The Finance Ministry has been urged to provide exemption from income tax and capital gains tax on Pakistan Mortgage Refinance Company (PMRC) bonds and Sukuk in the next fiscal year (2018) Finance Bill.
Sources said that the ministry was forwarded tax proposals by Securities & Exchange Commission of Pakistan (SECP) for onward submission to Federal Board of Revenue (FBR) for including in Finance Bill 2018 with regard to tax exemption on income tax and CGT on debt securities bonds and Sukuk issued by PMRC.
The proposals were submitted following a meeting among SECP, World Bank (WB) Housing Mission and PMRC on the issue on February 8, 2018. The proposals are aimed at making housing loans affordable and accessible to the middle and low-income groups and consequently promoting the development of the corporate fixed rate bond market and exemption from income tax and capital gains tax on PMRC bonds/Sukuks were stated to be important in this regard.
The SECP proposals for finance bill seek exemption of income tax on debt securities (bonds and Sukuk) issued by Pakistan Mortgage Refinance Company for a period of 10 years wile noting description of proposals and their rationale.
The description of proposals is that exemption of income tax on the income and gains derived by investors on their investment in debt securities (bonds) and Sukuk issued by PMRC (collectively referred to as "PMRC bonds") to refinance residential mortgage market and exemption of capital gins tax on sale of PMRC bonds by the investors, however, the holding period should be defined in case of capital gain tax.
The impact of the proposal will include;(i) to obtain easy access to housing loans at reasonable cost; (ii) to obtain attractive and affordable housing loan packages characterized by fixed rates for longer periods; (iii) to achieve the government of Pakistan's policy of encouraging home ownership to middle and low income groups; (iv) to encourage property development by developers and related spin-off effects such as the creation of employment and stimulation of the local economy; (v) economic activity in construction industry through mortgage financing may result an additional collection in general sale tax and duties; (vi) similarly, with the sale and purchase of homes, the provincial governments will also be generating stamp duties and transfer fee as per the provincial tax rates; (vii) PMRC bonds will provide high quality papers to investors and an attractive channel for investment for the pension funds, insurance companies, mutual funds and banks with large surplus long-term funds, seeking long-term investment assets; (viii) PMRC bonds and Sukuk will contribute in development of corporate bond market and capital market.
The SECP also proposed reduction in income tax rate on income derived from residential mortgage loans for affordable housing finance and suggested that the current tax rates for non-bank financial company (NBFC) on its income on housing finance portfolio should be reduced to 20 percent in order to incentivise the housing finance companies and sector in Pakistan.
The impact of the proposal will make availability of option for mortgage finance for the middle and low-income groups, low and affordable interest rates may lead to raise in housing finance and it is the commitment towards the financial enhancement in country in light of NFIS as well as economic drive due to construction and related ancillary business activity.
The rationale of the proposal was stated that housing finance remains severely underdeveloped in Pakistan relative to its size of the population and economy, Pakistan's mortgage to GDP ratio is 0.2 percent compared to South Asia's average of 3.4 percent. At the end of September 2017, there were approximately 69,000 residential mortgage loans outstanding for a consolidated amount of Rs75 billion (US $730 million). Mortgage finance for the middle and low-income groups are not available. With the exception of HBFC, most primary mortgage lenders are focusing on high-end resident's mortgages.
This is despite significant progress in the financial sector reforms for financial inclusion including the regulatory framework, credit information, payment, settlement systems and financial literacy. These reforms are inscribed in the National Financial Inclusion Strategy, which identifies housing finance as a priority area for government's intervention to address the housing shortage in the country.
The SECP also cited past precedent related to tax exemptions and concessions on Wapda bonds and National Savings Schemes in support of budget proposals.
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