Capital market, NBFCs and insurance sector: SECP, FBR hammer out major changes in tax laws

The Secur-ities and Exchange Commission of Pakistan (SECP) and the Federal Board of Revenue (FBR) are jointly working out major changes in tax laws to introduce multifaceted reforms for the development of capital market, non-banking finance companies and insurance sector. In this connection, the FBR is seriously considering five key budget proposals of Chairman SECP for the next fiscal year.

On the subject of "critical tax reforms for capital markets", Chairman FBR has received a letter from the Chairman SECP. Tax authorities are reviewing the proposals for next fiscal year, sources said.

According to the Chairman SECP, the FBR should introduce five major critical tax reforms for the development of capital market. Chairman SECP said that the various reforms being undertaken by the FBR will go a long way in reforming our tax system and widening the tax base.

Chairman SECP is confident that closer coordination between the FBR and the SECP will result in achieving common objectives for a more documented corporate/financial sector and promotion of business activity that spurs economic growth. With this objective, the SECP has embarked upon a multifaceted reforms agenda for the development of capital markets, non-banking finance and insurance sectors. However, the SECP feels that the success of the reform agenda greatly hinges upon the following critical taxation policy matters that need FBR's urgent attention:

(i): Applicability of withholding tax on sale of commodities in case of physical settlement of traders through Pakistan Mercantile Exchange platform is a major impediment for participants to trade on regulated platform, hence proposed to be exempted.

(ii): Limitations on pass-through status of private funds are restraining investors, in particular foreign investors, to invest in local private funds. Considering that private funds are quintessential source of financing for innovative businesses seeking buyout financing, such limitations are proposed to be removed.

(iii): Short-term and inadequate tax incentives for promotion of documented real estate sector through Real Estate Investment Trusts (REITs) affecting further interest in this area. Relevant tax reforms are therefore proposed for proportion of REITs.

(iv): Higher cost of business in the insurance sector is hampering growth and penetration. Since insurance enables risk mitigation and addresses financial fragility issues, taxation cost on insurance is proposed to be rationalized.

(v): Anomaly created in the capital gains tax (CGT) regime due to a court judgment has been severely impacting new listings and is therefore proposed to be rectified to restore status quo. This matter has already been raised with FBR, Chairman SECP added.