Originally published in March 2001

Present Economic Disorder

Booming or busting, one has to live his times. We are passing through a difficult economic turmoil. It is some thing more than the conventional economic cycle. It has stayed longer than expected and may last our lifetime. But we have to work hard for our generation to come.

We are in a serious Debt trap. It is caused because of our wrong economic priorities of the last five decades. We are facing the shattered investors confidence, high unemployment, negative growth, high inflation, increased costs and erosion of profitability as well as brain drain at a faster rate. This is happening in the back drop of the New World Order where the protective tariff walls have fallen and lucrative sources of state revenue are no more available and we have to strive hard to mobilize our resources to meet our development needs, social uplift and other programs.

Pre Documentation

The documentation of the economy is the primary agenda of the present regime. The pace of the economic activity is set by the legislature. Unfortunately, we could not house our institutions with people of vision and conviction. Our laws are made to be frequently amended, reluctantly complied and selectively enforced. This has been true of the laws governing the economic activity.

We have been having the sales tax since 1952. It was charged at the source of entry point either at the import stage or at the manufacturers factory gates. This used to cause two problems (1) Low reporting of production and (2) Low reporting of values. Generally the goods were handled through the offices of a Commission Agent who handled the goods at retail prices without making any value addition and against a fixed percentage point of commission. High protective tariff wall helped generate lucrative revenue for the government and provided a free hand for the operators at the market through out the channel of distribution.

The gimmicks of gross profit rates and the ritual of disallowances of the expenses has been the guidelines at the income tax stage. The only incentive to pay tax was provided by the self assessment scheme. This was not enough to meet the growing needs of the state.

To fill in the gap, refuge was taken behind the presumptive tax regime where withholding tax at source was taken as a final discharge of tax liability. While it provided an easy cover for the sector of economy generating high profits, it almost killed the low margin bulk trading community. The withholding tax was added to the cost of the product which could not be realized from the sales and ultimately resulted in the erosion of the equity.

The Capital formation has never been the focus of attention of the taxation laws. This resulted in no dividend to the shareholders, no ploughing back in the business and no investments ultimately leading to a sick economy that we are facing today.

If at all any sector of the economy made profits, the profits were ploughed back into business as a camouflage investments in the business mostly as benamidar. The real estate was the top priority to store the profits made by the successful sectors of the economy.. The advancing of credit to the customers in the distribution of channel is another large junk of unreported investments consisting of accounts receivables and un-consumed inventories. Periodical amnesty schemes, foreign currency remittances, government bearers bonds and other channels of no question asked were mostly used to channelize the untaxed profits of the economy. At the same time it fueled the pace of un-reported and un-documented and non-collated consumption in the economy. The state used the tools of section 13 of the Income Tax Ordinance 1979 to plug in the loopholes of the systems by selectively chasing the investments as well as expenditures on lavish consumptions.

The Prudential Regulations did not exists and the banks were allowed to create huge bad debts under the power of political influence and plunder. Mostly development banks handled country tied credit lines which fuelled the economy of the capital goods producing countries. In the absence of the prudential regulations, no long term sources were tapped for the financing of the permanent working capital and that mostly contributed to the sickness of the industrial sector coupled with huge depreciation, debt service and devaluation.

Documentation Through Income Tax Laws.

