Business Law Project - Semi Final

Business Law in Pakistan 1

Business Law and the Global legal environment

Term Paper

Authors:

Abu Bakar Bhatti

Enum Naseer

Faisal Mehmood

Mariam Asif

Omar Khan

Waqar Nadeem

Section N

Submitted to:

Mr Shariq Mehmood

Lahore School of Economics


Table of ContentsExecutive summary.....................................................................................................................................3

Law..............................................................................................................................................................4

Basic definitions:......................................................................................................................................4

Historical Perspective:.............................................................................................................................4

Business Law:...........................................................................................................................................7

The Companies Ordinance 1984- A brief overview:................................................................................7

Different Forms of Businesses.....................................................................................................................9

Sole Proprietorship................................................................................................................................10

Partnership............................................................................................................................................10

Limited Liability Company.....................................................................................................................12

Corporations..........................................................................................................................................12

Joint Venture.........................................................................................................................................13

Economic Environment.............................................................................................................................13

Monetary Policy:...................................................................................................................................14

Fiscal Policy:...........................................................................................................................................14

Trade Policy:..........................................................................................................................................15

Industrial Policy:....................................................................................................................................15

Infrastructure:.......................................................................................................................................16

Political Environment................................................................................................................................16

Political risk:..........................................................................................................................................16

Credit Risk:.............................................................................................................................................17

Legal Environment.....................................................................................................................................17

Types of business laws in Pakistan:.......................................................................................................17

Cultural environment................................................................................................................................22

References.................................................................................................................................................24


Executive summary

The term paper defines law- in the business context. It moves through the historical perspective

of law and narrows down to law relating to the business entities in Pakistan. The Companies

Ordinance, 1984 provides the legal framework for the law relating to the business organizations

(companies) in Pakistan. The businesses are categorized into sole proprietorship, partnership,

limited liability company (LLC), corporation and joint venture. The advantages and

disadvantages of each form of business are studied in detail. Furthermore, different types of

environment affecting performance of business entities are discussed i.e, economic, political,

legal and cultural environment. Finally, the impact of global legal laws has also been taken into

account which affects the businesses in Pakistan. These global laws and policies extend from the

role of global organizations, such as WTO, GATT, ISO 9001 Certification and other business

related regulatory authorities.


Law

Basic definitions:

There are multiple ways and perspectives of looking at what law means. Some of them are listed

below:

• “Rules established by a governing authority to institute and maintain orderly

coexistence.”

• “Any system of regulations to govern the conduct of the people of a community, society

or nation, in response to the need for regularity, consistency and justice based upon

collective human experience.”

• “A rule of action to which men are obliged to make their conduct comfortable.”

• “Law is the command of the sovereign. It imposes a duty and is backed by a sanction.

Command, duty and sanction are three elements of law.”

Historical Perspective:

Customs or a code of conduct governed by the force of the local king was replaced by laws in

ancient times. The earliest law book was written about 2100 B.C. for Ur-Nammu, king of Ur, a

Middle Eastern city-state. Within three centuries Hammurabi, king of Babylonia, had

enumerated laws of private conduct, business and legal precedents, of what he wrote 282 articles

have survived. The term "eye for an eye" (or the equivalent value) is found in his work and also

the issue of unequal treatment of the rich and the poor was codified here first. It took written law


codes a thousand years to be developed among Israel and Greek cities (especially Athens). The

Chinese developed rules in congruence with those that the Egyptians did.

In later years, American colonies followed the English Common Law with minor variations, and

the four-volume Commentaries on the Laws of England by Sir William Blackstone (completed

in 1769) was the legal "bible" for all American frontier lawyers and also it influenced, to a large

extent, the development of state codes of law. To a great extent common law has been replaced

by written statutes, and a gigantic body of such statutes has been enacted by legislatures both at

the federal and state level and this is done to cater to the complexities of modern life.

A statute/ ordinance/ regulation that is acted upon and enforced by the legislative branch of a

government and signed into law, or in some other nations created by decree without any

democratic process is also known as a law. This is different from "natural law," which is does not

have its basis on statute, but on alleged common-sense as in an understanding of what action is

right or proper and this mostly has to do with the moral and/or religious understanding of

acceptable and unacceptable behavior.

In the middle Ages, law was considered to have been dictated by Divine Will, and also to be

revealed to wise men. The most ancient legal precedents/ customs were considered to be the best

law, and much of Continental Europe ended up making secular law on the lines of the old Roman

law. In Byzantium, secular and sacred law somewhat intertwined, where secular law took

precedence. In western part of Europe, however, religious and secular law was considered to be

two opposite things. Church law was referred to as “Canon Law”, and was applicable to “the

clergy, to the secular world in matters of the administration of the Sacraments such as marriage,


and to the immunity of the clergy from secular law”. This is where the conflict between the

Church and the State found it roots. St. Augustine arranged law in three levels:

Divine law, a perfect system comprehended through faith and reason;

Natural law, which could be understood by all creatures, lacked the perfection of faith,

and could be improved by philosophy;

Temporal (secular) law, obedience to which was enjoined on all Christians, save where it

conflicted with Divine or Canon law.

