Karachi Stock Exchange (KSE) has proposed to the Ministry of Finance to reduce rate of tax for listed companies in order to encourage listing of companies on Stock Exchanges. KSE has requested government to review last year's proposal for reduction in tax rate on listed companies to 25 percent because out of 62,571 companies registered with the Securities and Exchange Commission of Pakistan (SECP), as on September 30, 2013, only 559 companies are listed on the KSE.
There are still several companies anxious to be listed on the stock exchanges. The Finance Act, 2013 had reduced corporate tax rate from 35 to 34 percent only, for both listed and unlisted companies. Tax rate on dividends from unlisted companies and listed companies is currently at 10pc which once again highlights that there is no advantage to listed companies.
The stock exchanges, on the directives of SECP, have introduced Code of Corporate Governance on the listed companies making them subject to much desired discipline to protect their shareholders. Many of the listed companies consider it a burden on them with no advantages vis-à-vis unlisted companies.
In Pakistan the corporate tax rate is much higher than the other countries in the region. The average rate of tax on the corporate incomes in the Asian region is 22.89 percent. In Australia it is 30pc, in India 32.45pc and in Sri Lanka it is 28pc so on and so forth. In Pakistan due to multiplicity of the taxes on the corporate sector it goes up to 41pc (34pc normal tax + 2pc Workers' Welfare Fund + 5pc Workers' Participation Fund).
The KSE further recommended that, in order to achieve desired results of Group taxation/Group Relief for the revival of the industries and to provide incentive to the companies for enlistment, subsequent amendments may be made in the forth-coming budget in the above sections, the primary amendment is Under the Group Taxation, involving listed company, the losses prior to the formation of the group be allowed to carry forward for a period of three tax years from the tax year in which the group is formed.
The second proposal states: presently the loss surrendered by the subsidiary company may be claimed by the Holding Company or a subsidiary company for set-off against its income under the head "Income from Business" in the tax year and following two tax years subject to various conditions provided under Sub-Sections (2), (3) and (4) of Section 59B,.we propose that the time limit for the group, involving listed company, provided in sub-sections (2), (3) and (4) of Section 59B be enhanced from three to five tax years.
Moreover the tax credit, on listing with stock exchange, is proposed to be allowed up to five years from the tax year in which company is listed, KSE suggests that the tax credit, under section 65C of the Ordinance, equal to 15pc of the tax payable, to the companies opting for enlistment on any registered stock exchange in Pakistan, be allowed up to five year from the tax year in which company is listed.
There is a dire need to bring these entities under corporate fold, and to encourage them to become part of the documented, regulated and structured and formal corporate sector. KSE states that increased number of enlistment will improve regulation of these companies since listed companies are subject to various regulations like Code of Corporate Governance and Listing Regulations. Also, these listed companies will have access to capital from public and at the same time investors will have access to new avenues of investments.
KSE states we feel that reduced rate of tax on the listed companies will serve as an incentive to the companies for enlistment, which will help in improving documentation of the economy and will have positive impact on the overall economic conditions of the country.