KARACHI: Pakistan Stock Exchange (PSX) has recommended to lower the rate of tax for listed companies in order to encourage listing in the equity market.
“The tax rate should be permanently lowered for listed companies, by giving tax credit of 20 percent of tax payable for those companies that meet the prescribed requirements including a minimum free float of 25 percent throughout,” the PSX suggested in its proposals for budget 2020/2021.
The stock exchange said that in order to encourage new listings, the Finance Act, 2011 introduced Section 65C of the Income Tax Ordinance, 2001; whereby tax credit equal to twenty percent (20 percent) for the tax year in which a company opts for enlistment on the Stock Exchange was allowed.
Currently, the tax credit is given for four years from the date of listing, subject to the condition that for the first two tax years.
This tax credit is very insignificant and not enough to attract new listings.
It is generally observed that when companies opt for a listing on a stock exchange, their profits enhance substantially due to effective corporate governance, better disclosures, and availability to additional funds from the market.
Increased profitability ultimately leads to higher tax revenue for the government as the number of listed companies on PSX grows. Higher listings, coupled with regulations to increase trading activity will result in higher liquidity, and also lead to incremental government revenues from capital gain tax.
The table below outlines the five-year summary of listing and de-listing on the PSX:
|Particulars||Number of Companies||Capital (Rs.)*|
|New Listings||24||62,607 Million|
|Delisted due to merger||9||140,535 Million|
*As of December 31, 2019
Giving rationale to the proposals, the PSX said that 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.
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:
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.