Pakistan Stock Exchange (PSX) has called on the government to review its taxation policies for capital markets as double and triple tax are negatively impacting growth and penalising capital formation.
In its budget proposals for fiscal year 2023-24, submitted to the Ministry of Finance, the PSX recommended aligning the rates of capital gains tax (CGT) on sale of stocks with the rates of CGT on immoveable properties. It also called for giving tax relief to foreign investors to attract investment from around the globe.
The proposals include enhancing tax credit for listed small and medium enterprises (SMEs), documenting the real estate sector, eliminating the minimum tax regime for listed companies, rationalising taxes on dividends and introducing registered saving and investment accounts (RSIA) as well as individual saving accounts (ISA) to channelise “savings towards productive investments.”
Going into details, the bourse stated that profits of corporate businesses were taxed twice, “once at company levels at the rate of 29% and again at the rate of 15% at the time of dividend distribution. This is in addition to the super tax of up to 4%.”
As compared to 44% tax in case of companies, unincorporated businesses are taxed 0% to 35% in different slabs.
“This inequality in taxation is discouraging corporatisation and documentation as unincorporated businesses are subject to substantially lower taxes.”
Therefore, “restoration of exemption for inter-corporate dividend between companies eligible for group taxation under Section 59B of the Income Tax Ordinance 2001 is proposed.”
PSX emphasised that the listing of companies at the bourse helped increase their profit and prop up economic growth. To encourage listings, “there should be reduced rates of corporate tax for listed companies compared to unlisted ones.”
The average corporate tax stands at 19.52% in the Asian region compared to 29% in Pakistan. Besides, super tax of 4% has also been imposed through the Finance Act 2022.
“To encourage documentation of the economy, the corporate tax rate should be permanently lowered for listed companies, by giving tax credit of 20% of tax payment to those companies that meet the prescribed requirements including a minimum free float of 25% throughout. This will have a long-run positive effect on tax revenue,” the PSX proposed.
It recalled that during discussions regarding the federal budget for 2022-23 with the then finance minister and the Federal Board of Revenue (FBR) chairman, a consensus was developed that the tax on capital gains on listed securities should be at par with that on real estate and other asset classes to create a level playing field.
The government had adopted the mechanism in the Finance Bill 2022. “However, the Finance Act 2022…has again created such tax disparity between the securities and immovable properties.”
Currently, carry-forward losses are allowed up to the period of three years under the CGT regime. Last year and the year before, the CGT collection was a mere Rs5.6 billion and Rs8.8 billion, respectively.
“Moreover, brought-forward losses amounting to Rs281 billion are to be adjusted against future capital gains, therefore the CGT collection will continue to be negligible.”
PSX also proposed the removal of the flat CGT rate of 12.5%, applicable to the disposal of securities acquired on or before June 30, 2022.
The CGT rate for all derivatives and future contracts is proposed at 5% in line with the tax rate for commodities futures at the Pakistan Mercantile Exchange.
Furthermore, in order to attract foreign investment and to support the foreign exchange reserves, the government has recently announced a major relief for the non-resident banking companies making investment in government debt securities including treasury bills and Pakistan Investment Bonds, whereby profit on debt and capital gains from such debt instruments shall be exempted from tax for these non-resident banking companies, it stated.
The bourse also suggested that a similar incentive for the capital market would not only benefit the struggling economy, but would also help restore the local investors’ confidence, which would eventually yield a positive impact in terms of tax revenue.
“In order to attract foreign investors into the capital market, it is proposed to exempt income derived from such foreign investment from tax,” it wrote.
To recall, foreign investment has declined to $300-400 million compared to the investment of billions a few years ago.
Published in The Express Tribune, May 9th, 2023.
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