Listed securities: PSX for bringing CGT rates in line with CGT rates on sale of immovable property

KARACHI: Pakistan Stock Exchange (PSX) has proposed that Capital Gain Tax (CGT) rates on listed securities be brought in line with CGT on sale of immovable property.

“This is essential to eliminate the tax driven distortion between different asset classes”, PSX said this in the federal budget proposals for the financial year 2024-25. CGT on all derivatives and future contracts (including cash settled derivative contracts) traded on PSX to be taxed in line with future commodity contracts traded at PMEX, it added.

In order to attract and encourage foreign investment into capital market, it is proposed to offer tax relief to foreign investors in terms of exemption on capital gains and dividend earned on such investment, in line with similar tax relief offered for investment in GoP securities, PSX proposed.

The PSX, in its budget proposals said that capital markets can play a significant role in tackling many of the structural imbalances that have bedevilled Pakistan’s economy over the years. These include, 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.

The PSX further said that Pakistan’s capital market needs to be and can be much larger and deeper than it is today. “We have come a long way but need to go much further to help businesses raise capital and for all investors to make a good return. As the markets grow, they will contribute to growth of Pakistan’s economy and create new revenue sources for FBR.”

To achieve this, well thought through, balanced, regionally competitive and long-term tax policies and measures are needed, PSX said. The tax measures are an important policy tool to increase investments and savings in the economy and to stay competitive with other markets. Capital markets are highly specialised and have many varied and different segments, each with their own commercial imperatives that need to be fully understood before successful tax measures can be implemented. Innovations and new products are a constant feature of capital markets.

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. 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. Government of Pakistan must consider adopting long term measures to promote savings and investment and development of the capital market.

“We believe that in the coming years, Pakistan’s capital market has immense potential for growth”. PSX remains committed to building the capacity and trust required for capital formation and financial inclusion by introducing new products and investing in world-class trading infrastructure, the PSX said.

In order to encourage small and medium enterprises to get listed on the SME Board, the PSX proposed that the rate of tax for such listed SME companies be lowered by giving tax credit of 50percent of tax payable for 3 to 4 years and 20 percent onwards of the tax payable.

PSX also proposed to reinstate Section 62 of the Income Tax Ordinance that was removed in the Federal Budget 2022-23 to promote savings for the taxpayers with no major impact on revenue.

It was proposed that in order to encourage companies to list, their tax status should be grandfathered at the time of listing application, i.e.; no new cases for past tax returns should be opened, except for such pending cases on which proceedings have already been initiated under the Ordinance, before the date of listing application, will continue as per the provisions of law.

Minimum tax regime should be eliminated or reduced for listed companies as such companies are documented and compliant with specific documentation requirements of various statutes.

PSX proposed to rationalise the tax rate on dividend, as it would generate more investment in stocks and thus more revenue for the Federal Government.

It was also proposed that the Government of Pakistan introduce a mechanism and regulatory structure for the launch of RSIAs or ISAs to help channel savings towards productive investments. These schemes will help channel capital which is invested in unproductive areas and from the large undocumented sector into productive parts of the economy.

PSX also proposed that the Government of Pakistan must move away from short term measures and frequent changes in tax regime and adopt long term measures to promote savings and investment and development of the capital market.

Copyright Business Recorder, 2024