In its most general and comprehensive sense, law signifies a rule of action, and is applied

indiscriminately to all kinds of action; whether animate or inanimate, rational or

irrational. In its more confined sense, law denotes the rule, not of actions in general, but

of human action or conduct.

Law can generally be divided into four main classes, namely:

Natural law;

The law of nations;

Public law; and,

Private or civil law.


“When considered in relation to its origin, it is statute law or common law. When examined as to

its different systems it is divided into civil law, common law, canon law. When applied to

objects, it is civil, criminal or penal.”

It is also divided further into natural law and positive law as well as into written law, (lex scripta)

and unwritten law (lex non scripta) and into merchant law, martial law, municipal law and

foreign law. When considered as to their duration, laws are immutable and arbitrary or positive.

When viewed as to their effect, they are prospective and retrospective.

Business Law:

Broadly speaking, business law refers to the laws that apply to business entities, such as

partnerships and corporations. It gives us the rules that govern business interaction and

organization. It defines the boundaries within which business can operate and also explicitly

defines the penalties for violation of these. Not only this, but it also includes legislations and

legalities regarding the entire business structure as well as providing a set of rules for setting up,

starting and conducting business. It clearly points out all the rights and responsibilities of

businesses.

The Companies Ordinance 1984- A brief overview:

The Companies Ordinance 1984 is a broad piece of Pakistani legislation that, according to its

preamble, was passed with the intent of serving as “an ordinance to consolidate and amend the

law relating to companies and certain other associations”. All legal regulations and laws for

businesses that are registered with the SECP or the Securities and Exchange Commission of


Pakistan are covered in detail in this ordinance. It is enforced by the SECP. The SECP polices

the actions of the business enterprises and keeps a watch on them to insure stakeholder interest.

The corporate sector in Pakistan is governed by the Companies Ordinance 1984 which was

promulgated on 8th October 1984 and repealed the Companies Act, 1913. The avowed

objectives of the Companies Ordinance 1984 were “to consolidate and amend the law relating to

companies and certain other associations for the purpose of healthy growth of corporate

enterprises, protection of investors and creditors, promotion of investment and development of

economy”. The detailed provisions of the Companies Ordinance, 1984 sought to meet these

objectives and have been amended and updated from time to time to keep in line with the

changing circumstances.

This piece of legislation has multi-faceted purposes and advantages. One of the positives that it

has to its credit is the legal protection that it provides to the Pakistani business community. Other

purposes and advantages that it has include promoting the healthy growth of the corporate

enterprises, protection of investors and creditors, promotion of investment and development of

economy.

In Pakistan, companies are the most favored form of organizations as far as medium and large-

scale enterprises go. The “legal regime” that serves dual purposes of establishment and

regulation of companies is the Companies Ordinance, 1984. As far as the function of

administration is concerned, it is vested in the Securities and Exchange Commission of Pakistan

and the Registrar of Companies appointed by the Securities and Exchange Commission of

Pakistan for a province of Pakistan where such company is to be registered.

Under the Companies Ordinance, 1984 a company is a corporate body that is a separate legal


entity and has a perpetual succession. It is formed by persons that associate for a lawful purpose

and this is done by subscribing the names of all such persons to the “Memorandum of

Association” and also complying with other requirements that concern the registration of a

company (covered by the Companies Ordinance, 1984).

The Companies Ordinance, 1984 provides for three different types of companies:

A company limited by shares

A company limited by guarantee

An unlimited liability company

Further, under the Companies Ordinance, 1984 two types of limited liability companies that are

provided for, namely:

A private limited company

A public limited company (which may be listed or unlisted)

One or more persons who subscribe their name(s) to the Memorandum of Association and

comply with other specific requirements stated in the Companies Ordinance, 1984 may

incorporate a private limited company. If the company has only one person as the subscriber to

the Memorandum of Association is known as a Single Member Company. Nevertheless, such a

company will stay as a private limited company “for all intents and purposes of the Ordinance”.

On the flip side, however, if three or more persons are associated, a public limited company is

formed. In Pakistan, the most common and frequent form of business enterprise, for both, private

and public is a company that is limited by shares.


Different Forms of Businesses

A business/company/enterprise or firm is a legally recognized organization comprising of a

group of people working to earn profit. It is usually built to provide goods, services, or both

to consumers or tertiary business in exchange for money. Businesses are predominant

in capitalist or market economies also known as laissez faire, in which most businesses

are privately owned and typically formed to earn profit that will increase the wealth of its

owners. The owners and operators of private, for-profit businesses have as one of their main

objectives the receipt or generation of financial returns in exchange for work and acceptance

of risk. Businesses may also be designed with a purpose other than profit or can also be owned

by the state.

