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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
Business Law in Pakistan 2
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
Business Law in Pakistan 3
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.
Business Law in Pakistan 4
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
Business Law in Pakistan 5
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,
Business Law in Pakistan 6
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.
Business Law in Pakistan 7
“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
Business Law in Pakistan 8
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
Business Law in Pakistan 9
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.
Business Law in Pakistan 10
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
Business Law in Pakistan 11
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.
Business Law in Pakistan 12
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.
Business Law in Pakistan 13
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
Business Law in Pakistan 14
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
Business Law in Pakistan 15
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
Business Law in Pakistan 16
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
Business Law in Pakistan 17
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.
Business Law in Pakistan 18
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
Business Law in Pakistan 19
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
Business Law in Pakistan 20
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%.
Business Law in Pakistan 21
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
Business Law in Pakistan 22
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.
Business Law in Pakistan 23
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.
Business Law in Pakistan 24
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
Business Law in Pakistan 25
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,
Business Law in Pakistan 26
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 Law in Pakistan 27
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
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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
Business Law in Pakistan 29
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.
Business Law in Pakistan 30
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
Business Law in Pakistan 31
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
Business Law in Pakistan 32
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.
Business Law in Pakistan 33
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
Business Law in Pakistan 34