PSX presents 2024-2025 federal budget proposals for economic growth, employment generation

Karachi – The Pakistan Stock Exchange (PSX) has submitted a number of important tax proposals to the Ministry of Finance (MoF) and the Federal Board of Revenue (FBR) for consideration in the federal budget for the fiscal year 2024-25. The recommended measures are positive for income and will promote the allocation of resources towards productive and documented sectors of the economy. This is important for economic growth and employment generation in Pakistan.

Pakistan’s stock market has recently seen an increase in its performance in response to stability measures introduced in the macro economy. The market capitalization has increased by almost Rs 4 trillion in the outgoing year, creating a significant wealth impact on the economy. Foreign inflows amounting to about USD 132 million have been invested in the country through the stock market from July 2023. It is imperative that the Ministry of Finance and the FBR consider the proposals put forward by PSX to ensure that the stock market continues to contribute to economic growth, taxes, the entry of foreign investors and documentation of the economy. This is a crucial step to ensure the continuation of positive capital market momentum and economic recovery.

PSX emphasizes that the government prioritizes the comprehensive documentation of all economic activities.

Capital markets are among the most well-documented sectors of the economy. A broad-based capital market supports key economic and social objectives, such as increasing the number of taxpayers, increasing savings and investment rates, and reducing wealth inequality. To meet these objectives, investors need favorable and sustainable tax treatment. The Pakistan Stock Exchange has submitted several proposals to the Ministry of Finance and the Federal Board of Revenue for the federal budget FY2024-2025. The most important proposals, which aim to positively affect government revenue, include the following:

• Align Capital Gains Tax (CGT) rates on the disposal of listed securities with CGT rates on the sale of immovable property: It is important to remove tax-induced distortions between different asset classes to create a level playing field. Basically, capital gains taxation on listed securities should be uniform with that of real estate and other asset classes. The PSX therefore proposes that the CGT rates for listed securities be brought into line with CGT for the sale of real estate.

• Align capital gains tax rates for all derivatives and futures contracts traded on the PSX with commodity futures contracts traded on the PMEX: CGT for all derivatives and futures contracts traded on the PSX to be taxed in line with the contracts commodity futures traded on PMEX. The review of domestic and international markets revealed that cash-settled derivative contracts available on exchanges have a lower tax rate. Currently, all derivatives and futures contracts traded on the PSX are subject to a higher CGT that must be matched by commodity futures contracts traded on the PMEX. Exchange-traded derivatives are also seen as better alternatives to leveraged trading platforms. Therefore, it is essential to have a favorable treatment for all derivatives and futures contracts, including cash-settled derivative contracts traded on the PSX to create a robust and efficient derivatives market.

• Rationalization of the current dividend tax rate: The dividend tax rate should be rationalized as it would generate more investment in shares and thus more revenue for the government. As it is, corporate business profits are already taxed twice. One time at company level @ 29 percent and on dividend distribution @ 15 percent. This is in addition to Super Tax of up to 10 per cent for 2023 onwards, based on the income bands established through the Finance Act 2023 for high earners and corporations. Any possibility of further increase in the said tax rate will be confiscatory in nature and will discourage equity investments which in turn will slow down business growth and industrialization in the country.

• Treatment of Bonus Shares as shareholder income: Bonus shares are capitalization of a company’s reserves and not a distribution of profit to shareholders. Therefore, no tax is due on such releases. Moreover, the bonus shares issued do not increase the resources of the recipient against any payment. Thus, it cannot be qualified as income in the hand of the recipient and the distribution by the issuer resulting in applying a tax on this matter does not fall under the scope of the Ordinance as it is merely an accounting treatment of the reclassification of the reserves of the issuing company resulting in profits diluted per share. PSX therefore proposed that the amendment made to clause (29) of section 2 and the newly inserted section 236Z of the Ordinance through the Finance Act 2023 may be withdrawn. It is pertinent to mention that in the period July 01, 2022 to June 30, 2023, 53 companies announced bonus shares worth (with face value) over Rs 31.4 billion; while for the period 01 July 2023 to 29 February 2024, only 04 companies announced bonus shares amounting (in nominal value) to Rs 446 million. Consequently, the Government has not received any significant income under this title; on the contrary, the government has lost the CGT which could have been earned from trading such an increased number of shares, if the same amount of bonus shares had been issued this year as well.

• Documenting the real estate sector & promoting REITS structures: REITS are an ideal instrument to document and help develop the real estate sector, a priority of the government. They also allow smaller investors to gain exposure to the real estate sector. The real estate sector is a major avenue of investment in Pakistan, albeit undocumented. REITs can prove to be an effective tool for bringing this sector into the tax net and encouraging documentation. Therefore, it is important to incentivize REITs. This will attract more investment especially from companies with current price and revenue disclosure. It will generate indirect and additional income from allied businesses and is positive. Moreover, speculative pressure on real estate prices will also ease. Exemption of advance tax on transfers of properties to/from a REIT scheme and removal of sunset clause i.e. June 2023 for all categories of REITs is proposed.

• Reinstatement of inter-corporate dividend exemption: Until June 2020, under clause 103C of the Second Schedule, dividend income received by a company was exempt if the recipient of the dividend for the tax year was eligible for Group Relief u/s 59B. The said clause has been removed from the Finance Act 2021. This discourages the formation of efficient group structures and large-scale companies that can compete regionally and globally. PSX therefore proposes to restore such an exemption for inter-corporate dividend between companies eligible for group taxation.

• Tax credits:

-> Tax credit for all companies doing an IPO: To encourage companies to engage in an IPO and get listed on the Stock Exchange, tax rates to be rationalized vis-à-vis unlisted companies. Companies in the Asia region are taxed at 19.8 percent, while in Pakistan the corporate tax rate is 39 percent including supertax. In this framework, it is proposed that the tax rate for all listed companies be permanently reduced by giving a tax credit of 20 percent that meets the requirements set out, including a minimum of 25 percent. This will result in higher tax revenue from listed companies along with increased documentation and transparency once listed, as well as higher CGT revenue.

-> Reintroduction of tax credit for equity investments: Tax credits are essential for small savers, especially the salaried class, to promote long-term savings for their retirement and other life goals. These savings are channeled into the stock market and government securities. The withdrawal under the Finance Act 2022 of tax credits available to individual investors for investments in new shares, mutual funds, sukuk and life insurance policies has diverted public funds to undocumented sectors. To counter this situation, PSX proposes to reinstate section 62 of the Income Tax Ordinance which was removed in the 2022-2023 Federal Budget. This step will promote savings to taxpayers without a major impact on revenue.