Pakistan Stock Exchange (PSX) has suggested that the government should work on developing the capital market through policymaking as it carries a high potential of addressing structural imbalances and can pave the way for higher economic growth.
Briefing media on the PSX’s budget proposals for fiscal year 2023-24 and the launch of a new trading system, PSX Managing Director and CEO Farrukh H Khan said on Tuesday that for the growth of economy, it was necessary to create a favourable environment through rational tax policies for the capital market.
“A broad-based capital market helps to achieve important economic and social objectives like increasing the number of taxpayers as well as saving and investment rates, and reducing wealth inequality,” Khan emphasised.
“Over the decades, (the) government has perhaps been the biggest beneficiary from it (PSX).”
A number of state-owned enterprises (SOEs) like Oil and Gas Development Company and Pakistan State Oil are listed at the PSX. The listings have enabled the companies to keep all business transactions transparent and remain well-documented. In return, the SOEs make higher profit, which goes to the government. Khan stressed that the capital market could play a significant role in tackling many of the structural imbalances that had bedeviled Pakistan’s economy over the years.
“These structural imbalances include the lack of documentation, a small tax base, low saving and investment rates.”
In fact, the imbalances can only be properly addressed by developing the capital market. To achieve this, “well thought through, balanced, regionally competitive and long-term tax policies and measures are needed,” he said.
“Tax measures are an important policy tool to increase investment and savings, and stay competitive with other markets.”
Capital markets are highly specialised and have varied and different segments, each with their own commercial imperatives that need to be fully understood before tax measures can be implemented.
Khan said the government should make tax policies compatible in terms of capital gains tax (CGT) on the capital market and real estate and property sector.
Real estate investors are enjoying lower CGT rates compared to the ones applied to the PSX. Tax rates in both markets should be same to create a level playing field.
“Any incentives to be given to the capital market will not go in vain, as they will generate revenue for the government,” the MD said. To encourage documentation of the economy, the corporate tax rate should be reduced for listed companies, by giving a tax credit of 20% of the tax payable by the firms that met the prescribed requirements including a minimum free float of 25%, he proposed.
It was proposed that the tax rate for listed small and medium enterprises (SMEs) should be lowered by giving a tax credit of 50% of the tax payable for three to four years of listing and then to 20% of the tax payable. Tax incentives would encourage companies to get listed, make their businesses transparent and documented, and become part of the formal economy, he pointed out.
Khan said the government should provide tax credit of 100% to all categories of private funds without any sunset clause. He called for restoring the tax exemption for capital gains, earlier available to the investors of private funds, or a specific rate, as provided for mutual funds, CIS and REITs (Real Estate Investment Trusts).
Published in The Express Tribune, May 24th, 2023.
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