Karachi, March 25, 2024 – The Pakistan Stock Exchange (PSX) urged authorities to provide tax exemption to private funds without the imposition of a sunset clause in the upcoming federal budget 2024-25.
In its proposals for the forthcoming budget, the PSX has advocated for a tax credit of 100 percent to be extended to all categories of private funds, without any accompanying sunset clause. Additionally, the stock exchange has proposed the restoration of tax exemption on capital gains, which was previously available to investors in private funds or at a specific rate, similar to that provided for mutual funds, Collective Investment Schemes (CIS), and Real Estate Investment Trusts (REITs). Furthermore, the PSX is seeking the exclusion of private funds from the application of minimum and withholding taxes.
The PSX emphasized that the regulatory landscape underwent a transformation in 2015 with the introduction of various types of private funds, effectively replacing the regulations governing private equity and venture capital. However, despite these changes, certain challenges persist, particularly regarding the taxation framework. Currently, the sunset clause applicable to private equity and venture capital funds until June 2025 is deterring long-term investors from participating in these funds.
One of the key issues highlighted by the PSX is the disparate tax treatment faced by private funds compared to other investment vehicles. For instance, a private fund investing in listed securities attracts capital gains tax at rates applicable to unlisted securities, resulting in a significantly higher tax burden for corporate investors. This misalignment in taxation not only discourages investment but also hampers the development of a robust private equity and venture capital industry, which are vital components of a modern economy.
The PSX underscored the importance of fostering a conducive environment for private equity and venture capital investments, citing their indispensable role in driving economic growth and innovation. However, the current tax regime is viewed as a major impediment, particularly for locally domiciled funds. The absence of pass-through status at the fund level, misalignment with the taxation of collective investment schemes, and taxation at multiple levels (entity, investors, and investee companies) are identified as key challenges that need to be addressed.
In light of these considerations, the PSX’s recommendation for tax exemption without a sunset clause for private funds aims to address these systemic issues and create a more favorable environment for investment. By aligning the taxation framework with international best practices and removing barriers to investment, Pakistan can unlock the full potential of its private equity and venture capital industry, driving economic development and prosperity.
As stakeholders await the government’s response to these recommendations in the upcoming budget, all eyes are on policymakers to enact measures that will promote investment, stimulate growth, and enhance Pakistan’s competitiveness on the global stage.
