Though a change in the business environment has been witnessed in Pakistan during the past few years, yet the speed of the shift of the form of business, from sole proprietorship and partnership concerns to corporate entities, has been very slow.
However, the corporate form is gaining more and more acceptance in business circles, as well as in the capital and financial market. The reason being that the law confers the status of a separate legal entity on a company, which means that the company itself is a person quite distinct from its promoters, having its own assets and liabilities.
A company registered under the Companies Ordinance, 1984 enjoys numerous privileges and benefits under various laws. The indefinite life character of a corporate body strengthens the faith of investors, creditors and other business associates. Besides, free transferability of shares of a company offers easy change in management, mergers or amalgamations.
Moreover, the banks and financial institutions feel comfortable while financing the companies due to their legal set-up and regulated culture. All this makes a company more popular than the traditional modes of doing business.
In Pakistan, the promotion, formation and management of companies is governed by the provisions of the Companies Ordinance, 1984.
According to a latest study, there are about two million SMEs in the country, which constitute over 90% of the business establishments in Pakistan. Out of these, 72% are sole proprietary concerns. Sole proprietorship is an arrangement whereby the owner and the business are a single entity and the business enterprise does not have a legal entity separate from its owners, as is in a company.
In my view, corporatization is the only solution for bringing this informal sector to the regulated and documented formal sector. Some sole proprietorships or businesses are paying taxes and otherwise complying with the requirements of various laws, but it is a fact that such concerns are invisible on all legal, regulatory and fiscal planning radar screens.
That is the reason that these are characterised as the informal sector. Since this sector does not believe in documentation, most of the entities rely upon the personal sources of capital.
In this context, I would like to mention a short history of company law in Pakistan. The Companies Act of 1913 (as amended in 1936) was adopted as such on independence and it continued to be the main statute governing the corporate sector in Pakistan till October 8, 1984, when the Companies Ordinance, 1984 was enforced.
In order to keep it updated the said law was amended from time to time. It may also be noted that till mid of 1974, the administration of company law used to be with the Provincial Governments and the Registrar Joint Stock Companies used to be an officer of the respective Provincial Government. The regulatory set-up under the provinces was not properly organised.
There was no concept of public facilitation and companies' records maintained by the Registrars, which are in fact public records that were in a really bad shape. On the establishment of the Securities and Exchange Authority of Pakistan, (SEAP), and, subsequently, the Corporate Law Authority (CLA), efforts were made to improve the environment and working of the Company Registration Offices throughout the country.
Due to better environment and businesses needs, people started to form companies ab-initio or through converting their partnerships into corporates. But the main reason was availing the facility of loans, which otherwise was not available due to stringent collateral requirements of Banks and Financial Institutions.
On establishment of the Securities and Exchange Commission of Pakistan (SECP) in 1999, there was a revolution in the functioning of its offices, particularly, the Company Registration Offices which are in fact front line image building offices of the Commission.
The general public and the professionals have to visit these offices for seeking registration of new companies, obtaining certified copies of various documents and inspection of records etc.
The functioning of these offices was totally changed through reorganisation, renovation and particularly by eliminating bureaucratic culture. A clear cut message was given by Khalid A. Mirza who took over as a second Chairman, to the dealing officers that they have to facilitate the companies' managements, professionals and general public to the best of their capability and any complaint about inaction and corruption would not be tolerated.
It will be self praise (which is not desirable) to mention that my humble contribution towards the improvement of the working of CROs made the dream, a reality. Besides, revising the office regulations, the promoters' guide, which I had introduced as back as in 1995, was also reviewed.
Model Memorandum and Articles of Associations of various sectors companies, alongwith prescribed forms, were placed on the Commission's website for public utilisation and convenience. Names of all the existing companies were made available on the website, enabling the promoters to decide about the names of their proposed company.
Inspite of taking all the possible measures, the owners of the small businesses could not be duly convinced to convert their concerns into companies. Their main concern appeared to be the high rate of income tax and the withholding tax charges to be paid by the suppliers.
Obviously, companies were at a great disadvantage viz-a-viz sole proprietorships and partnerships as the non-corporates were not required to maintain their books of accounts in a prescribed manner and were also not subject to a charge of withholding tax on the supply of goods and services.
Thus, in order to formulate a corporate tax policy aimed at encouraging corporatization in the country and progressive development of the corporate sector, the SECP and the Central Board of Revenue (CBR) constituted a joint task force on December 27, 2004.
Former Justice Saleem Akhtar was requested to accept chairmanship of the Task Force, whereas the leading corporate and tax laws professionals were associated as members.