Businesses can be of various forms. To name a few:

Sole proprietorship

Partnership

Limited liability company

Joint venture

Sole Proprietorship

A sole proprietorship is the least expensive and easiest way to start your business. Sole

Proprietorship refers to a single owner business. The owner and the business are not separate

entities. It has very few legal requirements to set up. There are thus no set-up costs. Hence costs

are lesser and the owner doesn’t have to divide or share the profit with anyone. Ideas and


knowledge is also less as compared to what there maybe with more heads to think. Sole

proprietorships also have lesser taxes to pay. Only the income or self employment tax applies to

this business. A sole-proprietor may also find it hard to get loans from the bank. Loss incurred

will have to be born solely by that single owner. A sole proprietorship has unlimited liability i.e.

in case of bad debts, the owner will have to pay them off personally by selling his personal assets

if the business fails to. Therefore risk in such a business is higher. Examples of sole

proprietorships are freelance writers, copy editors, photographers and craftspeople. A sole

proprietorship also has no continuity. If the owner dies, the business ends.

Partnership

Partnerships are two or more people working together. The two most common types of

partnerships are limited partnerships and general partnerships. Two or more people can form a

general partnership through a simple oral agreement. Starting a partnership with an oral

agreement is not recommended, legal documents should be drawn up by an attorney, namely the

partnership agreement. The costs may be higher than a sole proprietorship, but they would be

less than for incorporating. A large benefit for having a legal partnership drawn up is that it aids

in resolving any future business disputes. A down side to a partnership is that a partner can be

held responsible for the actions of other partners in the business in addition to their own. A

partnership is a business with more than one owner, usually two and up to twenty. Set up costs

are fewer, but still it is difficult to raise as much money as a larger business. Also, the owners

have unlimited liability, as does a sole proprietor: any debts incurred by the company must be

paid by the owners, even if they have to use their own personal property. However there is

continuity as if one owner dies, the partner continues it. The owner and the business are separate

entities.


Some of the things included in a partnership agreement:

The compensation for partners.

How long will the partnership last.

How will the profits or losses be divided?

What type of business is it?

What is each partner investing into the business?

If the partnership dissolves how will assets be distributed?

Provisions for dissolution of the partnership.

Provisions for future changes to the partnership.

Define any restrictions to expenditures or authority.

Provisions for death or incapacity.

Limited Liability Company

A limited liability company (LLC), also known as a company with limited liability (WLL), is a

flexible form of enterprise that blends elements of partnership and corporate structures. It is a

hybrid business entity having certain characteristics of both a corporation and a

partnership or sole proprietorship (depending on how many owners there are). An LLC, although

a business entity, is a type of unincorporated association and is not a corporation. The primary

characteristic an LLC shares with a corporation is limited liability, and the primary characteristic

it shares with a partnership is the availability of pass-through income taxation. It is often more

flexible than a corporation and it is well-suited for companies with a single owner.


Corporations

A legal entity, created under the authority of a statute, which permits a group of people, as

shareholders, to apply to the government for an independent organization to be created, which

then pursues set objectives, and is empowered with legal rights usually only reserved for

individuals, such as to sue and be sued, own property, hire employees or loan and borrow money.

Corporation is chartered by a state and given many legal rights as an entity separate from its

owners. The shareholders of corporations have limited liability protection, and corporations have

full discretion over the amount of profits they can distribute or retain. Corporations are presumed

to be for-profit entities, and as such they can have an unlimited number of years with losses.

Corporations must have at least one shareholder. An article of Association as well a

Memorandum of Association is needed for set up. Corporation also provides companies with a

more flexible way to manage their ownership structure. In addition, there are different tax

implications for corporations, although these can be both advantageous and disadvantageous. In

these respects, corporations differ from sole proprietorships and limited partnerships. Costs are

higher and profits are divided amongst owners, so are the losses. Knowledge is more as there are

more people involved. However there is continuity in this form of business as when an owner

dies it is continued by other owners. The primary advantage of a for-profit corporation is that it

provides the shareholders with a right to participate in the profits (by dividends) without any

personal liability (the company absorbs the entire liability of the business).

Joint Venture

A joint venture is a contractual agreement for a project joining together two or more parties or

companies for the purpose of executing a particular business undertaking. In a joint venture, both

parties are equally invested in the project in terms of money, time, and effort to build on the


original concept; they agree to share the profit or loss. While joint ventures are generally small

projects, major corporations also use this method in order to diversify. A joint venture can ensure

the success of smaller projects for those that are just starting in the business world or for

established corporations. Since the cost of starting new projects is generally high,

a joint venture allows both parties to share the burden of the project, as well as the resulting

profits.

