ACCORDING to the 2005 economic census there are 3.25 million establishments in Pakistan that are engaged in some kind of economic activity.

With a population of around 154m in 2005, if we assume that growth in business activity is the same as the population growth rate (averaging 2.69 per cent per annum from 2005 to 2018), then the total number of businesses in the country should have reached 4.39m in 2018, including 250,000 household establishments.

However, official statistics on the number of registered companies do not adequately reflect this number. This is due to the fact that a business in can be registered in a number of ways: sole proprietorships, partnerships, companies, societies, etc.

Moreover, the laws pertaining to the type and form of business are fragmented, with a number of different, and at times unregulated, forms in which businesses are being registered by entrepreneurs.

Incorporated businesses, such as limited liability companies, are regulated at the federal level by the Securities and Exchange Commission of Pakistan (SECP), and governed by the Companies Ordinance 1984 (now replaced with Companies Act 2017). Smaller unincorporated forms of businesses, such as partnerships, are regulated at the provincial level.

The available statistics on the number of companies registered under the Companies Act 2017 with the SECP indicates that a total of 93,175 companies were registered with the corporate sector regulator up to November 2018. However, it is estimated that only 45pc of these registered companies are active, while the remaining have become dormant.

The total number of businesses in the country should have reached 4.39m in 2018. However, official statistics on the number of registered companies do not adequately reflect this number

These active corporate firms contribute to around 63pc of direct and indirect taxes and approximately 75pc of corporate income tax to the national exchequer.

There are no accurate figures available for the number of unincorporated businesses, like partnerships, registered at the provincial level, with the Registrar of Firms.

Moreover, certain forms of businesses, such as sole proprietorship, have no requirement for registration with any government authority except for tax purposes and hence there is no data available for them.

Therefore, a large share of the national economy continues to remain undocumented and unregulated but is generating untaxed income. This is resulting in huge losses to the government in the shape of un-taxed business revenues.

The size of the informal economy in Pakistan is quite large as estimated in a study by M. Ali Kemal and Ahmed Waqar Qasim: 91pc of the GDP in 2007-08. This translates into informal economic activities to the tune of Rs31.3 trillion (in FY 2017-18) that go undetected.

The study further pointed out that if the underground economy in 2007-08 could have been brought into the tax net, the tax to GDP ratio could have increased to 19.6pc of GDP and the fiscal deficit 7.6pc of GDP could have been converted to a surplus of 2.7pc.

The above statistics clearly point towards the urgent need to properly document the country’s economy so that informal economic activities are reflected in the GDP and their income stream is brought into the tax net.

Moving towards mandatory registration of all types of businesses with a central registration authority is an essential reform in the medium to long term.

In this regard, cues can be taken from similar reforms implemented in other countries. For example, Malaysia has mandated business registration through the Registration of Businesses Act, 1956.

In terms of this law, all forms of business and any branches thereof need to be registered by the person responsible for the business within thirty days of the commencement of work.

The Malaysian law requires that the business registration certificate be prominently displayed at the principle place of business in order to enhance compliance.

Further, under the Companies Commission of Malaysia Act, 2001, the Companies Commission of Malaysia has been statutorily mandated to act as the registrar for incorporated and unincorporated businesses other than co-operative societies.

The practical implementation of such a centralised business registration framework in Pakistan will not be an easy task and cannot be achieved over the next 1-2 years. However, the current PTI government, which prides itself as being reform-oriented, can start this process in a phased manner, as political will is the biggest pre-requisite for initiating such reforms.

The long-term benefits of this proposal are too high to be easily ignored by the present government, especially in view of the fact that lower domestic resource mobilisation is one of the biggest constraints towards taking the economy to a higher growth trajectory.

Such a business registry can also play a pivotal role in improving the ease of doing business in the country in coming years, as it will eliminate the need for registration by a business with multiple government agencies.

It is important to point out that a central business registry is a common feature in countries that score highest on the World Bank’s Ease of Doing Business rankings.

The benefits of a central business registry will also prove beneficial for the provincial governments. The entity level information available in any such registry can be used by the provincial governments to increase their revenue base, as well as in regulation of labour and environmental standards.

The biggest foreseeable hurdle in the implementation of such a proposed mandatory business registration mechanism would be the post 18th Amendment separation of regulatory roles of the Federal and provincial governments with respect to different business types.

Presently, under the Constitution, incorporated forms of business are a Federal matter, whereas unincorporated forms of business are a provincial subject.

The forum of the Council of Common Interests can be used to persuade federating units to harmonize the business registration and regulation laws and empower the Federal to develop and maintain a central registry of all forms of businesses.

Moreover, Article 144 of the Constitution empowers the Parliament to legislate on behalf of one or more provinces provided that the respective provincial assemblies pass a resolution in this regard.

The first phase of the development of such a centralised registry can be initiated with a review of the existing laws on different forms of business registration, such as the Partnership Act, 1932, the Societies Registration Act, 1860, the Companies Act 2017, with a view to codifying them.

On the basis of this, work on drafting a new law in consultation with provinces can be started which covers all forms of business; both incorporated and unincorporated, laying down the standards of reporting proportionate to the size and risk of the business.

In parallel with the legal reforms, other supporting policies and incentives need to be put in place to ensure widespread adoption by the business community and general public, such as rationalising taxes, improving access to finance and encouraging the general public to only deal with registered businesses.

In the second phase, over the next 3- 5 years, a centralised business registry can be established on the basis of the consolidated law on business registration. This registry will maintain basic data and will assign a unique identity number to each business, akin to the Nadra database. This entity level data can then be shared with the concerned government entities.

The writer is an economist

umerkhalid@hotmail.com

Published in Dawn, The Business and Finance Weekly, March 4th, 2019