KARACHI: Pakistan Stock Exchange (PSX) has proposed time-bound elimination of capital gain tax (CGT) in order to attract new local and foreign investors.
The PSX in its proposals for budget 2021/2022 said that the recent changes in CGT structure for real estate and construction had created a tax driven distortion between listed and other asset classes, where the CGT rate is very high for listed investments.
“CGT is also high in Pakistan compared to regional and OECD countries,” according to the stock exchange.
The PSX proposed that the CGT for listed securities should be aligned with that of other asset classes and brought in line with international levels.
“A reduction or a time bound elimination of CGT will be a major incentive to attract new local and foreign investors, without any significant loss of tax revenue and will in fact increase tax revenue in the medium term.”
The PSX proposed 14 core proposals to increase the size and depth of the capital market by incentivizing new listings and increasing the investor base, without impacting government revenues.
All the proposals essentially focus on impediments and disincentives that are negatively impacting the development of the capital market, as well as the documented corporate sector.
The recommendations are primarily designed to remove the disincentives, and the incidence of double, and at times multiple, taxation that are penalizing capital formation, which is essential for our corporate sector to be able to compete effectively in the world. Most proposals are revenue neutral, and in many cases, likely to increase the government’s revenue.
Some of the key points in the budget proposals include
1. Reform of CGT
2. Rationalisation of tax rates of listed companies and SMEs.
3. Introduction of Savings and Investment Accounts
4. Documenting the real estate sector and promotion of REITS
5. Introduction of long term and consistent tax policies
Another key proposal is the rationalisation of tax rates for companies listed on the Stock Exchange and enhanced tax credit for listed small and medium enterprises.
The PSX has recently launched the Growth Enterprise Market (GEM) Board to facilitate SMEs to get listed and access alternative sources of capital. In order to support and encourage SMEs to get listed on the GEM Board, it is proposed that tax rate for listed SMEs be lower by giving them enhanced tax credit after listing. At the same time, PSX recommends that the corporate tax rate for listed companies should be reduced, which will prove to be a positive step for documentation of the economy and revenue generation.
PSX has also put forward budgetary proposals recommending the introduction of Registered Savings & Investment Accounts (RSIAs) and Individual Savings Accounts (ISAs), especially suited for Pakistan. This will help increase the low savings and investment levels in Pakistan, while enabling investors to accumulate savings to achieve life goals by investing in the capital market.
RSIAs and ISAs could become one of the driving forces in transformation of Pakistan’s economy. Much of the wealth that is currently locked in unproductive assets like real estate, gold and offshore, could be diverted towards productive use through these accounts. This will also help to increase documentation of the economy and tax revenue.
As much as favorable tax treatment, investors need a stable and predictable tax environment. Government of Pakistan must consider adopting long term measures to promote savings and investment and development of the capital market. To this end, PSX has proposed that the Tax consultative committee for Capital Markets meet regularly to discuss all tax measures impacting the capital markets.
Presenting the budgetary proposals for the 2021-22 budget, MD & CEO PSX, Farrukh H. Khan, said, “Pakistan’s capital market has immense potential to contribute to our country’s economic growth. PSX remains committed to building the capacity and trust required for capital formation and financial inclusion by introducing new products and investing in world-class trading infrastructure.”
He added: “We are pleased to present the proposals for the kind consideration of Ministry of Finance and the Federal Board of Revenue for inclusion in the federal budget 2021. We believe that implementation of these proposals will greatly help in improving the saving rate, encourage investment, increase tax revenue, contribute to economic growth and lower wealth inequality in Pakistan.”