The Task Force completed its challenging job within a minimum period and after taking into account, the views of all the stakeholders, recommended that small companies having a paid up capital upto of Rs 25 million or a turnover of Rs 200 million deserved a lower corporate tax rate.
A detailed report containing numerous recommendations was submitted to the CBR and SECP. The Chief Executives of both the organisations vigorously pursued the case with the government and fortunately for the first time in the history of Pakistan a 50% reduction in the tax rate of small companies, was allowed, which was no doubt a big achievement.
Now small companies, incorporated after July 1, 2005 are required to pay only 20% tax. Here I would like to point out that by not permitting the lower tax rate to the same sized, existing companies, incorporated before 30th June, 2005, a discriminatory treatment has been made which is not justified. I hope the CBR will reconsider and remove this anomaly at the earliest.
Similarly, disparity between small companies and non-corporate concerns, regarding withholding tax on payment for supply of goods and services was also removed through the Finance Act, 2005.
Since all the practical impediments for corporatization of businesses have been removed and a reduced corporate tax rate has been provided to small companies, it is a good opportunity for the owners of small businesses to convert the old and traditional mode into corporates and to become part of the formal sector.
For the facility and understanding of owners of the sole proprietorships and firms, I would like to point out that they may have a single member company or a small company having minimum two members and maximum fifty and they may enjoy the privileges and benefits of limited liability.
Even the landlords who do not want to associate any other family member or friend at the initial stage, may form a single member company in the field of agriculture and agro-based industry. Such initiations will be encouraging the further promotion of the concept of corporate farming in our country.
Now it is upto the regulators, professionals and consultants to convince the business community of the informal sector to convert their businesses concerns into corporates, and to save their coming generation from the threat of facing legal actions and consequential litigation on account of the non-payment of due taxes and keeping black money.
They must realise and appreciate that when a salaried person can afford paying taxes regularly and transparently, why can't a businessman belonging to the unorganised sector live by paying due taxes and contributing towards the national exchequer.
In order to encourage corporatization in our country, the SECP is also required to further reduce the registration fee in the cases of small companies and to simplify the procedure of registration and reporting. At present, there are various periodical returns which may be consolidated by reviewing the existing reporting system.
Similarly heavy penalties on companies where there is not a wilful default should be avoided. Here, I appreciate the approach of Chairman SECP, Dr Tariq Hassan who always keeps giving messages to the officers that penalties should not be treated as a source of income of the Commission and should only be imposed for ensuring compliance and, particularly, in chronic and continued defaults cases.
Besides, the amount recovered on this account should be spent on research and education of investors and companies' directors/managers. In case the Chairman wants to see good results, I would suggest the Commission that the powers of adjudication should only be delegated to the officers having legal knowledge and relevant experience in the field of enforcement of corporate laws.
Besides, relevant provisions pertaining to penalties under various sections in the Company Law and Securities Law need a complete revision so as to prescribe flat rates of fines for the defaults in the filing of periodical returns. This is desirable to save time from routine matters and also to control discretionary powers of the officers.
Since, there is a lot of class difference in our society due to undocumented economy and this difference is increasing day by day, it is the proper time to transfer the work pertaining to the registration of partnership firms to the SECP which, in my view, is in a position to monitor this area as well, in a befitting manner.
Besides, the Government may also consider introducing a 'Business Registration law' on the pattern of Malaysia requiring every form of trade, commerce, craftsmanship, profession or other activity carried on for the purposes of gains, excluding any office or employment, to be registered under the proposed law.
Apart from this, the Government may consider imposing a condition on suppliers and contractors that their bids for jobs to a certain value, say Rs 10 million will only qualify for acceptance if they are registered as companies under the Companies Ordinance, 1984.
It will definitely be helpful to bring the businesses in the formal sector, encouraging proper documentation and will help for increasing national revenue. It may be noted that presently businesses registered under the above mentioned law in Malaysia are about three million.
In this age of automation, it is not difficult for the regulator to organise the entire informal sector in a proper manner. However, it is otherwise a different debate as to whether there should be separate body for the registration and regulation of companies, firms and other small businesses, like many other countries in the world.
By entrusting the registration and regulation of business to a separate Regulatory Authority, the Securities Commission may focus exclusively upon its core function of regulating the capital market in the country. Such issues may be considered and decisions taken by the competent authority at some appropriate stage and time. But, I hope that if my aforesaid proposals are implemented, there will be a revolution as far as the regulation of businesses and collection of revenue is concerned in our country.
In case, a proper mechanism is evolved where the income of all the businesses is brought within the network, the desirable results may be achieved and due benefits may be provided to the deserving class by further reducing the tax rate or by providing social facilities to the general public.
(The writer is an ex-Chairman of CLA)