Pakistan Stock Exchange (PSX) has strongly proposed reduced rate of tax for listed companies which it says will serve as an incentive to the companies for enlistment and documentation of economy in budget (2016-17).
Budget proposals of PSX for 2016-17 stated that out of 67,624 companies registered with the Securities and Exchange Commission of Pakistan as at June 30, 2015 only 560 companies are listed on the PSX. The SECP during the first half of current fiscal year (2015-16) registered 2,747 new companies. There were 554 companies listed on the PSX as at December 31, 2015. PSX is sure that there are lot of potential companies, to be listed on the stock exchange, however, the main reasons for lack of interest by such companies for getting listed are as follows:
The tax incentives are not available until June, 2002 there was a tax differential of 10% for listed companies. Unlisted limited companies were subject to income tax rate of 45 percent whereas listed companies 35 percent. Tax rate on dividend from unlisted companies and listed companies is currently at 12.5 percent which once again highlights that there is no advantage to listed companies.
The code of corporate governance on the listed companies and cumbersome regulatory reporting requirements are considered a great burden by many listed companies, it said.
It proposed that the stock market transactions are fully documented and transparent with funds being channelised through proper banking transactions and are being considered important features of the market for prospective stakeholders to consider to their advantage.
PSX understand that a reduced rate of tax for newly listed companies versus unlisted companies will provide an impetus for attracting companies to list on the capital market, thus increasing its role in long term investment formation in the country. It is anticipated that with a reduced rate of tax for newly listed companies, there shall be a potential to attract new companies which will also improve the documentation of the economy.
With the introduction of tax reforms and tax incentives in place for newly listed companies, it will induce other corporate entities to raise long term funds from the capital market which also widens the scope for medium sized enterprises to raise money where they find difficulty in obtaining funds from the banking sector, PSX said.
The capital market shall become more broad-based with new company listings and attracting more investors thus they will have more alternatives to participate in Pakistan's corporate sector. This will help capital market to generate more revenue and contribute more to the national exchequer. Thus with increase in number of companies listed on the stock exchange will eventually increase tax revenue.
Karachi Stock Exchange in its proposal for Federal Budget 2015 had proposed that in order to attract more companies for listing, the tax rates for the listed companies may be reduced to 25 percent. However, the Finance Act, 2015 had reduced corporate tax rate from 33 percent to 32 percent only for both listed and non-listed.
The average world-wide tax rate has declined since 2003 from 30 percent to 22.9 percent in 2015. The average rate of tax on the corporate incomes in the Asian region is 20.6 percent in 2015 whereas in Pakistan due to multiplicity of the taxes for the corporate sector it goes up to 39 percent (32 percent normal tax + 2 percent workers' welfare fund + 5 percent workers' participation fund).
It is felt that reduced rate of tax for the listed companies will serve as an incentive to the companies for enlistment which will help in improving documentation of the economy growth and will have positive impact on the overall economy of the country, it maintained.
This will also help in promoting better corporate disclosures, excellent returns to equity investors, broadening of corporate sector tax base and enhancement of revenues for the national exchequer by way of taxes from a greater number of companies, PSX added.