Economy: capital markets can help govt tackle structural imbalances, says PSX CEO

KARACHI: The capital markets can play a significant role in tackling many of the structural imbalances that have bedeviled Pakistan’s economy over the years, Managing Director and CEO, Pakistan Stock Exchange Farrukh H Khan said on Tuesday.

These structural imbalances include, lack of documentation, small tax base, low savings rates and low investment rates. In fact, these structural imbalances can only be properly addressed by first developing the capital markets, he said while talking to reporters at PSX.

“To achieve this, well thought through, balanced, regionally competitive and long-term tax policies and measures are needed,” he said adding that 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 specialized 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.”

MD, PSX said the stock market is one of the most documented sectors of the economy and over the decades Government of Pakistan has perhaps been the biggest beneficiary from it. “For the growth of Pakistan’s economy it is necessary to create a conducive environment, which will help to attract more companies and investors to the capital markets. A broad-based capital market helps to achieve important economic and social objectives like increasing the number of tax payers, savings and investment rates, and reducing wealth inequality.”

Based on the above, PSX has presented some proposals for the consideration of the Ministry of Finance and the Federal Board of Revenue for inclusion in the federal budget 2023-24.

The PSX has proposed to remove the flat CGT rate of 12.5 percent applicable on disposal of securities acquired on or before June 30, 2022. The CGT rate for all derivatives and future contracts traded on stock exchange is proposed to be taxed at 5.0 percent.

In order to attract foreign investors into the capital market, it is proposed to exempt income derived from such foreign investments from tax. It is proposed to add an explanation under Section 37A to clarify that the share of a public company, disposed off in a tax year, “becomes a security” with effect from the date of acquisition.

The Finance (Supplementary) Act, 2023 has barred application of section 37A on disposal of shares of a listed company made otherwise than through registered stock exchange and which are not settled through NCCPL and the provisions of section 37 section are to apply in such case.

It is proposed that offer for sale at the time of listing should be excluded from the proviso’s purview.

To encourage documentation of the economy, the corporate tax rate should be lower 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.

The PSX also proposed that the rate of tax for listed SME companies be lowered by giving tax credit of 50 percent of tax payable for 3 to 4 years of listing and then onwards 20 percent of the tax payable.

The PSX requested to reinstate Section 62 of the Income Tax Ordinance that was removed in the Federal Budget 2022-23.

It was also requested to provide tax credit of 100 percent to all categories of private funds without any sunset clause and restore exemption of tax on capital gain, earlier available to the investors of private funds or a specific rate, as provided for mutual funds, CIS and REITs.

It was also requested to exclude private funds from application of minimum and withholding taxes, exempt advance tax on property transfers to/from a REIT Scheme u/s 236C and 236K and remove sunset clause i.e. June 2023 for all categories of REIT.

It was proposed that in order to encourage companies to list, their tax status should be grandfathered at the time of listing application. Minimum tax regime should be eliminated from listed companies as such companies are documented and compliant with specific documentation requirements of various statutes.

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 to resolve this matter.

It was proposed that regulatory structure for the launch of Registered Savings and Investment Accounts and Individual Savings Accounts be introduced to help channel savings towards productive investments.

It should also be considered that the changes in policies should be prospective rather than retrospective in nature.

Therefore, the government is requested to rectify all such amendments which have retrospective effect so that all the amendments made have a prospective effect.

Farrukh H. Khan said that the Government of Pakistan 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.

Pakistan Stock Exchange had launched the New Trading and Surveillance System on May 15, 2023. “This is a highly advanced, state-of-the-art and cutting edge system which has high scalability and low latency with enhanced safety and reliability features,” he said.

The high performance trading system can process 2,000 orders per second or 4 million orders per day on current servers and capacity can be enhanced 100 times by simply adding more servers. Its order processing latency is 2 milliseconds in active–active DR configuration.

Copyright Business Recorder, 2023