KARACHI: Pakistan Stock Exchange (PSX) has recommended a 20 percent tax credit should be granted to listed companies in order to encourage documentation of the economy.
In its proposals for budget 2021/2022, the PSX said that it is generally observed that when companies opt for a listing on a stock exchange, their profits grow substantially due to effective corporate governance, better disclosures, and ability to raise capital from the market.
Increased number of listed companies and higher profitability leads to higher tax revenue for the government, including incremental revenues from capital gain tax (CGT).
Hence it is important to encourage companies to get listed on PSX.
However, tax credit on enlistment under section 65C has been withdrawn through Second Amendment Act, 2021.
This tax incentive was a very small carrot with no significant revenue impact.
Presently, only 10 listed companies are availing this tax credit which we estimate, based on their latest audited financial statements, has a tax revenue impact of Rs. 175 million per annum. Out of these 10 companies, 4 companies are in their 4th or last year of this benefit and 4 companies have recently listed in the current financial year, the PSX said.
In fact, the tax revenue benefit in the medium term is very large as the documentation of the corporate sector increases and hence tax revenue of Pakistan.
Further, the CGT collected on these 10 symbols for the 8 months period from July 2020 to February 2021 is Rs.176 million, and, extrapolating based on this 8 months average collection of CGT, the tax collection for the 12 months period could be Rs.264 million, compared to the total estimated tax credits of Rs.175 million availed by these 10 companies.
The average rate of tax in the Asian region is 21.32 percent; whereas, currently in Pakistan the corporate tax rate is 29 percent.
As such it is imperative that the corporate tax rate after the tax credit is brought down reasonably to compete with the other regional and global countries.
Therefore, in order to encourage documentation and create a long term positive impact on tax revenue, there should be reduced rates of tax for listed companies compared to unlisted companies.
The PSX proposed that to encourage documentation of the economy, the corporate 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.
This will be long term positive for tax revenue.