Economic Environment

All types of businesses, either they fall in the category of single member company, partnership,

private limited company or the public limited company, they all are affected by the Economic

Environment of a particular country in which they are running or doing their business. The

economic policies of a country like the monetary policy, fiscal policy, trade policy and the

industrial policies along with the inflation rate also do affect the businesses in a particular

country. The Human resources, physical resources and the network of infrastructure like the

Road networks, communication systems and the energy consumption etc also affect the

businesses of a country. If the above mentioned factors are positive, then they would have good

impact on the companies and firms and they will have more chances of being successful.

Monetary Policy:

During the last 8 to 9 years from 2000-2009, the government of Pakistan has implemented

expansionary monetary policy that means the interest rates were set lower that caused the loans

for businesses from the banks at lower interest. In other words the monetary policy of Pakistan

was in the favor of firms and companies to do business and get finances at cheap rates. This

expansionary monetary policy had some negative impact on Pakistan’s economy too, as the


interest on the bank loans were set at lower rates the demand for money supply increased that

lead to the inflation in the country, which means the depreciation of rupee in the international

currency exchange, the imports got more expensive these additional costs were passed on by the

producers to the final consumers that lead to the high prices of consumer products and ultimately

in low demand from the consumers, because as the inflation would rise in Pakistan the

purchasing power of its nationals would reduce, now they could buy less items with the same

amount of money, that would result in low demand for products and would finally hurt the local

businesses of Pakistan. Overall the monetary policy is in the favor of businesses as it helps them

raise capital for expanding their operations, buts its side effects like the inflation along with other

factors also do affect it in a negative way.

Fiscal Policy:

Pakistan has been under the burden of external debt from the IMF and the bilateral sources, since

decades now, and this debt is continuously increasing over the time, currently Pakistan’s external

debt is around $55 billion dollars which is a huge burden on its economy. This debt is just one

thing its annual debt payments is another problem for Pakistan, each year a major portion of its

budget is spent on debt payments and another major portion on defense sector of Pakistan, so in

order to run other departments and sectors Government impose taxes on individuals and on all

types of businesses, over the years these taxes have been increased a lot. This increase in taxation

by the government is mainly because of the conditionalities of International Monetary Fund

which is the main donor of the funds (loans) given out to Pakistan. Now these higher taxes have

negative effect on industries and businesses either they are Multi-national companies, single

member companies partnership firms or private limited companies. These taxes will reduce the


profits of the companies and would also be very unattractive for the MNCs to go into those

countries that have such high corporate taxes.

Trade Policy:

The excise duties and the import duties are also of a huge concern to the businesses. During the

last few years Pakistan has opened up its borders for trade, according to the trade policy review

of year 2002, Pakistan’s trade liberalization have got very positive response from international

firms and multi-national banks and financial institutions. The tariffs and trade barriers have been

reduced a lot over the years. These steps have contributed in reducing the unemployment and

poverty in the country.

Industrial Policy:

Industrialization is very important for country’s economy to grow. As far as the industrial policy

of Pakistan is concerned, it’s not going that well, the government is trying to encourage public-

private sector to grow, but certain factors like high power tariffs, lack of availability of power,

high mark ups and difficulty in getting loans for the businesses are creating problems for

businesses to grow. The government needs to focus on improving and liberalizing its industrial

policy so it becomes attractive to the MNCs that would bring foreign direct investment in the

country and also in bringing up the local businesses.

Infrastructure:

Network of infrastructure is also very important for the businesses in a country, like the network

of roads, rail network, the communication system in the country and the facilities like power

supply; natural gas supply etc. without the availability of good and proper infrastructure

businesses cannot grow, in a speedy way in any country. In case of Pakistan the infrastructure is


not very good the industries do have suffer with the power shortages that makes it not very

favorable for the MNCs to invest in Pakistan.

Political Environment

Along with the economic environment, the political environment of a country also matters for

the businesses to grow. Firms require and prefer a stable form of government to conduct its

business and a good law and order situation in the country. The political environment includes

the Political risk, credit risk and the currency inconvertibility.

Political risk:

Political risk is basically the risk of losing the investment made in a particular country due to the

change in its government or a change in its policies such as tariff rates or taxes. If we talk about

Pakistan, it has very high political risk due to its unstable ruling body, rapid change of

governments, the enforcement of marshal laws, the corrupt governments and the issues of

security as of terrorism in the country. These all factors are contributing in high political risk in

Pakistan for international companies to invest in, because the investment might not probably

seems a good safe option to them.

Credit Risk:

The credit risk is also very high in Pakistan as it froze the foreign exchange accounts during

1980s when Pakistan had some serious issues with its foreign currency reserves that shackle the

trust of many investment companies in Pakistan. Most of the multi-national companies do

hesitate to invest in Pakistan due to its poor financial conditions and high credit risk.


