Capital markets taxation: SECP feels its role is misunderstood

Chairman says the proposal would not help money-laundering, would raise revenues.

KARACHI:

The Securities and Exchange Commission of Pakistan feels that its position in the government’s decision to grant an extension on documentation of income sources for capital markets investors has been misunderstood: the regulator says that its proposals would actually help the government raise more revenue from capital gains tax and help the long-run documentation of the economy.

“There will be no whitening of black money,” said Muhammad Ali, chairman of the SECP in an interview with The Express Tribune. “Under our proposal, much of the money that had left the markets will come back, providing more liquidity. And the capital gains tax will be automatically deducted by the National Clearing Company of Pakistan.”

The chairman seemed to feel that much of the media coverage of the SECP’s stance on this proposal had missed the critical advantages of the idea. “We will get more money into the documented economy and the capital gains taxes – which are currently not being collected – will be automatically withheld with every single transaction as it happens in real time, raising government revenues. What more do you want?”

The SECP’s proposals need the consent of the Federal Board of Revenue and the finance ministry before it can go into effect. While the finance minister had approved the SECP proposal in January, there had been some concern in some parts of the FBR that exempting stock market investors from disclosing their source of income would hamper the FBR’s own documentation and tax collection drive.

Muhammad Ali has been praised by many in Pakistan’s financial services sector as a regulator who understands the market well and has come up with sensible proposals to oversee it. It helps that he is from the Pakistani capital markets himself, having run French banking giant Credit Agricole Indosuez’s securities brokerage and investment banking arm in Pakistan for six years.

Yet much of the regulatory structure of Pakistan’s capital markets remains largely the same as it was when President Musharraf left office.

“The approval of laws we propose would help speed up the process [of reform],” said the chairman. He was careful not to blame Parliament for any delays, but seemed to indicate that there were limits to his effectiveness without legislative action.

One of the chairman’s pet projects seems to be to help Pakistan develop a larger, more liquid bond market. The Bond Automated Trading System has been revived during his tenure. Ali now wants to introduce an independent bond-pricing agency rather than relying on the Mutual Funds Association of Pakistan (Mufap) to do the job.

“There is an inherent conflict of interest since Mufap represents the asset management companies, which directly own the bonds,” he said.

Another project appears to be to introduce a more robust commodity market in the country. To this end, Muhammad Ali does not seem particularly pleased with the Pakistan Mercantile Exchange and wants to give it a run for its money.

“We have issued two more licences for commodity exchanges,” he said. “We believe that competition is healthy in the markets.”

The chairman also wants to overhaul some of the regulations on real estate investment trusts (REITs), private equity funds and venture capital funds by making it easier for asset management companies – which are currently restricted to mutual funds and individual accounts for high net-worth individuals – to get involved.

Muhammad Ali seems particularly keen on allowing micro-cap companies to raise funding, and has begun work with the three stock exchanges to introduce a special stock exchange for smaller companies, similar to the Alternative Investment Market, run by the London Stock Exchange.

Published in The Express Tribune, March 19^th, 2012.