Pakistan should ‘abandon’ CGT once and for all: co-founder of Tundra Fonder

Mattias Martinsson, Chief Investment Officer and co-founder of Tundra Fonder – a Swedish mutual fund that invests in frontier markets including Pakistan – on Friday voiced his concern over rumours of high taxes being imposed on the capital markets in the upcoming budget that is set to be announced on June 12.

Sharing his thoughts on the rumoured proposal, Mattias, while addressing Prime Minister Shehbaz Sharif in a post on social media platform X, said: “For years, we have repeatedly called for Pakistan to abandon its counterproductive capital gains tax, and replace it with a turnover based tax like Vietnam has (10bps when selling).”

The benchmark KSE-100 Index suffered its biggest fall in months, plunging below the 72,000 level with a decrease of over 2,000 points in the early minutes of trading on Friday as investors offloaded shares over rumours of high taxes being imposed on the capital markets in the upcoming budget.

Martinsson said that the turnover tax much simpler to collect, and would result in significantly more revenue for the Federal Board of Revenue (FBR).

“Most importantly, it will make the administrative hurdles for foreign investors bearable,” said Mattias.

The expert shared that Vietnam currently turns over $500-1,000 million daily against Pakistan’s $50-100 million. “When we started investing in Vietnam back in 2013 turnover was $100-200 million a day,” he shared.

Mattias said that it takes about 1-2 months for a new foreign investor to get access to Pakistani equities, and the major hassle is the monthly tax collection where a local tax advisor is required.

“Latest figure on total collected CGT indicates around $10 million annually. Is it worth making life hard for foreign investors for that kind of money? Well, in Pakistan it is. Then they wonder why so few foreign investors arrive…”

Highlighting the importance of equities, Mattias said the equity market act as a “starting point for valuation of unlisted investments”.

“Why should the state care about the equity market, if it is so tiny? “We want big projects. Well, because it is the starting point for the valuation of unlisted investments.

“If the equity market is trading at P/E (profit to earning) 4x, this means implicitly that the minimum required rate of return for equity markets investors is 25%. That becomes the floor for unlisted investments (which carry a higher risk premium).

“Why not do what you can to improve valuations before slumping away state assets?” questioned Mattias.

The expert noted that Pakistan’s “absolutely biggest problem” is the structural balance of payment deficits.

“Thus, the government should do everything they can to increase their export base, and make the market more attractive to Foreign Direct Investment (FDI).”

“There will come foreign investment but what will the required returns on these investments be? In India it is below 10%, in Pakistan…north of 30% I would guess. Again - why not trying to maximise the attractiveness of your country and thereby fetch higher valuations for the big projects?” he said.

“I really hope sanity prevails on this one. Abandon the CGT for foreign investors once and for all.”

Mattias said Pakistan possesses the preconditions for a vibrant equity market, including the breadth of a local investor base, and historically high earnings growth.

“What if the focus was to bring back Pakistan to that point? Make the cake bigger, and there will actually be something to collect for the state - and the people,” he said.