PSX presents proposals for economic growth

KARACHI: The Pakistan Stock Exchange (PSX) has submitted a series of important tax proposals to the Ministry of Finance and the Federal Board of Revenue (FBR) for consideration in the federal budget for FY2024-25.

The measures recommended are revenue-positive and will encourage resource allocation towards the productive and documented sectors of the economy. This is important for economic growth and employment generation in Pakistan, said a spokesperson of the PSX on Wednesday.

The PSX has recently seen an upsurge in its performance in response to the stability measures introduced in the macroeconomy. Market capitalization has increased by almost Rs4 trillion in the outgoing year, creating a significant wealth impact in the economy. Foreign inflows amounting to approximately $132 million have been invested into the country through the stock market from July 2023.

The PSX emphasizes that the government prioritize the comprehensive documentation of all economic activities. Capital markets are among the most documented sectors of the economy. A broad-based capital market supports key economic and social objectives, such as increasing the number of taxpayers, boosting savings and investment rates, and reducing wealth inequality. To meet these objectives, investors need favourable and stable tax treatment.

It proposes to align the rates of capital gains tax (CGT) on the disposal of listed securities with the rates of CGT on the sale of immovable property: It is important to remove tax-driven distortions among different asset classes to create a level playing field. Essentially, tax on capital gains on listed securities should be uniform with that on real estate and other classes of assets.

It also says that CGT on all derivatives and futures contracts traded on the PSX be taxed in line with future commodity contracts traded at PMEX. The review of local and international markets revealed that cash settled derivative contracts available on exchanges have a lower taxation rate.

The PSX says that tax rate on dividends be rationalized as it would generate more investment in stocks and thus more revenue for the government. As it is, corporate business profits are already taxed twice. Once at the company level at 29 per cent and then on dividend distribution at 15 per cent. This is in addition to super tax of up to 10 per cent for the year 2023 and onwards based on income brackets imposed through the Finance Act 2023 on high-earning persons and corporates.

Any possibility of further increase in the said tax rate will be confiscatory in nature and will discourage investment instocks which in turn will slow down business growth and industrialization in the country.

Bonus shares are capitalization of a company’s reserves and not a profit distribution to shareholders. Hence no tax is due on such issuances. Therefore, the PSX proposed that the amendment made in Clause29 of Section 2 and newly inserted Section 236Z of the ordinance through the Finance Act 2023 may be withdrawn.

REITs are an ideal instrument to document and help develop the real-estate sector, a priority of the government. They also allow smaller investors to gain exposure to the real-estate sector, which is a major investment avenue in Pakistan albeit undocumented. REITs can prove to be an effective tool in bringing this sector in the tax net and encourage documentation. The PSX proposes to exempt advance tax on property transfers to/from a REIT scheme.

Until June 2020, under Clause 103C of the Second Schedule, the dividend income derived by a company was exempt if the recipient of the dividend for the tax year was eligible for Group Relief u/s 59B. The said clause was omitted by the Finance Act 2021. This, according to the PSX, discourages the formation of efficient group structures and large-scale companies that can compete regionally and globally.

The PSX proposes to restore such exemption on inter-corporate dividends between companies eligible for group taxation. To encourage companies to engage in an IPO and list on the exchange, tax rates be rationalized vis-a-vis unlisted companies. Companies in the Asian region are taxed at 19.8 per cent whereas in Pakistan the corporate tax rate is 39 per cent including super tax. In this context, it is proposed that the rate of tax for all listed companies be permanently lowered by giving a tax credit of 20 per cent that meet the prescribed requirements including a minimum free float of 25 per cent.

Per the PSX, this will result in higher tax revenue from listed companies along with increased documentation and transparency once listed, as well as higher revenue from CGT. Tax credits are essential for small savers, especially the salaried class, to promote long-term savings for their retirement and other life goals. These savings are channelized towards the stock market and government securities. Withdrawal under the Finance Act 2022 of tax credits available to individual investors for investment in new shares, mutual funds, sukuk, and life insurance policies has diverted public funds towards undocumented sectors.