tax Liability.

D.           Exemption from specific provisions

Part IV of the Second Schedule provides for exemption from specific provisions of the Ordinance.

Exemptions for Modarabas

The Modaraba enjoys special tax benefits, which are as follows:

•             Income (except income from trading activity) of a Modaraba is exempt from tax provided that not less than ninety percent of the profits in the year as reduced by the amount transferred to a mandatory reserve are distributed among the Modaraba certificate holders.

•             It is taxed at a reduced rate of 25% as compared to 35 % applicable to companies.

•             Further, minimum tax is also not leviable on the Modarabas.

Depreciation and Amortization

Third Schedule to the Income Tax Ordinance, 2001 prescribes the rates of depreciation for various assets. It also provides for the following depreciation and amortization allowances:

•             Initial depreciation Allowance @ 50%

•             Amortization of pre-commencement expenditure @ 20%

Treaties for avoidance of double taxation

Pakistan has entered into treaties for avoidance of Double Taxation with different countries. These agreements are executed to avoid the fiscal loss of both countries. A brief about these treaties is provided as Annexure 3.

Capital Value Tax

The Capital Value Tax was introduced through the Finance Act, 1989. Initially this tax was also applicable to urban immovable properties and locally assembled/imported vehicles, but currently it is applicable to the following:

Activity                                                              Rate of Tax

             Purchase of shares through stock exchange           0.02%

             Purchase of Air Tickets (Diplomats are Exempt)     3.00%

             Purchase of New Vehicles                            3.75% to 7.50%

The tax is paid along with the payment and is final discharge of liability.

INDIRECT TAXES

The detail of indirect tax statutes is provided below:

Sales Tax

The VAT-mode Sale Tax has become a salient feature of the country’s tax policy.  Sales Act 1990 forms the legal frame work for the operation and collection of sales tax. The “Collectorate of Sales Tax” a division of the Central Board of Revenue (CBR) is the regulatory authority in this regard.

Sales tax is payable on monthly basis at the rate of 15, 17.5 & 20 % of the value of supplies net of the amount of input tax i.e. paid on purchases. The following persons are required to obtain the Sales tax registration:

1.            A manufacturer whose annual turnover from taxable supplies made in any period during last twelve months ending any tax period exceeds five million rupees.

2.            A service provider whose annual turnover from taxable services made in any period during last twelve months ending any tax period exceeds five million rupees.

3.            A retailer whose value of supplies made in any period during last twelve months ending any tax period exceeds five million rupees.

4.            An importer.

5.            A wholesaler including dealer and distributor.

The Government promotes the sales tax registration and it is a must for doing business with most of Government departments, Corporations and large Companies. To solicit such business a manufacturer, service provider or retailer may obtain voluntary registration at the time of commencing the business even if his turnover does not fall within the limits prescribed for compulsory registration.

Custom Duty

The Customs Act, 1969 (the Act) was promulgated on 8th March 1969. The Act consolidated and amended the laws relating to the levy and collection of customs duties and other allied matters. The Act along with Custom Rules, 2001 provides the legal framework for customs duties which presently are levied on the following goods:

             Goods imported into Pakistan;

             Goods exported from Pakistan;

             Goods which are brought from any foreign country and are transhipped or transported, without payment of duties, from one custom station to another; and

             Goods brought in bond from one customs station to another.

The rates of duty vary from item to item and are provided in section 18 of the Act. In view of the post WTO scenario, the Government is revisiting its tax policy and reduction and elimination of duty is expected.

Excise Duty

The Federal Excise Act 2005  and Federal Excise Rules, 2005 provide the legal framework to address the issues related to Federal excise duty. The Federal Excise Duty is a federal charge and it is levied and collected on excisable goods and services of the following categories:

1.            Goods which are produced or manufactured in Pakistan.

2.            Goods which are imported into Pakistan.

3.            Goods which are produced or manufactured in the non-tariff areas and are brought to the tariff areas.

4.            Excisable services provided or rendered in Pakistan.

The rates and basis of levying the duty vary from item to item and are provided in the first schedule of the Act. However, the Government now intends to gradually withdraw Federal excise duty from a number of items and restricts it only to five or six non-essential items.

 

4 comments on “::SETTING UP A BUSINESS IN PAKISTAN

  1. Does foreign company can be registered in SECP having JV with local registered company keeping 51% share capital by foreign company’s name with nominated five foreign directors without having share capital. Does it allowed by SECP ?

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  2. Does a liaison office requires registration by SECP if it is established by a Sole proprietor of a foreign country?

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    • Yes, the liaison office requires for the foreign company registration/ incorporated in Pakistan under the Company Laws of Pakistan.

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