SECP Proposes Tax Relief for Share Investors in 2024-25 Budget

SECP Proposes Tax Relief for Share Investors in 2024-25 Budget – In a bid to stimulate the stock market and promote investment, the Securities and Exchange Commission of Pakistan (SECP) has put forward a series of tax relief proposals for the 2024-25 budget.

These recommendations, submitted to the Federal Board of Revenue (FBR), aim to align the rates of capital gains tax (CGT) on the disposal of securities with those on the sale of immovable property, along with reinstating several beneficial tax credits.

One of the primary suggestions from the SECP is the alignment of CGT rates on securities with those applicable to real estate. This adjustment is designed to eliminate the existing tax-driven distortions between different asset classes. The SECP proposes the removal of the flat CGT rate of 12.5 percent, currently applied to securities acquired between July 1, 2013, and June 30, 2022. Instead, gains on such securities should be subject to the same rates as those acquired after June 30, 2022.

“This adjustment is essential to eliminate the tax-driven distortion between different asset classes,” the SECP stated. “It will also encourage the documentation of real estate activities, thereby easing speculative pressure on property prices in Pakistan, where much of the undocumented wealth currently flows.”

In addition to the alignment of CGT rates, the SECP has proposed the reinstatement of tax credits for investments in initial public offerings (IPOs), equity mutual funds, and exchange-traded funds (ETFs) for a five-year period. The removal of these tax credits in the past has been a deterrent for investors, particularly salaried individuals, from saving in regulated sectors. The SECP argues that reinstating these credits would promote savings and encourage new corporatization in line with international practices.

“The proposal to reinstate tax credits for investments in IPOs, mutual funds, and ETFs has no major impact on revenue,” the SECP explained. “Rather, it will promote savings and increase new corporatization, enhancing the investment culture in corporate and mutual funds sectors.”

The revenue impact of withdrawing these tax credits was approximately Rs 2.6 billion in mutual funds, shares, and insurance combined, a relatively minor amount considering the potential benefits.

Furthermore, the SECP has recommended the reinstatement of tax credits for investments in life and health insurance. This measure aims to encourage a broader spectrum of the population to avail of these essential protections. The total credit availed by individual tax filers in this regard was Rs 280 million.

To address another critical issue, the SECP has called for a separate clause with a lower tax rate under section 233 of Income Tax Ordinance, 2001 for brokerage and commission paid to brokers of the Pakistan Stock Exchange. Previously, the Pakistan Stock Exchange collected tax at a rate of 0.02 percent on the sale and purchase of securities against the brokerage and commission of stockbrokers. However, this tax was omitted through the Finance Act 2021 to provide relief to stock exchange brokers registered in Pakistan. Unfortunately, no separate clause was inserted at that time, leading to the brokerage and commission earned by these brokers being taxed at a higher rate of 12 percent.

“Reducing the tax rate on brokerage and commission paid to brokers of Stock Exchanges registered in Pakistan will not only help in reducing the increasingly cost of business for stock brokers but will also help in the growth of the Capital Market,” the SECP emphasized.

In 2019, section 233A of Income Tax Ordinance, 2001 was omitted to provide relief to the broker industry, but due to a lack of proper tax planning, this objective was not fully achieved. By addressing these concerns now, the SECP aims to foster a more favorable environment for stock market activities, ultimately contributing to the economic growth of Pakistan.