UNIT 7: BUSINESS — CONCEPT, EVOLUTION, TYPES, AND AUXILIARIES

Learning Objectives

After completing this unit, students will be able to:

• Define business and explain its essential characteristics and economic importance.
• Trace the historical evolution of business from the barter system to modern digital commerce.
• Classify business activities into Industry (Primary, Secondary, Tertiary/Service) and Commerce (Trade and Auxiliaries/Aids to Trade).
• Differentiate between Home (Internal) Trade and Foreign (International) Trade.
• Understand the basic concept of Business Taxation in Nepal (PAN, Direct vs. Indirect Tax, and VAT fundamentals).

7.1 Meaning, Definition, and Characteristics of Business

Literally, the word Business means the state of “being busy.” In economics and accounting, however, not every human activity is business. Cooking food for one’s own family is a non-economic activity driven by love and affection, whereas cooking and selling food in a restaurant for money is an economic business activity.

Business is defined as any lawful, regular human economic activity directed toward producing, purchasing, and selling goods and services with the primary objective of earning profit and acquiring wealth through customer satisfaction.

“Business may be defined as a human activity directed towards producing or acquiring wealth through buying and selling of goods.” — L.H. Haney
“The whole complex field of commerce and industry—the basic industries, processing and manufacturing industries, and the network of ancillary services: distribution, banking, insurance, transport, and so on—which serve and interpenetrate the world of business as a whole, are business.” — F.C. Hooper

Essential Characteristics (Features) of Business

1. Human Economic Activity: Performed by human beings to earn a livelihood and create monetary wealth (excludes charity or hobbies).
2. Production and Exchange of Goods and Services: Involves either manufacturing/extracting goods (Industry) or buying and selling goods/services for value (Commerce). Self-consumption is not business.
3. Regularity and Continuity in Dealings: A single isolated transaction (such as selling one’s old personal motorcycle) is not business; buying and selling motorcycles regularly in a showroom is business.
4. Profit Motive: The primary driving force of every business is earning a surplus of revenue over cost (profit) for survival and growth.
5. Risk and Uncertainty: Every business faces uncertainties such as changes in customer taste, price fluctuations, competition, natural disasters, and fire, meaning loss is always possible.
6. Creation of Utilities and Customer Satisfaction: Business creates form utility (through manufacturing), place utility (through transport), and time utility (through warehousing) to satisfy human wants.
7. Legality: The activity must be lawful under the laws of the country (smuggling, black-marketing, or gambling is not legitimate business).

7.2 Classification of Business Activities: Industry and Commerce

All business activities are classified into two broad branches: 1. Industry and 2. Commerce.

1. Industry

Industry refers to economic activities connected with the extraction, reproduction, conversion, processing, and construction of raw materials into finished or semi-finished goods (creation of form utility):

• Primary Industry:
  • Extractive Industry: Extracting natural resources from the earth, water, or air (e.g., mining, quarrying, fishing, timber collection, herb gathering in Nepal’s Himalayas).
  • Genetic Industry: Breeding and multiplying plants and animals for sale (e.g., poultry farming, cattle breeding, pisciculture/fish farming, plant nurseries, horticulture).
• Secondary Industry:
  • Manufacturing Industry: Converting raw materials into finished products using machines and labor—including Analytical (crude oil into petrol/diesel), Synthetical (limestone, gypsum, and coal into cement), Processing (sugarcane into sugar, tea leaves into orthodox tea, jute into sacks), and Assembling (assembling parts into computers, televisions, or vehicles).
  • Construction Industry: Building physical infrastructure using manufactured materials (e.g., constructing hydropower dams, roads, bridges, tunnels, and commercial buildings).
• Tertiary / Service Industry: Providing intangible commercial services such as hospitality/hotels, tourism and trekking agencies, aviation, hospitals, and software development.

2. Commerce

Commerce encompasses all activities that remove the hindrances of person, place, time, finance, risk, and information in transferring goods from the place of production (factories/farms) to the ultimate consumers. Commerce consists of two parts: (A) Trade and (B) Auxiliaries (Aids) to Trade:

Commerce = Trade + Auxiliaries to Trade

(A) Trade

Trade means the actual buying and selling (exchange) of goods and services for money or money’s worth between buyers and sellers. Trade is classified into:

1. Home / Internal / Domestic Trade: Buying and selling of goods within the geographical boundaries of the same country (e.g., tea produced in Ilam sold in Kathmandu or Pokhara), settled in domestic currency (NPR):
   • Wholesale Trade: Buying goods in large bulk quantities directly from manufacturers/producers and selling in smaller lots to retailers.
   • Retail Trade: Buying goods in small quantities from wholesalers and selling directly to ultimate consumers in local shops, department stores, or supermarkets.
2. Foreign / International / External Trade: Buying and selling of goods and services across national borders between two or more countries, involving foreign currency, customs duties, and Letters of Credit (L/C):
   • Import Trade: Purchasing goods from a foreign country into one’s own country (e.g., Nepal importing petroleum products from India or machinery from China/Japan).
   • Export Trade: Selling domestically produced goods to foreign countries (e.g., Nepal exporting hand-knotted carpets, pashmina, cardamom, orthodox tea, and electricity).
   • Entrepôt / Re-export Trade: Importing goods from one country not for domestic consumption, but for processing/re-packing and exporting them to a third country (e.g., a Singapore or Dubai trading hub importing goods from Country A and exporting them to Country B).

(B) Auxiliaries (Aids) to Trade

Activities that facilitate smooth trade by removing specific commercial hindrances:

7.3 Fundamentals of Business Taxation in Nepal

Every registered business in Nepal contributes to national revenue through taxation administered by the Inland Revenue Department (IRD):

• Permanent Account Number (PAN): A unique 9-digit taxpayer identification number issued by the IRD that is mandatory for every business, company, and salaried professional in Nepal.
• Direct Tax: A tax whose incidence and burden fall on the very same person or business—such as Corporate Income Tax, Individual/Proprietorship Income Tax, Remuneration Tax, and Property/Vehicle Tax.
• Indirect Tax: A tax levied on goods and services whose burden is shifted to the final consumer—such as Value Added Tax (VAT — standard rate 13% in Nepal), Excise Duty, and Customs Duty.

Things to Remember (Unit 7 Summary)

• Business combines Industry (production of goods and services) and Commerce (distribution of goods and services).
• Commerce equals Trade (Home Trade + Foreign Trade) plus Auxiliaries to Trade (Transport, Warehousing, Banking, Insurance, and Advertising).
• Home Trade includes Wholesale and Retail trade; Foreign Trade includes Import, Export, and Entrepôt trade.

Exercises (Unit 7)

A. Very Short Answer Questions (1 Mark Each)

1. Define business in one sentence.
2. What is meant by Entrepôt Trade?
3. Write the equation connecting Commerce, Trade, and Auxiliaries to Trade.
4. Which hindrance of trade is removed by (a) Warehousing and (b) Insurance?
5. Write the full form of PAN and VAT, and state the standard rate of VAT in Nepal.

B. Short Answer Questions (4 Marks Each)

1. Explain any five essential characteristics of business.
2. Differentiate between Industry, Commerce, and Trade.
3. Distinguish between Home Trade and Foreign Trade on any four bases.

C. Long Analytical Questions (8 Marks Each)

1. What is meant by Auxiliaries to Trade? Explain how transportation, warehousing, banking, insurance, and advertising help in the smooth operation of commerce.

Worked answers to these exercises are in Unit 7 Solutions.