The Securities and Exchange Commission of Pakistan (SECP) has expressed concern over certain amendments proposed in the Finance Bill (2013) which would hurt the financial services industry. Sources told Business Recorder on Friday that the Acting Chairman of SECP Tahir Mahmood wrote a letter to the Ministry of Finance highlighting implications of the Finance Bill (2013) on the sector.
The SECP said that proposals having a serious negative impact on the financial sector included imposition of the federal excise duty (FED) on investors in mutual funds, tax credit on investments to be obtained via refunds from FBR and the Income Support Levy (ISL).
Being the regulator of non-bank financial sector (capital markets, insurance, NBFCs, mutual funds, pension funds) and corporate sector, the commission has long been advocating reduction of corporate tax rate, to encourage corporatisation and documentation of economy. SECP had submitted a number of proposals for inclusion in the Finance Bill 2013.
The SECP appreciates the federal government's announcement of corporate tax rate of 34 percent for 2013-14 and a gradual reduction in its rate to 30 percent over five years. The SECP stated that this measure would help achieve the objectives of documentation, besides stimulating capital formation and enhancing competitiveness of local companies in the global markets.
However, certain 'tax revenue' neutral proposals were not considered in the Finance Bill and the impact of certain amendments proposed through the Finance Bill will be detrimental for the financial services industry under the regulatory ambit of SECP, it said. The SECP had proposed the following tax neutral amendments in Income Tax Ordinance, 2001 (ITO):
Exemption from withholding tax deduction on withdrawal of accumulated sums from VPS if the amount represented transfer from provident fund (Section 156B of ITO). Tax chargeability on the same is already exempt under clause 23C of Part I of Second Schedule. Exemption from withholding tax deduction of monthly instalments paid from Income Payment Plan, the duration of which exceeds ten years (Section 156B of Income Tax Ordinance). The tax chargeability on the same is already exempt under clause 23B of Part I of Second Schedule.
Ownership threshold to avail group taxation under 59AA is 100 percent which is difficult to be met if a subsidiary company, which is listed on stock exchanges in Pakistan, is delisted. Some minor shareholders may be untraceable for variety of reasons and therefore holding company is not able to acquire 100 percent shares to avail group taxation benefit. SECP recommend that the condition of 100 percent shareholding in the subsidiary company by the holding company should be reduced to 98 percent in case the subsidiary company being a listed company undergoes delisting.
Furthermore, the following amendments proposed in the Finance Bill would adversely affect the government's target to increase savings and investment rate to 20 percent of GDP.
Imposition of FED on investors in mutual funds: Investors in mutual funds are already subject to provincial sales tax on services at 16 percent. The Finance Bill 2013 carries a proposal of introducing federal excise duty on asset management services (which is paid by the mutual fund investors) as well. This tantamount to double taxation on mutual funds investors and will result in mutual funds investors paying a total levy of 33 percent (on top of the capital gains tax and tax on dividends at investor level already being paid by them) which will severely discourage them from investing in mutual funds. In an environment where savings rate is already very low, and investors base in the mutual fund industry is very limited, such measures will deter investment, SECP said.
The SECP therefore, requested that in the presence of provincial sales tax, FED should not be additionally imposed on mutual funds investors and the amendments proposed through clause 5(8)(b)(ii) and clause 5(9)(b) of the Finance Bill 2013 in S. No 8 of Table II of the First Schedule and in S. No 8 of Table II of Third Schedule of the Federal Excise Act, 2005 should be removed.
Tax credit on investments to be obtained via refunds from FBR: Presently tax credit on investments in mutual funds, voluntary pension schemes, and life insurance schemes is allowed as adjustment against the gross tax liability on production of documentary evidence. This facility has now been proposed to be withdrawn with the recommendation that the tax credit may be claimed as a refund at the end of the year. This proposal is revenue neutral but will certainly create delays and operational inconvenience both to the investors and the FBR. The complication of tax credit process will discourage investors from investing in mutual funds, voluntary pension schemes and life insurance schemes, thus hindering savings and resource mobilisation in the country and affecting capital markets. The proposed change will be detrimental for the development of the retail investor base and will not help grow the savings rate in the country. This measure also appears to be in a sharp contrast with the present regime's stated objective of simplifying the tax procedures to make them compatible with the efficient tax jurisdictions of the contemporary world.
Therefore, the SECP requested that the amendment proposed through clause 4(18) of the Finance Bill 2013 in section 149(1)(b) of the ITO may accordingly be omitted.
Pass through status of mutual funds: Section 233AA, amended through clause 4(39) of the Finance Bill 2013, proposes 10 percent withholding tax on margin financiers for stock exchange transactions. Mutual funds world-wide, and in Pakistan, are recognised as a pass through vehicle in order to prevent double taxation on savings through mutual funds.
The SECP proposed that when mutual funds act as margin financiers, considering their pass through status as recognised by FBR, they should not be subject to withholding tax under this clause. For mutual funds, income from capital gains and profit from debt is also not subjected to withholding tax. This measure will be revenue neutral as mutual funds being pass through vehicles will in any case be entitled to a tax refund of the same amount. An amendment in clause 47(b) of Part IV of Second Schedule of the income Tax Ordinance may accordingly, be made to allow exemption to mutual funds from the withholding tax.
Income support levy proposed through clause 6 of the Finance Bill, 2013: This levy will be only overburdening those who are already in the tax net, paying income tax and have made their wealth after paying due taxes, therefore this should be withdrawn. Such a levy will not support the Government's objective to bring in those persons in the tax net who are presently not paying any income tax to the government.
Terming the proposals significant, the SECP strongly recommended appropriate incorporation in the final Finance Act of 2013. The SECP proposals would help in achieving objectives of documentation of economy and to promote development of alternative non bank financial system working in parallel to the banking system.
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