Legal Environment

“Law is an instrument of social justice of the state that seeks to provide justice, stability and

security in the society”- (Prasad, 2005)

Law by its rules and regulations helps the individuals to maintain a uniform pattern of

interactions and behaviors against each other. It is the command of the sovereign which is

enforced by the legal institutions such as judiciary and court. In the business context, law helps

the businesses to operate freely in a uniform manner in the global environment. It limits the

actions of the businesses to an admissible level where the policies adopted by these businesses

do not harm the society. Law also safeguards the interests of the businesses in bad

circumstances. In case of non compliance to the rules and regulations, law defines the penalties

and fine to the particular business organization.

Types of business laws in Pakistan:

1. Business formation laws:

This law defines the type of business entity formed in Pakistan – a sole proprietorship,

partnership or a limited liability company (LLC). Each type of the business entities has

different legal implications and tax standards. They have altogether different business

processes, and duties to their stakeholders in the business environment.

2. License laws:

Different forms of business entities need to take certain type of licenses to operate in

Pakistan. They need to fulfill certain pre requisites before they get registered with the

registrar or start their operations directly. In case of a sole proprietor, an individual may

set up the business as sole proprietorship without any registration except with the tax


authorities. The partnership can be formed by executing a partnership deed (on a stamp

paper) between or among the partners whereby it defines the purpose of the business and

the rights and liabilities of each partner in that business. The partnership firm may or may

not get register with the registrar of firms. The Partnership Act, 1932 is the legal

framework for the partnership firms. The securities and exchange commission of Pakistan

(SECP) is the regulatory authority of the companies, whereas The Companies Ordinance,

1984 and The Companies (General Provisions and forms) rules, 1985 provides the legal

framework in this regard. In Pakistan, the Ordinance provides the following categories of

companies:

A company limited by shares

A company limited by guarantee

An unlimited company

Companies can also be classifies according to their structures:

Private company

Public company (listed or unlisted)

Single member company

In case of a listed company, the shares and stocks of a company can be listed on the three

stock exchanges available in Pakistan:

Karachi stock exchange

Lahore stock exchange

Islamabad stock exchange


3. Tax laws:

As the business entity begins its operations and start generating sales, it needs to keep a

record of all its transactions and at the end of the (fiscal) year it is required to pay a lump

sum amount to the government in the form of taxes. The tax collection from these

businesses is an important component of the tax revenues – under fiscal policy

management.

The Central Board of Revenue (CBR) is the regulatory authority which is responsible for

the management of the taxation system in Pakistan. It is engaged in the collection of taxes

under various structures. These forms of taxes can be divided under two categories:

A. Direct taxes:

A tax whose burden cannot be shifted to the third party is classified as a direct

tax. It means that the tax should be directly paid by the entity on which it is

imposed. It consists of the income tax (business income) and the capital value tax.

The income tax (also referred as corporate tax or profit tax) is levied on the

income of the companies. According to the current fiscal year 2010-2011, the

present corporate tax rate is 35% of the net taxable income of the company. The

taxable income is subject to the gross earnings less the interest on debt. Also a

10% tax rate is applicable on the companies on the income from dividend.

Moreover, the capital value tax was introduced through Finance Act, 1989.

Capital gains are one of the heads of income and are taxed at the normal corporate

rate. Gains derived from the sale of capital assets held for more than 1 year are

reduced by 25% for tax purposes and, therefore, 75% of the net gain is taxable at

a rate of 35%.


B. Indirect taxes:

When the ultimate burden of the tax can be shifted on someone else, it is known

as an indirect tax. Examples of an indirect tax are the general sales tax, excise and

custom duty. The Sales Act, 1990 forms the legal framework for the operation

and collection of sales tax. Sales Tax is levied on the supply of goods and

services, and the import of goods. The current sales tax rate in Pakistan is 17%. In

Pakistan, sales tax returns and payments must be made on a monthly basis. The

sales tax registration is mandatory for manufacturers if turnover exceeds PKR 5

million; for retailers, if the value of supplies exceeds PKR 5 million; and for

importers and other persons if required by another federal or provincial law.

The Custom Act, 1969 and Custom Rules, 2001 provides the legal framework for

custom duty laws. The custom duty is applicable on the goods imported/exported,

and brought into Pakistan from any other country. There are some exemptions on

products on which custom duty does not apply. However, the custom rate varies

from product to product.

The Federal Excise Act, 2005 and the Federal Excise Rule, 2005 provides the

legal framework for the excise tax. The rates and basis for levying the duty varies

from item to item.

4. Employee law:

The labor policy issued by the government of Pakistan identifies the worker’s rights. The

policy also provides for the compliance with international labor standards ratified by

Pakistan. At present, the labor policy as approved in year 2002 is in force. The total labor

force of Pakistan is comprised of approximately 37.15 million people, with 47% within


the agriculture sector, 10.50% in the manufacturing & mining sector and remaining

42.50% in various other professions. To address the issue the problem of child labor in

Pakistan, the Employment of Children Act, 1991 is in practice. It says about the child

labor protection:

“No child below the age of fourteen shall be engaged in any factory or mine or in any

other hazardous employment. All forms of forced labor and human trafficking are

prohibited."

