PSX against tax-driven distortions in asset classes
A sign of the Pakistan Stock Exchange is seen on its building in Karachi, Pakistan January 11, 2016. PHOTO: REUTERS
Pakistan Stock Exchange (PSX) has submitted tax proposals to the Ministry of Finance (MoF) and the Federal Board of Revenue (FBR) for consideration in the federal budget for fiscal year 2024-25, submitting that the government should align rates of capital gains tax (CGT) on the sale of stocks with those applicable to the sale of property and real estate.
PSX said it was important to remove the tax-driven distortions amongst different asset classes to create a level playing field. Essentially, the tax on capital gains on listed securities should be uniform, in line with the tax on real estate and other classes of assets.
“Therefore, the PSX proposes that CGT rates on listed securities be brought in line with the CGT on the sale of immovable property.” Besides, the CGT on all derivatives and future contracts traded on PSX should be in line with the future commodity contracts traded at the Pakistan Mercantile Exchange (PMEX).
A review of local and international markets revealed that the cash-settled derivative contracts available on exchanges have a lower taxation rate. “Currently, all derivatives and future contracts traded on PSX are subject to higher CGT that should be aligned with the future commodity contracts traded at PMEX.”
To recall, the PSX benchmark KSE-100 index has fallen by 2.2% or 1,659 points in the past three days to a three-week low at 74,219 points on Wednesday. A leading businessmen linked the selling pressure at the PSX with the government’s consideration to increase the rate of CGT or its slabs on the sale of shares.
PSX said in a statement that the measures recommended are revenue positive and will encourage resource allocation towards productive and documented sectors of the economy. This is important for economic growth and employment generation in Pakistan, the statement read.
It urged the government to rationalise the current tax rate on dividend, as it would generate more investment in stocks and “thus more revenue for the government.”
Corporate business profits are already taxed twice – once at company level at 29% and on dividend distribution at 15%. This is in addition to the super tax up to 10% for 2023 and onwards based on the income brackets imposed through the Finance Act 2023 on high earning persons and corporates. “Any possibility of further increase in the tax rate will discourage investment in stocks which in turn will slow down business growth and industrialisation in the country.”
In the recent past, the PSX has seen a surge in its performance in response to the stability measures introduced in the macro economy. The market capitalisation has increased by almost Rs4 trillion in the outgoing year, creating a significant wealth impact in the economy.
The benchmark index crossed over 76,000 points in recent weeks, rising from the multi-year low of around 40,000 points in June 2023.
Foreign funds amounting to approximately $132 million have been invested into the country through the stock market from July 2023. “It is imperative that the Ministry of Finance and the FBR consider the proposals presented by PSX to ensure that the stock market continues to contribute towards economic growth, taxes, foreign investor inflows and documentation of the economy. This is a crucial step to ensuring the continuity of the positive momentum of the capital market and economic recovery.”
Bonus shares are capitalisation of a company’s reserves and not a profit distribution to shareholders. Hence no tax is due on such issuances. “PSX proposed that the amendment made in clause (29) of Section 2 and newly inserted Section 236(Z) of the Ordinance through Finance Act 2023 may be withdrawn.”
Published in The Express Tribune, June 6th, 2024.
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