SECP Proposes Revival of Tax Credits on IPO Investments

SECP Proposes Revival of Tax Credits on IPO Investments – The Securities and Exchange Commission of Pakistan (SECP) has proposed the revival of tax credits for investments in initial public offerings (IPOs). The proposal is part of SECP’s recommendations for the 2024-25 federal budget.

The SECP highlighted that the government’s decision in the Finance Act 2022 to remove tax credits on investments in IPOs and mutual funds has potentially deterred investors, particularly salaried individuals, from participating in these regulated sectors. This shift, the SECP argues, could discourage savings and limit investment in corporate and mutual fund sectors.

In its budget proposal, the SECP has urged the government to reinstate these tax credits, emphasizing that such a move would not significantly impact revenue. Instead, it would foster a culture of savings and investment, aligning with international practices aimed at promoting investment in corporate entities and mutual funds.

To facilitate this, the SECP suggested that Asset Management Companies (AMCs) issue a separate class of equity units that are eligible for tax credits under Section 62 of the Income Tax Ordinance, 2001. These units would be marked as separate blocked units, incorporating an aging mechanism to deduct taxes in the case of early withdrawal or redemption. Similarly, investments made in IPOs should be eligible for tax credits.

The SECP pointed out that the financial impact of removing these tax credits was minimal. According to the Tax Expenditure Report 2022, the combined impact on mutual funds, shares, and insurance was approximately Rs 2.6 billion. Given this relatively minor fiscal impact, the SECP believes that reinstating these credits would provide significant benefits by encouraging investments and supporting new corporatization.

The SECP also suggested reinstating tax credits for investments in equity mutual funds and exchange-traded funds (ETFs), provided that these investments are held for at least five years. This long-term investment incentive would help stabilize the market and encourage sustained investment.

The proposal underscores the SECP’s commitment to fostering a robust investment environment in Pakistan. By reinstating tax credits for IPO investments, the SECP aims to create a more attractive landscape for investors, ultimately driving economic growth and corporate development.

As the federal budget for 2024-25 approaches, the SECP’s recommendations highlight the importance of supportive tax policies in nurturing investor confidence and promoting a vibrant financial market in Pakistan.