  • The survey of business and properties is being carried out at a mass scale through out the major cities of Pakistan under the Survey for the Documentation of the National Economy Ordinance 2000. Section 61A has been introduced in the Income Tax Ordinance 1979 to utilize the data collected under that Ordinance. Besides, the association of private agencies as well as firm of Chartered Accountants in the tax collection and audit system has been on test and trail for quite some time now. Besides, computer are now being used in a big way to collect and collocate the information obtained through the survey of the properties and businesses.
  • Anti-camouflage investment law has been introduced in the Income Tax Ordinance 1979 in the shape of section 12(18) which initially restricted the receipt of loans at Rs. 50,000/- in 1987, raised the limit to Rs. 100,000 in 1990. Since 1998, the fate of the camouflage investment in business is permanently ceased as now no loans or gifts can be received from a person not holding the National Tax Number and also otherwise than by crossed cheque. This leads to a serious problem when "a friend in need proves to be a friend indeed". In the case of the foreign currency remittances from abroad, the issue of the applicability of the law is of utmost attention. The law of section 12(18) might be anti-camouflage investment but it is anti-social too.
  • The power of section 13 of the Income Tax Ordinance 1979 has been liberalized as it can now be applied to the facts without any limitation of time. This has been done by eliminating clause (7) of the Part IV of the Second Schedule to the Ordinance. At the same time, the power of section 13 has been disciplines by providing adequate and equitable guidance in the shape of Rule 207A in the Income Tax Rules 1982.
  • The law of non-admissibility of expenses has been made too stringent by making it obligatory to pay through crossed cheques and also by ensuring the withholding tax at source. All salaries exceeding Rs. 5,000 are bound to be paid by crossed cheques and all payment for a head of account exceeding Rs. 50,000 p.a. are to be made likewise.
  • Rule 32A is introduced in the Income Tax Rules 1982 to ensure that all persons having an annual turnover exceeding Rs. 2.50 million or an income of Rs. 200,000 maintain books of accounts.
  • The minimum tax of ½% of turnover is extended to all the taxpayers.

GST Take It Positively

GST is a multi stage value added tax and is being gradually levied at all the stages of the channel of distribution. At every stage it requires the documentation and record keeping. It is based on issue of invoices inclusive of sales tax which are taken as input credit by all the intermediary operators of the distribution channel. Any body putting the goods to final consumption has to absorb it, others would just pass it on to the next operators charging the out put on its sales prices and taking the credit for the input tax paid making the value addition subject to added tax at each stage.

It is regressive tax as the population with low income pays a large portion of their income as GST and the population with high income pays low portion of their income. This justifies exemption to some of the essential commodities like food and medicines.

It ask for regular reporting on monthly basis, continuous record keeping of all transactions inclusive of inventory. It is based on self clearance, self declaration and periodical audit.

The exports sales is zero rated allowing the refund claim of the input tax paid at all the stages of manufacturing.

The input claimant is expected not only to hold the purchase invoice of the goods sold or consumed but is also expected to have first paid it. This is ridiculous. All the sales are charged to tax at the point of delivery, but all the input is not being allowed. The basic concept of the accrual is being violated. Reasonable, and prudence demands that the concept of accrual be consistently followed and any harsh treatment to the tax payer with un-necessary emphasis on tax collection should be discontinued. The market realities should also be kept in view. The existence of a large base of credit in the market can not be denied. No business can exist in the present day market of Pakistan without advancing credit to its customers. A large part of this credit remains un-reported as the channels of distribution is working on "parchi" systems. This is quite evident in the wholesale market of Pakistan.

The start up problem consist of the inventory including sales tax paid value. The pre-registration inventory needs to be carefully handled whenever the GST is adopted.

The availability of the goods with GST invoices is one of the problem in the marker place. This is caused because of the selective implementation of the GST. The policy of gradual and slow beginning has caused a chaotic situation in the market place. Some of the people are operating with GST and others are not. This makes the people under GST registration as non-competitive and is one of deterrent in the process of registration.

The value of the goods is the biggest problem for those who are registered and are buying the intermediary goods from manufacturing who are not providing the GST invoices at the value paid for. This is the practice inherent from the previous non GST system. The paper and packages industry is in point.

GST Implications

The GST paid is not taken as part of the cost of goods sold as the input tax paid is taken as advance payment of tax. If the goods are not purchased from a registered person issuing the sales tax invoices, the cost of the goods bearing the burden of the GST is higher and pushes the G.P. Therefor there is need that consistently purchases of goods have to be from sources of registered persons only otherwise it will adversely affect the G.P. rate adversely and the income tax assessment based on the gimmicks of G.P. rate would exposes one to a disadvantageous position.

It enhances the working capital requirements of the business as the charge and payment of the tax is based on accrual concept and the input tax credit is based on the cash basis. Previously, the refunds were linked with the level of inventory as input was allowed on the basis of accrual.

