Restoring confidence: Pakistan Stock Exchange seeks tax incentives

PSX aims to restore investors’ confidence, mobilise new investment

KARACHI: Pakistan Stock Exchange (PSX) - where listed firms lost over one-fourth or a cumulative Rs2.3 trillion (over $14 billion) of their market value primarily due to the coronavirus pandemic - has sought a relief package from the government to restore investor confidence, mobilise new investment and sail through testing times.

The stock market has sought new investment into shares from government’s pension funds and tax incentives to encourage new listings as well as reduce the cost of shareholding and trading for shareholders.

“Pakistan’s capital market saw robust growth over the years in terms of market capitalisation, which was around Rs8 trillion ($49.5 billion) on January 30, 2020 but as a result of global downturn due to the coronavirus, the market capitalisation spiralled downwards to around Rs5.7 trillion ($35.25 billion) on April 1, 2020,” PSX said in a set of budget proposals for 2020-21 sent to the finance ministry. The government is expected to announce the budget in the first week of June for the next fiscal year starting July 1.

Pension funds

PSX said the government should form pension funds for its retiring employees, whose life expectancy rate was on the rise, rather than financing their pensions from future tax revenues. The pension funds should invest in different assets, including PSX, and pay pensions from the earnings to be generated through the investment.

“The government should start funding its pension liabilities to avert a future pension crisis and encourage capital formation. An adequately funded pension scheme would offer old-age benefits to retired employees of public-sector enterprises and government workers, without putting burden on the annual budget. “Furthermore, it is recommended that a certain percentage of the funded pension scheme be invested in capital markets,” PSX said in the budget proposals.

Governments in various countries have actively worked to provide financial security for their aging population by maintaining adequately funded pension funds. These pension funds invest in a diversified range of global assets including equities, bonds, mutual funds, exchange-traded funds, and even real estate, infrastructure and alternative assets, it said.

Tax incentives for investment

The stock market proposed that the government should eliminate the capital gains tax (CGT) - tax on gains in the share price - for the next one to two years or reduce the tax rate from the existing 15%.

PSX proposed 10% CGT on shares to be sold within one year from the time of purchase. The rate should be zero if shareholders sell the securities any time after one year, it said.

The government introduced the tax to encourage long-term investment in 2011. It set different tax rates for different shareholding periods in different years.

Besides, the stock market called for increasing the period of adjusting losses on sales to six years from the current three years.

The PSX also proposed to align the CGT rate with government debt securities for overseas investors.

“In order to attract foreign investment in the capital market, it is essential to provide a level playing field for such investors. At present, the capital gains tax on equity securities is higher for non-residents than the capital gains tax in the debt market for non-resident companies having no permanent establishment in Pakistan,” PSX said.

Tax incentives for listed firms

The stock market sought tax incentives to encourage new companies to offer their shares to the general public through listing at PSX and persuade the existing listed firms not to get delisted.

PSX proposed 20% tax credit for new and existing listed firms on a permanent basis, subject to their minimum free float (shares available for trade) always at 25%.

Currently, the tax credit is given for four years from the date of listing, subject to the condition that for the first two tax years the tax credit will be 20% of the tax payable and 10% for the last two tax years.

PSX listed 24 new companies (market capitalisation Rs62.20 billion) and delisted 42 companies (Rs12.97 billion) in the past five years till December 2019. The stock market proposed that double taxation on profit should be done away with as first the tax was imposed on profit at the corporate level and then when listed firms distributed the profit to shareholders in the form of dividend. 

Published in The Express Tribune, April 30^th, 2020.

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