5. Environmental laws:

In 1983, the Pakistan Environmental Protection Ordinance (PEPO) was passed. Presently,

the National Environment Policy, 2005 is in practice. The goal of National Environment

Policy is to protect, conserve and restore Pakistan’s environment in order to improve the

quality of life of the citizens through sustainable development. The policy highlights the

sectoral guidelines for different sectors, whereby the guidelines for businesses includes

the promotion of ISO 14000 Certifications, and the development of technologies to help

control the detrimental effect of hazardous pollutants and wastes in the country.

6. Intellectual property laws:

Intellectual property law safeguards the rights of the owner and his work from being

copied or misused by someone else. Under this law, owners are granted exclusive rights

to a number of intangible assets such as words, symbols, designs, artistic work etc. In the

business context, it can be divided into trademarks, patents, industrial designs, integrated

circuits, copyrights, geographical indications and plant breed rights.


Cultural environment

Culture is made up of values, beliefs, attitudes, assumptions and behaviors shared by a group of

people in a particular place. Pakistani culture is being influenced by many empires and cultures;

still it stands as a country having a rich and unique culture. In business context, the culture can

be seen as having positive or negative influences. Different aspects of cultures of a society might

be seen as hindering or assisting business performances.

In order to do set up a business in Pakistan, there are key concepts and values which should be

taken into account before hand.

1. Religion:

Religion plays a very important role in the life of almost every Pakistani. Muslims must

live according to the five pillars of Islam, which involves praying facing Mecca five

times a day. That is why it is seen that most of the business organizations have the

facilities of a mosque or a pray area; giving time to their employees to say their prayers

during the working hours. Friday is the holy day when everything is closed during the

juma break. Further restrictions may occur during the holy month of Ramadan, when

Muslims fast and the working day are shortened. Also the food businesses have to make

sure that the food they are selling is ‘halal’ which do not contains any ingredients which

are declared ‘haram’ in Islam.

2. Language:

The national language of Pakistan is Urdu, where English-the international language, is

becoming dominant in the socio-economic class A and B extensively. So the businesses-

MNC’s- have to take great care of this fact before communicating to their target

audience.


3. Values and ethics:

Values are the ideas and beliefs we hold as special. They are, in fact powerful drivers of

how we think and behave. Pakistan is a country where family is the most important unit

of social organization. Elders are given due respect in the society. Collectivism is one of

the dominating factors of the society. Religious values form the basis of interaction

among individuals. Businesses have to consider these factors before operating in

Pakistan.

Global Legal Laws and their effects on Pakistani economy

International Laws and treaties govern the conduct of independent nations in their relationships

with one another. In this paper we will look at the major global laws and treaties and their

respective effects on Pakistan.

GATT & WTO

Pakistan was one of the 23 founders of GATT in 1947. It actively participated in all the

subsequent GATT negotiations and was involved in the Uruguay Round that resulted in the

creation of the WTO. Pakistan was thus also one of the founding members of WTO that was


established in 1995. There is a considerable impact of WTO on all sectors of Pakistan's

economy, particularly, its industries - textile, agriculture and services. The nature of impact is

predictable for some sectors, whereas, it is difficult for others in view of global developments in

trade and the degree of complexity involved.

As far as the industrial sector is concerned, Pakistan’s main exports are textile and related

products. The non-textile exports of Pakistan are negligible but have a potential to grow

tremendously under the WTO regime. On the import side, Pakistan has been rationalizing its

tariff structure to a large extent under the trade liberalization principle as proposed by WTO. The

average tariff in Pakistan is around 17 percent; however, there is a need to ensure that there are

no adverse affects of trade liberalization on the domestic producers. This calls for a need to make

adjustments in the policies for the domestic industry, so that they may be able to face the

increased competition from global market.

The complete integration of all textile and clothing products into the free trade environment

under the Agreement on Textile and Clothing on 1st January 2005 was one of the most

significant changes for Pakistan under the world trade regime. Pakistan’s economy finds itself

heavily dependent on the textile and clothing (T&C) sector. It is because of the nature of textile

industry being labor intensive and requiring less capital and technical skills. However, a quota-

free trade era calls for structural and operational adjustments in the textile sector to enable

Pakistan's exporters to be globally competitive. China is the biggest challenge to Pakistan’s

textile exports in this post ATC regime.

As far as agriculture is concerned, Pakistan being an agrarian economy is still a net importer of

food items. The Agreement on Agriculture of WTO has been significant in molding agricultural

policies of Pakistan. The Agreement on Agriculture provides rules regarding export subsidies,


domestic support and market access. Furthermore, the WTO Agreement on the application of

Sanitary Measures with regard to food safety and protection of human and animal life, and health

from agricultural imports has considerable impact on Pakistan.

