Finance Minister Miftah Ismail has agreed, in principle, to change some of the existing rules and rationalise taxes on stocks to encourage individuals and institutions to invest in productive sectors and document the economy at the Pakistan Stock Exchange (PSX).
After hosting a meeting between the finance minister and capital market stakeholders, PSX Managing Director Farrukh Khan told The Express Tribune on Wednesday that the minister had agreed to encourage state-owned enterprises (SOEs) to pay maximum dividend to shareholders, encourage state-run institutions to invest in stock market and remove discrepancies in the capital gains tax (CGT) on stocks and real estate.
“Existing rules and taxes discourage investment in documented sectors at the Pakistan Stock Exchange and encourage investment in undocumented sectors like real estate, national savings schemes and gold,” Khan pointed out.
“The emergence of issues and challenges…including in the macro economy has caused a slump in market capitalisation to just over Rs7 trillion compared to over Rs10 trillion in the past and volumes have also dropped to low levels.”
At present, while some of the SOEs are extremely profitable, their payout ratio is a meagre 18%. Meeting participants stressed that the ratio should be raised to 50%.
Given the imminent board meetings, there was urgency for guidance to the SOEs to declare healthy dividends, which would result in dividend income and 15% taxation revenue for the government, giving it fiscal space for reducing circular debt.
Minister Ismail gave directives for immediately calling a meeting with the authorities concerned (including the Ministry of Petroleum) to look into the matter.
“Let’s make a strategy. It (increased dividend) is a win-win situation for everyone including the government,” Khan cited Ismail as saying at a meeting held at the PSX on Friday (August 5).
Meeting participants pointed out that the market valuations presented compelling opportunities for companies like State Life Insurance Corporation (SLIC) and Employees Old-age Benefits Institution (EOBI) to invest in listed equities for the benefit of their policyholders and pensioners.
Khan said the minister directed the Federal Board of Revenue (FBR) “to immediately remove distortion and discrepancies in the capital gains tax on stocks and real estate”.
The PSX MD said the government had given tax (CGT) incentives on only those stocks that were bought on or after July 1, 2022 while the investors were forced to pay a higher CGT on shares bought earlier.
Compared to this, equal CGT incentives are offered to all sellers of plots in the real estate sector whether the property was bought on July 1, 2022, before or after that.
He recalled that the government had agreed to equally treat the CGT on stocks and immoveable properties in the budget “but the discrepancies are still there”.
“The minister noted this (CGT discrimination)…and asked the department concerned to remove the discrepancies,” Khan quoting the minister as saying at the meeting.
“Right now you have both KYC (know your customers) and tax-driven distortion between asset classes,” Khan said, adding when people come to invest in “documented” and “productive sectors” at PSX they are asked tens of questions, while they are asked no questions on making such an investment in undocumented sectors including real-estate, national saving schemes and gold.
“How does it make sense that if you are encouraging productive sectors to document the economy, but the policies you devise work in the opposite direction.”
In terms of the macroeconomic situation prevailing in the country, the participants emphasised that movements in the rupee-dollar exchange rate have been too volatile and changes to this effect should be gradual. With regard to the central bank’s key policy rate, it was pointed out that interest rates in almost all countries of the world are negative and that this must be taken into account in the context of interest rates in Pakistan.
On his part, the Finance Minister clarified that “Macroeconomic stability was forthcoming with the IMF programme resuming before end of August as all conditionalities have been met. Furthermore, the balance of payments position is now well under control. With increased hydel power, lower energy demand, and lower oil prices, Pakistan may even have a balance of payments surplus in coming months”. Regarding tax measures, the minister stated, “Fiscal discipline will be strictly followed and all additional expenditures will be fully funded by tax measures.”
Published in The Express Tribune, August 11th, 2022.
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