Capital market, corporate sector boost: FBR urged to consider new taxation proposals

ISLAMABAD: Securities and Exchange Commission of Pakistan has proposed the Federal Board of Revenue to consider new taxation proposals for development of capital market and corporate sector. This includes income-based Capital Gain Tax on stock market against the existing transaction based fixed rate of CGT, major reduction in corporate tax rate and increase in the tax rates on the National Saving Schemes (NSS).

Chairman SECP Muhammad Ali on Thursday shared the tax proposals for the revival of capital market and corporate sector with the National Assembly Standing Committee on Finance, which met with Fauzia Wahab MNA in the chair at SECP head office.

The preliminary discussion on the tax proposals has been done by the SECP and FBR whereas detailed budgetary proposals will be sent to the FBR by February 2011, the SECP Chairman stated.

Sharing implications of tax on stock exchanges, the SECP Chairman informed the committee that the tax on the investors of stock exchanges should be on the basis of income and not on transactions. The SECP does not support transaction-based tax on stock market investors because it would not encourage documentation.

Prior to 2010, there was a tax on stock market and investors made huge profits from the market. However, most of the investors were not filing their income tax returns and even the FBR was not pressing the stock market investors to file the returns.

After the imposition of CGT on stock market, investors are not willing to invest in shares with the argument that the tax department could ask for the source of investment, as under the existing law, source of investment could be asked by the FBR from those coming to invest in the stock market. The CGT has created a serious problem in the stock market and people have pulled out huge investment from the market and now the trading volume has touched its' lowest ebb.

He informed that the CGT collection mechanism needs to be revised in such a way that the people again start making investment in the stock exchanges. The SECP has proposed the FBR to collect the CGT on traded stocks at the level of National Clearing House and not on transactions made in the market on day to day basis. The SECP has further proposed the FBR to allow functioning of the new mechanism for at least two years to restore the confidence of the investors. However, fixed tax should not be imposed on the stock market transactions.

The SECP Chairman stated that the commission is in favour of documentation along with income based CGT on stock market. The objective of CGT collection and documentation would be met by implementation of the proposals of the SECP on the CGT. About the impact of the CGT on the stock market, SECP Chairman informed the committee that prior to the imposition of CGT, the FBR had collected Rs.4.5 billion tax from stock market and after the imposition of CGT it's collection has drastically reduced to Rs.500 million.

While strongly pleading the case of reduction in corporate tax rate, SECP Chairman informed the committee that globally tax rate on listed companies or corporate sector is low and high tax is charged from the non-listed companies. In Pakistan, the tax regime on corporate sector is entirely different as compared to other best tax administrations. The corporate sector which is more documented and making huge tax contributions to national kitty is being charged with higher tax rate of 35% rate and non-listed companies are enjoying documentation immunity as well as paying 25% tax with no regulatory requirement. It is unfortunate to note that the units not paying tax are flourishing and those who are paying high tax in the corporate sector have to fulfil all regulatory requirements including compliance of tax laws etc.

The SECP Chairman termed the un-favourable tax regime for corporate sector as main hurdle in promoting listing of companies in stock market. Giving a comparison of corporate sector in countries similar like Pakistan has at least one million companies. On the other hand the number of listed companies in Pakistan is continuously declining. Out of 60,000 registered companies, only 10% listed companies are making huge tax contributions and 90% are avoiding tax payments, being non-listed companies. There should be incentives for the companies to come forward and list them selves in stock market, the reduction in corporate tax rate could help increase in listing of companies as well as increase in tax collection from this key sector.

He informed that initially the proposal of reduction in corporate tax rate has been discussed at the level of FBR and SECP has plans to discuss this issue with Finance Minister and Prime Minister for consideration and approval.

The SECP Chairman said that the commission would also propose rationalisation in the higher interest rate of the National Saving Schemes. Similarly, tax rate on the NSS needs to be enhanced. People are more interested in keeping their money in NSS keeping in view higher interest available to them rather than investing it in productive sectors. In this way, huge public savings are being parked in un-productive area. If such money is brought into the economy and is invested in productive economic activity of the country it could result improvement in economy GDP as well as this can in job creation in private sector.

In his presentation, SECP Chairman stressed the need for addressing the distortion created by the national saving schemes.

During the discussion on these tax proposals, SECP Chairman said that SECP's final budget tax proposals would be shared with the Committee for it's input. The chairperson of the committee appreciated the proposals and asked the SECP to finalise and share it with main stakeholders in the government.

It was decided in the meeting to present comprehensive tax proposals after thorough consultations with stakeholders. In this regard, the SECP would submit its tax proposals to the standing committee for consideration at the time of the preparation of the Finance Bill.

Former Information Minister Qamar-Zaman Kaira, MNA speaking on the occasion said that such kind of tax breaks had also been introduced in the past but failed to get desired results. He asked the SECP to arrange a meeting of top officials of SECP, FBR, Ministry of Finance, State Bank of Pakistan and other public sector stakeholders so as to come up with concrete and agreed proposal on CGT at stock market.

Responding to this, Muhammad Ali informed the committee that all the tax proposals are being finalised in consultation with the stakeholders for onward transmission to the FBR for consideration.