Apart from the major crops, Pakistan needs to exploit its comparative advantage in the

production and exports of meat, dairy products, fruits, vegetables, horticulture, etc. The

developing countries and the developed world are at loggerheads over agriculture. With regard to

agricultural negotiations in the WTO, Pakistan along with the other developing countries, insists

on a world trading system that is fair.

Moreover, Pakistan has a comparative advantage in many primary commodities. But in order to

fully utilize its comparative advantage, it needs to focus on and solve the problems in supply

side. Pertaining to the Agreement on trade related aspects of intellectual property rights (TRIPS),

Pakistan needs to ensure that the industry is encouraged to provide intellectual property

protection for its products and also make certain that there is effective protection of the

intellectual property rights attached to imported products.

Services are the largest and most dynamic component of both developed and developing country.

It is impossible for any country to prosper today under the burden of an inefficient and expensive

services infrastructure. In Pakistan, the services sector contributes more than half of the GDP.

Workers’ remittances account for the largest component of services and the country has a large

number of expatriates throughout the world. Being a developing country, Pakistan has adopted a

cautious approach while making commitments in trade in services. However, the actual policy of

the government is far liberal as compared to the binding commitments scheduled in the General

Agreement on Trade in Services. Pakistan has made some general commitments that apply

across the board, while in six sectors specific commitments have been made. These include


Business services, Construction and related engineering services, Tourism and travel related

services, Health and related social services, Telecommunication services, and Financial services.

Pakistan’s domestic industry also faces problems of increased imports and unfair practices under

the global trade regime. WTO Agreements have an in-built mechanism providing for trade

remedial measures to counteract the effect of dumping, subsidies and surge of imports.

Accordingly, Pakistan through national legislation has come up with anti-dumping laws against

dumping, countervailing duties laws against subsidies and safeguard action laws against surge of

imports in order to protect its domestic industry.

In a nutshell, at present Pakistan maintains a fairly liberal trade regime, where all quantitative

restrictions on imports have either been removed or converted into tariffs. It is noteworthy that

the applied tariffs in Pakistan are well below the bound tariffs under WTO, translating into

market access. However, quality control is integral to competitiveness of Pakistan's exports. Low

quality products fetch low price in the international market. The obvious problems of quality for

Pakistan are those of technical precision, grading and specialization. The WTO Agreement on

Technical Barriers to Trade is relevant in this regard. Proper support and prudent policies for the

industry, along with intelligent balancing of imports and exports is vital for the sustainability and

growth of Pakistan's economy and is likely to lead towards a bright future and trade enhancement

under the WTO regime.

International Standards Organization

ISO (International Organization for Standardization) is the world's largest developer and

publisher of International Standards. ISO is a network of the national standards institutes of


163 countries, one member per country, with a Central Secretariat in Geneva, Switzerland, that

coordinates the system. ISO enables a consensus to be reached on solutions that meet both the

requirements of business and the broader needs of society.

The idea is to create a set standard of quality that can be ensured in companies that apply and

carry the symbol of being an ISO certified company. The ISO certification has made it a lot

easier for local firms to ensure their foreign clients that the products/services being sold would

be of high quality and that it would meet/match international standards. Supporters of this

organization say that it has lead to significant increase in the overall volume of international

trade and enabled developing countries like Pakistan to capture markets that were once out of

reach. Additionally, it has also raised the general quality standards of firms who either have the

certification or desire to have it in the future.

On the flip side, many trade analysts have criticized Pakistani ISO certifications as being

redundant and not up to international standards.

Protectionism vs Free Trade

Protectionism refers to the economic policy of restraining cross border trade through tools like

Tariffs, Quotas, Embargoes, Exchange rate manipulation, Subsidies and Anti-Dumping Policies.

The 21st century has been a huge critic of such policies and the developed world, especially

countries like US and UK have tried to directly link FREE TRADE with Democracy and the

overall well fare of the mankind. The World Trade Organization has continued to pressurize the

developing world, and some very important ‘free trade agreements’ have been signed by various

countries. Yes, no one can deny that the fundamentals of ‘free trade’ functioning under the


umbrella of a FULLY globalized world offer irresistible benefits. But the important question is –

Will a Fully Globalised world ever shape up?

According to most conservative analysts the developing world simply does not have the ability

or the economic strength to compete with the already developed countries in an open market.

And for the sake of debate, why should they? Didn’t all these countries - who now form the

Developed world, enjoy the benefits of protectionism during the course of their development? Of

course they did! After all ‘free trade’ as we see it today is a new concept.

Then why should the developing countries of this era suffer? Isn’t ‘free trade’ just another

poverty trap for states like us? Or is it simply a tool to expand into new markets for the Western

businesses.

Also, if all conservative economies adopt ‘free trade’, some of the world’s most troubled nations,

like Pakistan would go into deeper trouble with massive BOP deficits – and with limited Foreign

exchange reserves, this could be a death sentence.

