ISLAMABAD: The Federal Board of Revenue (FBR) is seriously considering the budget proposals of the Securities and Exchange Commission of Pakistan (SECP) to grant tax credit to private funds, restoration of tax credit on enlistment, non-applicability of capital gains tax (CGT) on foreigners, align rates of CGT on disposal of securities with other regional exchanges and documentation of real estate sector through the real estate investment trusts (REITs).
In this regard, the FBR has received the budget proposals of the SECP for consideration in the next fiscal budget.
“The viable budget proposals would be incorporated in the Finance Bill 2022,” officials engaged in budget preparation exercise told Business Recorder.
The SECP has proposed to align rates of CGT on with other regional exchanges and OECD countries and with the rates of CGT on sale of immovable property. The tax treatment of capital gains and dividends favours investment in fixed income and real estate, discouraging flow of capital into productive areas.
The CGT in Pakistan is now higher than most regional countries and does not encourage long term savings and investment. This will encourage documentation of real estate activity, and lead to an easing of speculative pressure on real estate property prices in Pakistan where much of the undocumented wealth has been currently flowing.
According to the SECP’s budget proposals, as the REIT sector has started to grow, the sunset clause may be removed to boost investor confidence and increase number of REITs in Pakistan. The FBR should also exempt advance tax on property transfers to and from a REIT Scheme.
The foreigners and non-resident Pakistanis who do not have any other source of income in Pakistan might only be making capital gains from investment in the capital market, where the tax is deducted at source by NCCPL. Hence, payment of an additional 100% tax for not being in the active taxpayer list (ATL) may not be applicable for such investors.
The SECP has also proposed to bring Alternative Corporate Tax (ACT) treatment for non-banking finance companies (NBFCs) at par with banks. The existing provision creates an anomaly by exempting Alternate Corporate Tax from banks which are also engaged in leasing business while NBFCs engaged in the same business are subject to charge of ACT. This provision is discriminatory in nature.
Due to competition from the commercial banks which are also engaged in leasing, the number of leasing companies has shrunk from 39 to 3 active leasing companies.
The ACT can prove to be the last straw on the camel’s back for the leasing companies. In case of closure of these companies due to tax discrimination, the contribution to revenue made by the leasing companies to the exchequer would be lost. The SECP has strongly proposed that the rate of tax for companies to be brought at par with individuals/ AOPs or dividend tax on small companies to be removed.
The corporate businesses profits are taxed twice: once at company level @ 29% and on dividend distribution @15%. As compared to 44% of total tax in case of companies, unincorporated businesses are being taxed from 0% to 35% in slabs. This inequity in taxation is discouraging corporatization and documentation as unincorporated businesses are subject to substantially lower taxes. It is recommended that taxation of incorporated businesses, if not incentivized at the minimum provide a level playing field for incorporated and other business.
Copyright Business Recorder, 2022