KARACHI: Pakistan Stock Exchange (PSX) has advised the government to introduce a scheme for attracting investment from large black economy.
In its budget proposals for fiscal year 2019/2020 the stock exchange advised the government to introduce a mechanism and regulatory structure for the launch of registered savings and investment accounts (RSIA) to help channel savings towards productive investments.
“RSIAs will help capital from the large undocumented sector into the formal economy. Further. It is also crucial firm guarantees be offered that contributions be subject to full amnesty – aside from Anti-Money Laundering and Terrorist Financing issues diligence.”
Giving rationale to its proposal, the PSX said that where they have been introduced, registered savings and investment accounts have been very successful in channeling saving to productive investments through capital markets and often constituents the main source of income in retirement.
In Pakistan, they will bring the added benefit of driving the government’s goal to document the informal sector.
RSIAs could become one of the driving forces in the transformation of Pakistan’s economy. By some estimates, 40 million middle-class Pakistanis have an average accumulated wealth of $10,000 for a total over Rs50 trillion.
“Much of that wealth is currently investment in real estate, gold and other asset classes in Pakistan and offshore. If RSIAs can capture 10 percent of that wealth, it would be equivalent to more than half the current market capitalization of PSX listed companies or more than the outstanding amount of PIBs and Sukuks.
The stock market proposed the new scheme to be introduced in the Income Tax Ordinance, 2001.
The PSX recommended that initially there should be no limit to the amount an investor can contribute to a RSIA. “In this way, the government would maximize the benefits of RSIAs described above, including tax revenue upon withdrawal. Furthermore, unlike VPSs, no tax credit should be given with regard to contributed amounts.”
It is further recommended that all income within the account such as capital gains and dividends should be tax free, like VPSs. It is this feature and the opportunity to legally invest in capital market instruments that will attract capital from the informal sector.
“Investment should be limited to listed equities, ETFs, tradable bonds and mutual funds. Principle-based prudential rules must be adopted to ensure protection of client assets and suitability of investments.”
The PSX said that withdrawals should be treated a taxable income because contributions are presumed to have been made from sources that have not been taxed.
“Unlike VPSs, investors should be allowed to withdraw capital from the account any time they want. That feature is key in attracting capital from wealthy individuals who may otherwise not want to lock up their capital.”