Amid the hue and cry over whether it has the mandate to do so, the Federal Government announced its sixth Budget last week marked largely with some broad-based tax concessions; while it may draw mixed reaction from trade and industry, the equities and the corporate sector in general have some treats in the latest proposals.
Corporate tax rates in Pakistan that have been one of the highest in the region has seen gradual decline over the years. Federal Budget FY19 has continued to rationalise the corporate tax rates over the next six years from the existing 31 percent to 30 percent in tax year 2018, to 25 percent in tax year 2023. This attempt seems in line with the government’s reduction of income tax for individuals and Association of Persons and will be appreciated by the market.
Apart from significantly high corporate tax rates, there have been some anti-corporate measures taken in the recent years. These have been the minimum tax, the super tax, tax on undistributed profits and tax on bonus shares. Such measures have been criticized by the proponents of corporatisation; in FY19 Budget, tax on bonus shares has been abolished completely, whereas super tax and tax on undistributed profits are proposed to be reduced in a phased manner.
To be specific, super tax imposed in 2015 was set for internally displaced persons. The existing rate stands at 4 and 3 percent, respectively for banking and non-banking companies with income of over Rs500 million. While the super tax is to be continued for FY18, it is proposed to be reduced by one percent every year from FY19 onwards. While some believe that this move is positive news for the corporate sector, others believe that it might act as a dampener as the corporate voices have been asking for a complete abolishment of super tax.
Tax on undistributed profits too has been proposed to be brought down to 5 percent from the existing 7.5 percent on accounting profit. At the same time, the mandatory requirement to distribute at least 40 percent dividend by companies to avoid tax on undistributed profits is also proposed to be reduced to 20 percent. These measures too will have two impacts. On one hand, the budget speech highlighted that various professional bodies have been insisting on relaxing the requirements to facilitate businesses in retaining earnings for investments; thus, this attempt could increase investment and expansions by the firms. However, it is also being opined that dividend payout by the companies will be adversely affected, affecting shareholder interest that look for payouts.
Another tax reduction measure in the budget comes with the withdrawal of 5 percent Withholding tax on bonus share issuance, which could encourage capital formation where cash constrained companies increase the issuance of bonus shares, which are free of cost unlike issuing new shares.
Also, the tax credit for establishing a new industrial undertaking, extension, and expansion, BMR of machinery and purchase of machinery is proposed to be extended up to June 30, 2021 from the existing deadline of June 30, 2019. And tax credit limit for IPO participation has been increased to Rs2 million from Rs1.5 million. The tax credit extension for expansion BMR, extension etc. is likely to bode well for companies with expansions coming online later than FY19; while the tax credit limit enhancement for IPO participation can incentivise participation in new offerings and IPO subscriptions.
The concept of REITs has not taken off in the country largely due to the tax regime. While the income tax provisions applied in true spirit can rationalise of taxation and valuation in the real estate sector, the proposal to reduce dividend tax on REIT unit holders from 12.5 percent to 7.5 percent is a step to promote more listing of REITs on the stock exchange.
Overall, Budget FY19 looks decent for the corporate sector. But then again it could be a good budget with bad timings. With the incumbent government leaving office, the caretaker government might not find the budget proposals difficult to abide by. However, a lot depends on the how the new government post elections take it.
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