KARACHI: Pakistan Stock Exchange (PSX) has presented important budgetary proposals for 2021-22 to boost economic growth and address key structural imbalances in Pakistan’s economy. The stock market is one of the most documented sectors of the economy. All capital market participants are fully documented; hence developing the capital markets is fully aligned with Federal Board of Revenue’s (FBR) efforts to increase the tax base in Pakistan.
An efficient, equitable and broad-based tax system and a culture of corporatisation are interdependent. In addition, a broad-based capital market helps to achieve important economic and social objectives like increasing the number of taxpayers, improving savings and investment rates, and reducing wealth inequality.
Fiscal discipline and tax measures have a direct and profound impact on the structure and functioning of the capital markets. A large and well-functioning capital market is a prerequisite for a modern economy. Hence, it is imperative for the growth of Pakistan’s economy to create a conducive environment which will help to attract more companies and investors to the capital markets.
The core principle of the 14 proposals presented by PSX is to increase the size and depth of the capital market by incentivising new listings and increasing the investor base, without impacting government revenues. All the proposals essentially focus on impediments and disincentives that are negatively impacting the development of the capital market, as well as the documented corporate sector.
The recommendations are primarily designed to remove the disincentives, and the incidence of double, and at times multiple, taxation that is penalising capital formation, which is essential for our corporate sector to be able to compete effectively in the world. Most proposals are revenue neutral, and in many cases, likely to increase the government’s revenue.
Some of the key points in the budget proposals include reform of Capital Gain Tax (CGT), rationalisation of tax rates of listed companies and small-medium enterprises (SMEs), the introduction of savings and investment accounts, documenting the real estate sector and promotion of real estate investment trusts (REITS) and introduction of long term and consistent tax policies.
Capital Gains Tax (CGT)
Recent changes in Capital Gains Tax (CGT) structure for real estate and construction have created a tax driven distortion between listed and other asset classes, where the CGT rate is very high for listed investments. CGT is also high in Pakistan compared to regional and Organisation for Economic Co-operation and Development (OECD) countries.
PSX proposes that the CGT for listed securities should be aligned with that of other asset classes and brought in line with international levels. A reduction or a time bound elimination of CGT will be a major incentive to attract new local and foreign investors, without any significant loss of tax revenue, and will in fact increase tax revenue in the medium term.
Rationalistaion of tax rates
Another key proposal is the rationalisation of tax rates for companies listed on the PSX and enhanced tax credit for listed small and medium enterprises. PSX lauds the steps taken by the Government to address the issues faced by the SMEs, especially in view of the pandemic, in allowing them access to capital on easy terms and conditions.
PSX has recently launched the Growth Enterprise Market (GEM) board to facilitate SMEs to get listed and access alternative sources of capital. In order to support and encourage SMEs to get listed on the GEM Board, it is proposed that tax rate for listed SMEs be lower by giving them enhanced tax credit after listing. At the same time, PSX recommends that the corporate tax rate for listed companies should be reduced, which will prove to be a positive step for documentation of the economy and revenue generation.
Introduction RSIAs and ISAs
PSX has also put forward budgetary proposals recommending the introduction of Registered Savings & Investment Accounts (RSIAs) and Individual Savings Accounts (ISAs), especially suited for Pakistan. This will help increase the low savings and investment levels in Pakistan, while enabling investors to accumulate savings to achieve life goals by investing in the capital market. RSIAs and ISAs could become one of the driving forces in transformation of Pakistan’s economy.
Documentation of real estate sector
Much of the wealth that is currently locked in unproductive assets like real estate, gold and offshore, could be diverted towards productive use through these accounts. This will also help to increase documentation of the economy and tax revenue.
Consistent tax policies
As much as favorable tax treatment, investors need a stable and predictable tax environment. The government of Pakistan must consider adopting long-term measures to promote savings and investment and development of the capital market. To this end, PSX has proposed that the tax consultative committee for capital markets meet regularly to discuss all tax measures impacting the capital markets.
Presenting the budgetary proposals for the 2021-22 budget, PSX’s MD and CEO, Mr. Farrukh H. Khan, said, “Pakistan’s capital market has immense potential to contribute to our country’s economic growth. PSX remains committed to building the capacity and trust required for capital formation and financial inclusion by introducing new products and investing in world-class trading infrastructure.”
“We are pleased to present the proposals for the kind consideration of ministry of finance and the FBR for inclusion in the federal budget 2021. We believe that implementation of these proposals will greatly help in improving the saving rate, encourage investment, increase tax revenue, contribute to economic growth and lower wealth inequality in Pakistan.”