GST chases the profits in the economy. The goods moves from one channel of distribution to the other and every segment of the society from importer, manufacturers, wholeseller and retailers pays the tax on the value addition made by them. This exposes the value addition made by them. The gross value addition minus the cost is the profit of reporting entity. Based on the monthly returns filed, one can easily ascertain the mechanics of profitability.

This is the problem with the goods which sells for the utility and professionalism. The case in point is that of the advertising give-aways and the opticians.

It leads to cost reduction as it is taken out of the cost of imports and production. Given the same level of gross profit rate charged, GST leads to cost reduction.

The Options of Registration

Type of Registered Person

Under GST System

Turnover Tax


Enlistment Tax 1%

June 2001

Exemption Turnover


15% +1.5%

2.5 million










Can opt for TOT

5.00 million








Prudential Regulations

We have been living without prudential regulations for the last more than five decades. What they demand is financial prudence, discipline and ask us to follow the time proven principles of finance. They simultaneously address the borrowers as well as the lenders in the financial market. There are three set of prudential regulations viz:-

  • For BANKS
  • For non-banking financial Institutions
  • For Modarbas

Regulation IV

  • The total accommodation availed by any borrower from banks must not exceed 10 times of the capital and reserves (free of losses) of the borrower as disclosed in its audited accounts.
  • Subordinate loans as equity
  • Revaluation Reserves counted as equity.
  • Nonfund based facilities not included.
  • Fresh injected equity acceptable
  • Accounts to be filed duly signed by

Exposure of Rs. 2.oo million

Signed by borrower

Rs. 2.00 to 10.00 million

Chartered Accountant or ACMA

Exceed Rs. 10 million

Practicing chartered Accountant

Practicing Cost and Management Accountants

Regulation does not apply in case of loans does not exceed Rs 500,000


Regulation V

Current ratio to be maintained at 1:1

Current matures of long term debt not yet due for payment may be excluded from the current liabilities.

Long term debt shall be provided on a debt equity ratio of 60:40

Regulation VI

Financing Facilities Against Shares

  1. Provide unsecured credit to finance subscription toward flotation of share capital of public limited companies.
  2. Allow financing facilities, whether fund based or non-fund based, against the shares of companies not listed on the Stock Exchange.
  3. Provide loans and advances to any public limited company against the security of its own shares. The existing lending against such shares shall be regularized within 180 days of the date of issue of this circular.
  4. Provide financing against sponsor directors shares (issued in their own name or in the name of their family members) of private banks.
  5. Provide financing to any one person (whether singly or together with other family members or companies owned and controlled by him or his family members) against shares (other than the sponsor shares) of any commercial bank in excess of 5% of paid up capital.
  6. Allow financing facilities, whether fund based or non-fund based, against the shares of the companies which are not in the Central Depository System.
  7. Facilities against the shares of listed companies shall be subjected to minimum margin of 30% of its average market value of the preceding 12 months. The banks are however, free to set higher margin requirements keeping in view other factors.
  8. Banks shall continue to obtain prior clearance from the State Bank for the purchase of shares of NBFIs including Modarbas and Leasing Companies.
  9. Each bank shall furnish a statement on half yearly basis showing finances provided by them against pledged of shares latest by 20th January and 20th July of each preceding half year ( as per enclosed format ).


The system of audit in the society be made independent and its credibility be enhanced in the sense that the regulatory authorities must be made to rely on them for the purposes of the revenue collection. These audit and the accounts which are the subject matter of audit be carried out under broad based guidelines explaining situation and the related treatment. This would take the fear of the discretion of the society out of the taxation system. There has to be a single audit for all purposes. The apex tax authorities must apply their energies in developing of the undisputed laws and guidelines. Society must follow and comply the guidelines in letter and spirit and the profession must be help them achieve the objective of a beautiful tomorrow.

The implementation of the documentation must not be carried out through harsh penalties. Rather incentives for the documentation must be provided within the four corners of the law to inspire confidence of the society. The rituals of assessment like rejection of accounts, applying of arbitrary G.P. rates and harsh disallowances be discontinued in the case of the tax payers opting for the documentation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances