‘Productive’ investments: PSX proposes launch of RSIAs to help channel savings

ISLAMABAD: Pakistan Stock Exchange Limited has proposed to the Federal Board of Revenue (FBR) to launch registered savings and investment accounts (RSIAs) to help channel savings towards productive investments, eliminate/reduce capital gains tax (CGT) on disposal of securities, measures to avert future pension crisis and long-term measures to promote savings and investment and development of the capital market.

According to the budget proposals of the PSX received at the FBR House for consideration in the next fiscal year, the PSX believed that implementation of these proposals will greatly help in improving the saving rates, encouraging investment, contributing to economic growth and lowering wealth inequality in Pakistan.

The PSX stated that Pakistan's capital market saw robust growth over the years in terms of its market capitalisation, which was around Rs8 trillion on January 30, 2020, but as a result of global downturn of events due to coronavirus pandemic that spiraled down the market capitalisation to around Rs5.7 trillion on April 01, 2020.

This has led to uncertainty and pessimism surrounding Pakistan's national economic indicators.

The first half of fiscal 2020 showed some clear signs of a path towards economic recovery, however, considering the existing situation, the journey towards sustainable long-term growth is expected to take time, the turnaround efforts are well under way.

Keeping in mind the chronic macro-economic stability challenges, low savings and investment rates, underdeveloped rural economy, digitalisation of financial transactions and the emerging connectivity with China and other neighboring economies, Pakistan has immense potential given implementation of strong structural reforms in the capital market.

It is proposed that the government should introduce a mechanism and regulatory structure for the launch of registered savings and investment accounts (RSIAs) to help channel savings towards productive investments.

The 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 the AML and the terrorist financing issues.

It has proposed to eliminate/reduce CGT for next 24 months or at a minimum align rates of capital gains tax on disposal of securities with other regional exchanges and the OECD countries of the world.

The tax exemption on sale of immovable property to both types of real estate investment trust (REIT) schemes (Development and Rental), which was available prior to Finance Act, 2015, should be resorted and made available upto June 2025.

The PSX has 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 burden on the annual budget.

Further, it is recommended that a certain percentage of the funded pension scheme be invested in the capital markets.

The FBR should align the rates of capital gains tax on disposal of equity securities of non-residents with that of debt securities for non-resident companies having no permanent establishment in Pakistan.

All the proposals outlined are primarily designed to remove the disincentives, the incidence of double and at times multiple taxation that are penalising capital formation, which is essential for our corporate sector to be able to compete effectively in the world.

Most proposals are revenue neutral and in cases, likely to increase the government's revenue.

The core principle of our proposal is aimed at increasing the size and depth of the capital market by incentivising listing of new capital without impacting government revenues, the PSX added.

The Sharia 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 the PSX through mobilising resources towards faith-based investor savings, the PSX proposed.

The wordings of the laws enacted by the Sindh Revenue Board, the Punjab Revenue Authority, and the 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 the Council of Common Interests, so that a sharing formula for each province can be devised.

The government 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.

The tax rate should be permanently lowered for listed companies, by giving tax credit of 20 percent of tax payable for those companies that meet the prescribed requirements including a minimum free float of 25 percent throughout.

In order to encourage small and medium enterprises to get listed on the small and medium enterprise (SME) Board, it is proposed that the rate of tax for such listed SME companies be permanently lowered by giving tax credit of 50 percent of tax payable.

Copyright Business Recorder, 2021