March 24, 2021: The Management and the Board of Directors of Pakistan Stock Exchange (PSX) has reviewed the proposed tax amendments reported in the media with concern and strongly recommends a review of the same by the Ministry of Finance, FBR and relevant authorities. The PSX Board would like to delineate the following with regard to the proposed amendments.
After a long hiatus, IPOs have recently restarted and there is a robust pipeline of companies waiting to raise capital from the stock market to expand their operations. Capital markets in Pakistan are probably the most documented sector of the economy. When a company gets listed, not just that company, but its supply chain and all its shareholders also become documented and come into the tax net. In fact, all activities related to listed companies vis a vis the capital market are documented and automated, to the extent that even capital gains tax is deducted at source by NCCPL and submitted to the FBR.
Until June 2002, there was a tax differential of 10% between public/ listed companies and private/ unlisted companies, who were taxed at the rate of 35% and 45% respectively. Subsequently, this was changed and newly listed companies are now given a tax credit only for four years, with the tax credit being 20% for the first two years and 10% for the next two years.
The tax incentive for new listings is a very small enticement with no significant revenue impact. Presently, only 10 listed companies are availing this benefit, which in our estimate based on their latest audited financial statements, comes to a total tax credit of approximately Rs 175 million per annum. Out of these 10 companies, four companies are in their fourth or last year of availing this benefit and four companies have recently been listed in the current financial year. This tax incentive greatly encourages new companies to come forth and get listed. This has a significant impact on increasing the documentation and tax base of Pakistan and hence on tax revenue. It is also important to realize that a large, well-functioning capital market is a prerequisite for a modern economy. Hence it is imperative to take measures that help the capital markets in Pakistan to grow.
Due to various disclosure, listing and corporate governance requirements, the cost of a company goes up when it becomes listed. Hence a small tax incentive is given to encourage companies to get listed. The benefits of companies listing for Pakistan’s economic growth, documentation and positive impact on tax revenue far outweigh the revenue gained by withdrawing the tax credit.
Other measures negatively impacting REITs, Modarabas, Mutual funds and intercorporate dividend have also been proposed. All these sectors need to be encouraged for economic growth and documentation of the economy. For example, the concept of group taxation was introduced to promote corporatization and group formation, allowing corporate entities to grow into conglomerates. Pakistan’s industry needs to consolidate and grow in scale to compete against regional and global competitors. As a result of corporatization and consortium relief, the groups can grow their subsidiaries, list profitable businesses in the capital markets, raise liquidity through equity and debt issuance at different layers of the group structure, increase capital market turnover and capitalization, and enable the common person to invest and benefit from well-governed and regulated businesses. All of this results in greater documentation, tax revenue and economic growth.
The Hon. Finance Minister has recently set up a capital markets tax consultation committee. PSX strongly requests that this committee fully reviews the implications of these proposals before moving ahead.
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