Revenue-neutral incentives proposed for capital market growth

KARACHI: Pakistan Stock Exchange (PSX) on Wednesday proposed revenue-neutral incentives for the upcoming budget to increase the size and depth of the capital market amid the new influenza that mauled the already fragile economy and obstructed its recovery.

Market capitalisation that rose to around Rs8 trillion earlier this year spiraled down to Rs5.7 trillion on April 1 as a result of coronavirus-driven global downturn.

“The core principle of our proposal is aimed at increasing the size and depth of the capital market by incentivizing listing of new capital without impacting government revenues,” PSX said in a document. “Most proposals are revenue neutral and, in cases, likely to increase the government’s revenue.”

PSX asked the government to remove disincentives, incidence of double and multiple taxations that are penalizing capital formation. The budget proposals focus on some impediments and disincentives that have crept into the development of the capital market and the documented corporate sectors.

“The capital market has immense potential for growth and with introduction of advanced products and our investment in world-class trading infrastructure, PSX remains committed to building the capacity and trust for capital formation and financial inclusion,” it said. “As much as favourable tax treatment, investors need stable and predictable tax environment. Government must consider adopting long-term measures to promote savings and investment and development of capital market.”

A mechanism and regulatory structure needs to be launched for channeling savings towards productive investments. Registered savings and investment accounts would help in bringing capital from large undocumented sector into formal economy. The government should ensure amnesty to the contributions.

The government was asked to eliminate/reduce general sales tax for next two years or at minimum align rates of capital gains tax on disposal of securities with other regional exchanges. The capital gains tax on disposal of equity securities of non-residents needs to be aligned with that of debt securities for non-resident companies.

The government was advised to allow carry-forward of losses, for six years rather than for three years. Transfer of portfolio – basket of securities – from authorised participants to exchange traded funds (ETFs) should not be treated as disposal.

PSX proposed the government to reduce withholding tax rate on the gross income of margin financing transactions to 2.5 percent from 10 percent. “The tax reduction would help in developing the market and increasing tax collection by the Federal Board of Revenue because 10 years back the size of similar market for margin transactions was several times higher,” it said. Government should introduce a mechanism to remove the double taxation of company’s profits in a way that the effective tax rate on dividends is on par with profit on debt. It should rationalise tax on dividends to make them equal to the tax rate on profit from debt and there should be no withholding tax on dividends up to Rs100,000 per annum.

The tax rate should permanently be lowered for listed companies by giving tax credit of 20 percent of tax payable for companies that meet the prescribed requirements, including a minimum free float of 25 percent throughout.

The government was proposed to give tax credit of 50 percent of tax payable to encourage small and medium enterprises to get listed on the stock exchange.

Currently, the tax credit is given for four years from the date of listing, subject to a condition that for the first two years the tax credit should be 20 percent of the tax payable and 10 percent for the last two years.

“Government must remove away from short-term measures and frequent changes to tax treatment and adopt long-term measures to promote savings and investment and development of the capital market,” PSX said.

PSX further advised the government to start funding its pension liabilities to avert a future pension crisis and encourage capital formation. “An adequately funded pension scheme would offer old age benefits to retired employees of public sector enterprises and government workers without putting burden on government budget,” it said.