Pakistan Stock Exchange (PSX) has sent proposals for the Federal Government’s Budget 2020-21
The proposals essentially focus on some impediments and disincentives that have crept into the development of the capital market, as well as the documented corporate sectors.
Introduction of Registered Savings and Investment Accounts
PSX has proposed the government of Pakistan to introduce a mechanism and regulatory structure for the launch of registered savings and investment accounts (RSIAs) to help channel savings towards productive investments.
RSIAs will help bring capital from the large undocumented sector into the formal economy. Further, it is also crucial that firm guarantees be offered that contributions be subject to full amnesty – aside from AML and Terrorist Financing issues due diligence, noted the proposal.
Funding the Federal Government Employees Pension Scheme
The PSX proposed that the government should start funding its pension liabilities to avert a future pension crisis and encourage capital formation in Pakistan. An adequately funded pension scheme would offer old-age benefits to retired employees at public sector enterprises and government workers, without putting a burden on the annual budget.
Further, it is recommended that a certain percentage of the funded pension scheme be invested in the capital markets.
Eliminate or Reduce Capital Gains Tax (CGT) for Next 24 Months
It also proposed the government to eliminate/reduce Capital Gains Tax (CGT) for next 24 months or at a minimum align rates of capital gains tax on disposal of securities with other regional exchanges and OECD countries of the world.
Align the Rate of Capital Gains Tax
Align the rate of capital gains tax on disposal of equities securities of non-residents with that of debt securities for non-resident companies having no permanent establishment in Pakistan.
Definition of Security
“In order to nullify the judgment of the Sindh High Court dated 04-03-2-16 namely Khalid Mansoor Vs FBR and 3 others and in the interest of the capital markets,” PSX proposed that shares of a company disposed of, in the tax year for which the company has the status of a Public Company, shall be deemed to be securities with effect from the date of acquisition, irrespective of the status of the company at the time of acquisition of the said shares.
Carry Forward of Losses
It was proposed to allow carry forward of losses, for six years rather than for three years as stated in Proviso of Sub-Section 5 of Section 37A of the Income Tax Ordinance, 2001.
Tax Treatment on Creation of Units of Exchange Traded Funds
The PSX has also proposed that in order to facilitate the market for Exchange Traded Funds, transfer of Portfolio (basket of securities) from Authorized Participants (AP) to ETF’s Account should not be treated as disposal and therefore holding period of ETF constitutes be carried forward to the ETF, upon conversion of Portfolio Deposit to ETF units, for the purpose of CGT calculation.
Reduction of WHT
It was proposed to reduce the rate of withholding tax on the gross income earned on MF transactions from 10% to 2.5%.
Rationalization of WHT on Dividends
It was also proposed that the government should introduce a mechanism to remove the double taxation of the company’s profit – once in the hands of the company and once in the hands of shareholders as dividends – such that the tax rate on dividends is on par with profit on debt.
The PSX proposed to rationalize the current tax rate on dividends to make it equal to the tax rate on the profit of debt. Provided that there should be no withholding tax on dividends up to Rs. 100,000 per annum. The applicable rate of tax on the dividend by a REIT scheme should be levied as it is applicable for mutual funds.
Tax Credit for Companies Listed on the Stock Exchange
The tax rate should be permanently lowered for listed companies, by giving tax credit of 20% of tax payable for those companies that meet the prescribed requirements including a minimum free float of 25% throughout.
Enhanced Tax Credit for SMEs
In order to encourage small and medium enterprises to get listed on the SME Board, it was proposed that the rate of tax for such listed SME companies be permanently lowered by giving tax credit of 50% of tax payable.
Treatment of Unrealized Gain on Sale of Immovable Property to a REIT Scheme
The tax exemption on the sale of immovable property to both types of REIT schemes (Development and Rental), which was available prior to Finance Act, 2015 should be restored and made available up to June 2025.
Disparity in FBR and SECP Rules Relating to Shariah Compliance
It was proposed that the Shariah compliance criteria under the income tax laws be modified to make it practically possible to meet it. This will help the promotion and development of Islamic capital markets by encouraging new listings of companies on PSX through mobilizing resources towards faith-based investor savings.
Provincial Sales Tax on Services
The wording of the laws enacted by the Sindh Revenue Board, Punjab Revenue Authority and Khyber Pakhtunkhwa Revenue Authority are overlapping. The matter being of equal relevance to all the provinces and affecting the entire Services Sector, may be placed on the agenda of Council of Common Interests so that a sharing formula for each province can be devised, said the proposal.
Consistent and Long-term Tax Policies
It was also proposed that the Government of Pakistan must move 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.