Due to the current regulatory environment, it is not easy for entrepreneurs to do business in Pakistan. One of the biggest pain points for doing business currently is taxation.
This was stated in a joint report of the World Bank (WB) and Invest2Innovate’s Pakistan Startup Ecosystem Report 2019.
The report stated that issues such as opening a bank account, receiving credit, paying taxes, enforcing contracts, etc, still need to be dealt with. There is a lack of an efficient taxation process which saves time and resources for entrepreneurs and investors.
World Bank’s Country Director for Pakistan Illango Patchamuthu, while sharing the report on social media, tweeted,
Old & tedious procedures barred the entrepreneur’s way in successfully Trading Across Borders – till the Reformer brought in the reforms to make this integral part of #DoingBiz a much easier, less costly & time-intensive procedure!
According to the report, in 2019 the time required to start a business in Pakistan was reduced by three days while the time required to register a property was reduced by 13 days.
Another important aspect of taxation is the difference among provinces owing to federal taxes and provincial taxes. Each province has its own revenue authority that administers sales tax on services and other provincial duties. The recent federal tax exemption for tech startups is only applicable at the federal level, many perceived it as an all-round exception.
This exemption (from paying Corporate Income Tax) means that startups in different provinces are paying other types of taxes such as (GST, property taxes, Provincial Sales Tax, etc.) and that too at different rates.
Additionally, startups are currently taxed on revenue rather than profits which creates a common misconception that startups do not qualify for corporate income tax because they are not profitable up until a certain point in their lifecycle.
The government should to not only make the regulatory processes simpler but also focus on creating a better user experience for entrepreneurs; i.e. a one-window solution, says the report.
Startup Ecosystem’s Growth
While Pakistan’s digital startup landscape has grown significantly in the past seven years, the ecosystem has its share of challenges, particularly when it comes to regulations, access to early-stage capital, and the gender gap in the entrepreneurship space.
Other than that, the investors point to unfavorable policies and regulations as a major obstacle for their activities in the Pakistan startup ecosystem.
Currently, there are 20 formal investors in Pakistan and many of these cater to startups ranging from pre-seed to pre Series-A stages. Despite this notable increase in activity and players, there are still a number of challenges that make it difficult for early-stage firms to grow and succeed in Pakistan.
Comparison With The Neighbors
Over the past five years, (2015-19), there were a total of 101 venture capital deals of Pakistan-based companies worth over $165 million which were raised by 82 companies. While this is encouraging, Pakistan still has a long way to go compared to its neighbors in South Asia. Based on a score given to the number of venture capital deals per year in 2019, Pakistan ranked at 72, which was below India (30) and Sri Lanka (45) but was higher than Bangladesh (73).
While local venture capital funds are not incentivized to invest their funds inside Pakistan, foreign investors also need incentives to enter and invest in startups in the country. This, in addition to the stringency and complexity of the regulatory processes, poses a serious challenge to all stakeholders in the ecosystem.
Business Environment Needs to Be Improved
The report recommended that the government needs to continue to improve the business environment, such as making doing business less cumbersome for investors and startups.
Improving fund legislation and compliance as well as registration for startups is key. Pakistan’s government can play a strong role in providing high-risk no-return capital to startups to reduce the pre-seed and early-stage gap and mitigate risk for investors and to help bring in private sector investors.
Supporting players need to customize their curriculum keeping local realities in mind and focusing on industry-specific mentor matching. A one-window operation for startups to register their businesses and consolidate compliance requirements could avoid delays and additional costs.
The report underscored the need for improving the current regulatory environment for doing business to help startups and investors alike. The government can also do more to improve the environment for local venture capital funds. It can iterate on the current private funds’ legislation to make it more flexible and cost-effective for venture capital funds to set up inside the country and run their operations seamlessly.