ISLAMABAD: Pakistan Stock Exchange Limited (PSX) has strongly proposed to digitize a huge portion of cash transactions in Pakistan and align the rates of capital gains tax (CGT) on disposal of securities with the rates of the CGT on the sale of immovable properties in the next federal budget (2023-24).
According to the budget proposals of the PSX for 2023-24 submitted to the Ministry of Finance, the PSX has proposed that the CGT rates on listed securities should be brought in line with the CGT on the sale of immovable properties.
This is essential to eliminate the tax-driven distortion between different asset classes. Moreover, CGT on all derivatives and future contracts traded on the PSX to be taxed in line with future commodity contracts traded at the PMEX.
In order to attract and encourage foreign investment into capital market, it has been proposed to offer tax relief to foreign investors in terms of exemption of capital gains and dividends earned on such investment, in line with similar tax relief offered for investment in government securities.
The tax exemption on inter-corporate dividends between companies eligible for group taxation should be restored, it proposed.
The PSX observed that the core principle of the proposals is aimed at increasing the size and depth of the capital market by incentivizing new listings and increasing the investor base, without impacting government revenues.
All the proposals essentially focus on impediments and disincentives that are negatively impacting the development of the capital market, as well as the documented corporate sector.
The recommendations are primarily designed to remove the disincentives, and the incidence of double, and at times multiple, taxation that are penalizing capital formation, which is essential for our corporate sector to be able to compete effectively in the world. Most proposals are revenue neutral, and in many cases, likely to increase the government’s revenue.
PSX believed that implementation of these proposals will greatly help in improving the saving rate, encourage investment, increase tax revenue, and contribute to economic growth and lower wealth inequality in Pakistan.
Hence, it is important that tax policies and measures are reviewed regularly, with input from specialist stakeholders, so that debt and equity markets, commodity futures, mutual funds, REITs, corporate and insurance sector, amongst others, can grow successfully.
The development of these important sectors is a prerequisite for the growth of a modern economy and will contribute greatly to the documentation and growth of tax revenue in Pakistan.
As much as favourable tax treatment, investors need a stable and predictable tax environment. The government must consider adopting long-term measures to promote savings and investment and development of the capital market, it maintained.
The PSX has also submitted proposals relating to the taxation of the capital gains on disposal of securities. It is proposed that an explanation be added under section 37A of the Income Tax Ordinance 2001 to clarify that, the share of a company, disposed off in a tax year for which the company has status of a public company, “becomes a security”, with effect from the date of acquisition, irrespective of the status of the said company, at the time of the acquisition of the shares.
It is proposed that the proviso added under sub-section 1 of section 37A be revised to exclude taxation of offer of sales at the time of new listing, PSX proposed.
In order to encourage small and medium enterprises to get listed on the SME Board, it is proposed that the rate of tax for such listed SMS companies be lowered by giving tax credit of 50 percent of the tax payable for 3-4 years and 20 percent onwards of the tax payable, it proposed.
PSX further proposed to reinstate section 62 of the Income Tax Ordinance 2001 which was removed in the federal budget (2022-23) to promote savings for the taxpayers with no major impact on the revenue.
It has also been proposed to rationalize the current tax rates on dividends and also on companies listed on stock exchange.
The PSX has also informed the Federal Board of Revenue (FBR) that the government’s first and foremost role is in comprehensively documenting all economic activity in the country.
The financial sector including the capital markets are few of the well documented sectors in the economy, along with companies listed on the stock exchange.
At the same time, whether it is rest of the service and trade sector, the real estate sector, the agricultural sector — which together constitute the bulk of GDP — all have to be documented in order to have a realistic picture of actual economic activity and the taxation potential therein.
Unless this is done, fiscal deficits will remain the bane of economic development, holding back the country’s progress.
Concurrently, in order to support the documentation drive, digitization of the payment system is a must in today’s world. Estimates of the cash based economy range from 35 percent to 50 percent of GDP.
Technology is now available to digitize a huge portion of these cash transactions and thus allow for proper assessment of the economic activity pool.
It is therefore imperative that the government devise a policy for comprehensively digitizing the payment system and provide incentives to the private sector to rapidly adopt it, PSX proposed.
Finally, in order to fashion a proper policy, appropriate data collection methodology and data analytics expertise is imperative.
In this regard, it is recommended that the Federal Bureau of Statistics be made into an autonomous body with sufficient resources, powers and accountability to the parliament to provide independent surveys, statistical studies and assessments based on global best practices.
Unless data integrity is established, policies based on flawed data and estimates thereof will not achieve desired objectives.
The PSX added that the fiscal discipline and tax measures have a direct and profound impact on the structure and functioning of the capital markets.
The stock market is one of the most documented sectors of the economy and over the decades the government has perhaps been the biggest beneficiary from it.
It is imperative for the growth of Pakistan’s economy to create a conducive environment which will help to attract more companies and investors to the capital markets.
All capital market participants are fully documented; hence developing the capital markets is fully aligned with FBR’s efforts to increase the tax base in Pakistan. An efficient, equitable and broad-based tax system and a culture of corporatization are interdependent.
In addition, a broad based capital market helps to achieve important economic and social objectives like increasing the number of taxpayers, savings and investment rates, and reducing wealth inequality.
Capital markets can play a significant role in tackling many of the structural imbalances that have bedevilled Pakistan’s economy over the years.
These included lack of documentation, small tax base, low savings rates and low investment rates.
In fact, these can only be properly addressed by first developing the capital markets. Pakistan’s capital market needs to be and can be much larger and deeper than it is today, PSX added.
Copyright Business Recorder, 2023