PSX proposes rationalizing tax rates for listed companies

PSX proposes rationalizing tax rates for listed companies

KARACHI: Pakistan Stock Exchange (PSX) has proposed rationalizing tax rates for listed companies through incentives and credits, in order to encourage documentation of economy.

The PSX in its proposals for budget 2022/2023 submitted to the Federal Board of Revenue (FBR) said that it is generally observed that when companies opt for a listing on a stock exchange, their profits grow substantially due to effective corporate governance, better disclosures, and ability to raise capital from the market. Increased number of listed companies and higher profitability leads to higher tax revenue for the government, including incremental revenues from CGT. Hence it is important to encourage companies to get listed on PSX.

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However, tax credit on enlistment under section 65C has been omitted by the Finance Act, 2021. This tax incentive was a very small carrot with no significant revenue impact. Had this section not been omitted, only 8 listed companies would have availed this tax credit which we estimate, based on their latest audited financial statements, the tax revenue impact would have been Rs. 342 million per annum.

Further, the CGT collected on these 8 symbols for the 6 months period from July 2021 to December 2021 is Rs. 237 million, and, extrapolating based on this 6 months average collection of CGT, the tax collection for the 12 months period could be Rs. 474 million, compared to the total estimated tax credits of Rs. 342 million that would have been availed by these 8 companies.

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The average rate of tax in the Asian region is 19.62%; whereas, currently in Pakistan the corporate tax rate is 29%. As such it is imperative that the corporate tax rate after the tax credit is brought down reasonably to compete with the other regional and global countries.

Therefore, in order to encourage documentation and create a long term positive impact on tax revenue, there should be reduced rates of tax for listed companies compared to unlisted companies.

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To encourage documentation of the economy, the corporate tax rate should be permanently lowered for listed companies, by giving tax credit of 20% of tax payable for those companies that meet the prescribed requirements including a minimum free float of 25% throughout. This will be long term positive for tax revenue.

The table below outlines the five-year summary of listings and de-listings on the Pakistan Stock Exchange:

ParticularsNumber of CompaniesCapital (Rs.)*
New Listings24**57,381 Million
De-listings387, 241 Million
Delisted due to Merger9120, 525 Million

*As of December 31, 2021

**It includes listings of preference shares of already listed companies.

Rationale

i) It is generally observed that publically-listed companies are able to improve profitability due to effective corporate governance, better corporate disclosure and availability of additional funds.

ii) The incremental benefits arising from the preferential tax structure for listed companies will foster a business environment that encourages new listings on the stock exchange, resulting in higher trading volumes and lead to:

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a)   Higher tax revenue from listed companies’ income as a result of higher corporate profits.

b)   Higher revenues from tax on brokers activity on new listings.

c)    Higher revenue from Capital Gains Tax on disposal of newly listed securities

iii)            Furthermore, with the government’s increased pace of privatization of its entities, the stock market will attract local and foreign investors and increase the market size. The average rate of tax in the Asian region is 19.62%; whereas, currently in Pakistan the corporate tax rate is 29%. As such it is imperative that the corporate tax rate after above tax credit is brought down reasonably to compete with the other regional and global countries. Following are the average worldwide corporate tax rates:

LOCATION2012201320142015201620172018201920202021
Africa29.028.327.927.927.528.7328.8128.4528.5027.97
Asia22.922.121.922.621.920.0520.6521.3220.0619.62
Europe20.420.619.720.120.518.3518.3820.2719.9919.84
Oceania28.627.027.027.026.023.6722.0023.7523.7523.75
North America33.033.033.333.333.323.0823.0125.8526.0626.37
OECD25.225.324.124.924.824.1823.9323.5923.5123.04
Global24.423.723.623.923.622.9623.0324.1823.8523.54

Proposed Amendment

Reinstate section 65C of Income Tax Ordinance, 2001 to be read as under:

“Where a taxpayer being a company opts for enlistment in any registered stock exchange in Pakistan, a tax credit equal to twenty percent of the tax payable shall be allowed for the tax year in which the said company is enlisted and for the following years for those companies that meet the prescribed requirements including a minimum free float of 25% throughout and”.

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