Lets also not forget that tariffs on international trade are important means of generating revenue

for most developing nations. Therefore, it would be a huge burden on their liquidity position to

stop this all important stream of funds coming their way. Additionally, they’d also have to forgo

a significant source of foreign exchange reserves.

In addition, protectionism is the single most important instrument to protect local industries and

save them from fierce international competition. If this is not done, local firms would often find

it extremely difficult to operate and match the efficiency of International competitors.


Businesses that succumb to competition would create unemployment which can further lead to

many other problems. On the other hand, if state protection is not provided to infant (new) and

sunset (declining) industries – they would inevitably collapse to the competition provided by

well established firms in the international market. This would again result in Unemployment,

which in turn would lead to increase in poverty.

Just like people, all countries are not equally blessed. Some have an abundance of natural

resources, some depend on progressive R & D, and there are also those that have almost nothing.

What they do is - form a potential market for others. Therefore it is completely fair if they use

protectionism policies like ‘Tariffs’ to milk this opportunity that they do have.

Likewise, countries who have a natural or artificial edge in the production of certain goods often

indulge in unethical practices like DUMPING in order to slaughter the competition in some

international markets, especially where the local firms are not strong enough to fight back.

Protectionism is a great shield against such practices

Let’s not forget that economic actions are very strongly bonded with politics. Protectionism

promotes the all important principle of ‘subsistence’ that recommends countries to produce what

they consume. It is crucial that nations at least produce some of what they consume, so that in

case of war ‘food’ is the last of their worries.

Also, we’ve seen that Hegemonic powers like US continue to use their economic strength to fuel

their political might. They regularly use economic gimmicks to control the political actions of

developing countries like Pakistan. Allowing them to further improve their economic power by


offering our local markets would result in long-term political dependence which in itself is a very

dangerous thing.

Additionally, Protectionism also helps countries fight cultural attacks and assists in sustaining

traditional and religious values. Example, Pakistan has banned certain products that go against

our religious teachings (like Alcohol).

Looking at the other side of the coin, protectionism reduces international trade volume and

hampers economic progress of the combined world. It also creates an artificial bias and reduces

the positive effects of competition. However, the inability of countries like Pakistan to compete

freely in the global markets make it a luxury that the world would not enjoy for quite some time.

Intellectual Property Law in Pakistan

Intellectual Property laws include the copyright laws, patent laws and trademark laws.

Intellectual Property is often the most valuable and least protected asset of many businesses and

creative individuals. This area of law protects the work of creative individuals and businesses

and protects such creation from unauthorized use or exploitation by third parties. By utilizing

Intellectual Property laws, creators and innovators can fully protect and benefit from their

creations. Pakistan is a signatory to the Marrakesh Agreement, signed in Marrakech, Morocco,

on April 15, 1994, which established the World Trade Organization. The WTO aims to increase


international trade by promoting lower trade barriers and providing a platform for the negotiation

of trade and to their business. Under the provisions of this agreement all states which subscribe

to WTO become bound to a mutual recognition of intellectual property rights at a higher level of

protection that the older conventions could offer. However, amendments have now been made in

the Pakistani intellectual property laws, to accommodate the new WTO provisions.

Pakistan is also a signatory to the Berne Convention for the Protection of Literary and Artistic

Work of 1886 and to the Agreement on Trade Related Aspects of Intellectual Property Rights,

which came into being on January 1, 1995 (TRIPs). The TRIPs is an international treaty

administered by the World Trade Organization, which sets down minimum standards for most

forms of intellectual property regulations within all member countries of the WTO.

Even though Pakistan is an active member of the WTO and has also signed the TRIPs

agreement, copyright infringement in Pakistan is not only normal but also very intense. In fact,

Pakistan is one of the largest exporters of pirated CDs/DVDs in the world. The estimated

consumption of pirated goods in Pakistan is put at a staggering figure of $80 billion USD.

Therefore, the moral of the story is that not all international laws are effectively and actively

imposed by signatories even though they agree to the basic idea promoted by that law/treaty. As

far as intellectual property rights are concerned, the government of Pakistan needs to actively

take steps before innovation and creativity which are already very low in the country –

completely disappear.


References

Form of businesses. (n.d.). Retrieved fromhttp://library.thinkquest.org/16500/Articles/BizTypes.html

Corporation. (n.d.). Retrieved from http://www.investorwords.com/1140/corporation.html

Types of Business Laws: Small Business Formation Laws & More. (2008). Retrieved from http://www.morebusiness.com/business-laws

Pakistan tax rates. (n.d.). Retrieved from http://www.taxrates.cc/html/pakistan-tax-rates.html

Intellectual property organization of Pakistan

Elements of culture. (n.d.). Retrieved from

http://changingminds.org/explanations/culture/elements_of_culture.htm

http://changingminds.org/explanations/culture/elements_of_culture.htm

Business Law Project - Semi Final

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