PSX wants reduction in corporate tax, CGT

Proposes government to collect tax on ‘face value’ of bonus shares, not on market value

Salman Siddiqui May 25, 2017

KARACHI: The Pakistan Stock Exchange (PSX) has urged the federal government to bring down the corporate tax rate for listed companies and those that are willing to get listed at the bourse.

The suggestions come as part of the PSX’s proposals ahead of the budget announcement to be made on Friday.

The PSX argued that Pakistan’s corporate sector pays a high rate of tax at 38% compared to an average 24% around the globe. “The high-tax regime has played a part in creating an undocumented economy, which is equivalent to the formal one at $300 billion or higher.

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“This would simultaneously help the government enhance the regulated economy, while also helping the national exchequer collect higher tax revenues from listed-and-documented firms,” a statement of the PSX said. Insignificant tax incentives for the corporate sector have seen 106 companies (worth Rs75 billion) get delisted from the bourse in the last four years. In comparison, only 31 companies (worth Rs87 billion) got listed during the same time.

In order to encourage new listings, the Finance Act 2011 introduced 20% tax credit for the tax year in which a company opts for enlistment on the stock exchange. Currently, the same is for two years from the date of listing.

“This tax credit is very insignificant and not enough to attract new listing (documentation of the economy). Tax credit may be allowed up to five years,” the PSX said.

It is generally observed that on enlistment of companies, the profits have enhanced substantially due to effective corporate governance, better corporate disclosure and availability of additional funds.

Bonus shares

The PSX has also proposed to the federal government to collect 5% tax on the ‘face value’ of bonus shares instead of currently collecting the same 5% on ‘market value’ of bonus shares.

The acceptance of the proposal would result in bonus issuance of at least Rs50 billion per year and result in revenue collection of Rs2.5 billion.

The government has collected only Rs0.5 billion on average in the last three years with the 5% tax on ‘market value’ of bonus shares.

“The Finance Act, 2014 introduced 5% tax on the value of bonus share. The levy instead of generating more revenue drastically reduced the issuance of bonus shares and earned very little revenue,” PSX said.

Only 32 companies issued bonus shares worth Rs4.2 billion in 18 months (from July-2015 to December-2016) as compared to 71 companies issuing bonus shares worth Rs19 billion in the year (July-2013 to June-2014) prior to imposition of the tax.

The decreased issuance of bonus share has not convinced listed companies to pay a higher cash dividend, which is otherwise the general impression, the PSX said.

Capital gains tax

The stock market also proposed reducing the maximum period of holding shares to one year, instead of the current five, that entitles investors to pay zero capital gains tax.

“Short-term trading is generating about 70% of the taxes on capital gains (of the total CGT collection).”

In addition, the PSX has asked the government to collect a minimum 8% on sale of shares in less than six months and collect a maximum 10% if shares are sold between six to 12 months.

At present, there are three slabs of CGT; 15% (or 18% per non-tax filers) on disposal of shares in less than one year from time of purchase; 12.5% (16% for non-filers) for 1 to 2 years and 7.5% (11% for non-filers) for 2 to 5 years. There is zero collection on shares sold after five years.

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“CGT is not in line with the taxability on other asset class, for instance, there is no tax on gain on disposal of immovable property, if the holding period is three years or more,” it said.

The stock exchange has also urged rationalisation of taxes on derivatives/options and SMEs to increase trading activities.

“We also feel that in order to provide confidence to the investors and drive growth of capital market, a long-term taxation policy (for a minimum of 3 years) for the capital market should be announced in the forthcoming budget,” it said.

Published in The Express Tribune, May 25th, 2017.

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Nadeem jamil | 4 years ago | Reply I agree tax on bonus shares should be exempted.
rustam | 4 years ago | Reply "The PSX has also proposed to the federal government to collect 5% tax on the ‘face value’ of bonus shares instead of currently collecting the same 5% on ‘market value’ of bonus shares." Tax on the bonus shares is levied in Pakistan, although there is no gain or income to the shareholder as corresponding book value and market price of the share get diluted/reduced.Therefore, it is not a fair levy. I am surprised that PSX instead of demanding to abolish this unwarranted tax, it is talking for reduction in percentage of this tax. Can PSX cite even a single example of any country where tax is levied on bonus share? Likewise, so called associations of share investors are also silent on this unfair and unprecedented practice.
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