PSX proposes launch of saving, investment accounts

KARACHI: Pakistan Stock Exchange (PSX) has urged the authorities to introduce saving and investment accounts in the upcoming budget 2022/2023.

In its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR), the PSX said that saving and investment are crucial and play and important role in the process of socio-economic development through capital formation. Pakistan, besides facing problems such as unemployment, rapid growth of population, slow economic growth in the country, has a saving rate that is too low for sustainable national economic development. Low level of saving rates in any economy have been cited as one of the most serious constraints to sustainable economic growth. Higher savings and the related increase in capital formation can result in a permanent increase in economic growth rates.

Registered savings and Investment accounts (RSIAs) are personal accounts that allow investors to accumulate savings towards life goals. A defined amount per annum can be contributed to such schemes and this amount enjoys tax benefits. Most RSIA-like schemes in other countries are aimed at retirement savings (e.g., Individual Retirement Accounts in Canada). Other variations on the theme promote savings toward other goal like children’s education (Registered Education Savings Plans in Canada) or funding future needs of a disable individual (Registered Disability Savings Plan in Canada).

Although their design varies according to the schemes objective, they all have 2 features in common:

Capital accumulates free of tax (on interest, dividend or capital gains);
Eligible investments in the account are listed stocks and ETFs, tradable bonds and mutual funds

In the United States, Roth Individual Retirement Arrangement (Roth IRA) is similar to TSFA. The Roth IRA was established by the Taxpayer Relief Act of 1997. The total contributions allowed per year to all IRAs is the lesser of one’s taxable compensation. The Packwood-Roth plan would have allowed individuals to invest up to $2,000 in an account with no immediate tax deductions, but the earnings could later be withdrawn tax-free at retirement.

Introduction of the different types of Individual Savings Accounts (ISA) such as those available in the UK being tax free will induce and promote national savings. The types of ISAs include the following:

Cash ISAs
Stocks and shares ISAs
Innovative finance ISAs
Lifetime ISAs

Having different types of ISAs will generally attract investment in banks, capital market, unit trusts, investment funds, corporate bonds, government bonds, peer-to-peer loans (loans given to other people or businesses without using a bank) and crowdfunding debentures (investing in a business by buying its debt).

Hence, by introduction of UK style ISAs not only will savings will be encouraged but also investment will increase in different asset classes and financial instruments.

It is proposed that the Government of Pakistan introduce a mechanism and regulatory structure for the launch of Registered Savings and Investment Accounts and Individual Savings Account to help channel savings towards productive investments.

These schemes will help capital from both unproductive and the large undocumented sectors into the formal, productive sectors of the economy.

Rationale

Where they have been introduced, RSIAs and ISAs have been very successful in channeling savings to productive investments through capital markets and often constitute the main source of income in retirement. In Pakistan, they will bring the added benefit of driving the government’s goal to document the informal sector.

RSIAs could become one of the driving forces in the transformation of Pakistan’s economy. By some estimates, 40 million middle-class Pakistanis have an average per capita accumulated wealth of over USD 10,000, for a total of over Rs50 trillion. Much of that wealth is currently invested in real estate, gold and other asset classes in Pakistan and offshore. If RSIAs can capture 10% of that wealth, it would be equivalent to more than half the current market capitalization of PSX listed companies or more than the outstanding amount of PIBs and Sukuks.

Many countries have effectively used tax policies to improve and investment rates and divert funds to productive sectors of the economy.

Appropriate amendment to be made in the Income Tax Ordinance, 2001.