SECP proposes new incentives to Shariah compliant companies

Securities and Exchange Commission of Pakistan (SECP) has strongly proposed new incentives to Shariah compliant companies to encourage listing on Pakistan Stock Exchange (PSX) in coming budget (2018-19). According to the SECP's budget proposals for 2018-19, an additional tax credit equal to 30 percent of tax payable is proposed for new listings of Shariah compliant companies.
Where a taxpayer being a Shariah compliant company lists on a licensed securities exchange in Pakistan, in addition to the tax credit as given in sub-section (1), an additional tax credit equal to 10 percent of tax payable shall also be allowed for the tax year in which the said company is listed and for the following tax year, SECP proposed.
The impact of proposal is that it would lead to development of Shariah compliant capital market which will lead to equitable distribution of wealth and income shall lead to implementation of equity and justice in economy. It shall provide more Shariah compliant avenues of investment to investors and employment generation in the respective sectors will also increase the tax revenue.
It will attract capital inflows from brother Islamic countries who will be interested in investing in shariah compliant avenues and help in capital formation in the country. It will help to develop Islamic capital market in line with Government policy incentivizing the shariah compliant companies for listing; develop broad based shariah compliant capital market and will provide more shariah compliant avenues of investment.
It has been proposed reduced rate of tax for Shariah compliant companies (Second schedule, Part II, Sub- clause (188) of ITO). It would result in development of Shariah compliant capital market which will lead to equitable distribution of wealth and income, lead to implementation of equity and justice in economy, provide more shariah compliant avenues of investment to investors and employment generation in the respective sectors will also increase the tax revenue.
It will attract capital inflows from brother Islamic countries who will be interested in investing in shariah compliant avenues and help in capital formation in the country. The condition of five years consecutive dividend payment seems to be stringent. The proposal would incentivize existing companies to move towards shariah compliance for new listing of shariah compliant companies. This will improve shariah compliant avenues of investment for investors.
SECP proposed that small company means a company registered before, on or after the first day of July, 2005, under Companies Act, 2017, which, has paid up capital plus undistributed reserves not exceeding fifty million rupees; has employees not exceeding two hundred and fifty any time during the year; has annual turnover not exceeding two hundred and fifty million rupees and is not formed by the splitting up or the reconstitution of company already in existence.
There is a disparity in the small companies due to the date of corporatization will be removed. A positive impact on incorporated and more companies would come under the purview of a documented sector. The existing definition of a small company discriminates between small companies incorporated before, on and after the specified date of July 1, 2005. Different rates on corporate profits on the basis of period of incorporation are not only inexplicable, but also discriminatory vis-à-vis small companies incorporated before and after the cut-off date, SECP added.
Referring to the Corporate Income Tax rate for small companies, SECP said that Schedule I, Part I, Division II of Income Tax Ordinance, "2001 -Corporate Income Tax rate for small companies is flat ie @25 percent as compared to AOPs which enjoy tax slabs based on taxable income. It is proposed that Tax slabs V' may be introduced for small companies similar like AOPs with the taxable income ranging from Rs 400,000 to Rs 2,500,000 and above and effective tax rate ranging from 1 percent to 20 percent maximum.
Moreover, the tax rates for other companies should be further reduced to 25 percent. The small companies with be treated at par with AOPs/ Individuals and more companies. The companies will be attracted towards corporatization. The proposal would have a positive impact on incorporating with more companies to come under the purview of a documented sector.
The major hurdle in corporatization is higher tax rates including the small companies paying tax @ 25 percent of taxable income. In comparison to AOPs, different tax slabs are available for low income groups enjoy lower corporate tax rates.
To increase corporatization and provide incentives to small companies and to reduce imparity between the AOPs and companies, tax slabs may be introduced and the maximum tax rate fixed at 20 percent. The high tax rate is discouraging documentation of economy, SECP added. The SECP's another proposal is related to the Minimum tax on the income of certain persons.
The SECP proposed that minimum tax on the income of certain persons. This section shall apply to a resident company (except a small company as defined in Section 2 having turnover not exceeding ten million rupees or above), an individual (having turnover of ten million rupees or above in the tax year 2017 or in any subsequent tax year) and an association of persons (having turnover of ten million rupees or above in the tax year 2017 or in any subsequent tax year).
The impact of the proposal is that the small companies with be treated at par with AOPs/Individuals and facilitate small companies in ease of doing business. It shall bring the small company at par with an individual and AOP Beneficial for small company to conduct business, SECP added.
The SECP has further proposed that the individuals and AOPs are acting as withholding agents whose turnover is Rs 50 million or above whereas no threshold is available for companies and all companies including small companies are acting as withholding agents.
Description of proposals revealed that the "Prescribed person" would means: Federal Government; a company other than a small company having turnover of fifty million rupees or above in the tax year 2019 or in any subsequent year; an association of persons constituted by, or under law; a non-profit organization; a foreign contractor or consultant; (f) a consortium or joint venture; an exporter or an export house for the purpose of subsection (2); an association of persons, having turnover of fifty million rupees or above in tax year 2007 or in any subsequent tax year; an individual, having turnover of fifty million rupees or above in the tax year 2009 or in any subsequent year and a person registered under the Sales Tax Act, 1990.
The impact of the proposal is that the small companies with be treated at par with AOPs/Individuals and facilitate small companies in ease of doing business. It shall bring the small company at par with an individual/AOP and it would be beneficial for small company to conduct business, SECP added.