Qudsia Bano

The Pakistan Stock Exchange (PSX) has recently proposed several tax reforms to the Ministry of Finance and the Federal Board of Revenue with the potential to significantly bolster the country's capital markets and overall economic stability. Meanwhile, financial experts and industry leaders are advocating for comprehensive tax incentives aimed at encouraging Initial Public Offerings (IPOs) and promoting long-term saving investments. One of the primary proposals by the PSX is to lower the tax rate for all listed companies by providing a 20% tax credit. This measure is designed to make the prospect of going public more attractive to private companies. Currently, companies in Pakistan face a corporate tax rate of 39%, including super tax, which is considerably higher compared to the 19.8% average in Asian. “Reducing the tax burden on companies that opt for IPOs will not only increase market listings but also enhance transparency and documentation within the economy,” said Ali Habib, a senior financial analyst at Integrated Equities Limited. “A lower tax rate for listed companies can drive substantial growth in market capitalisation and attract foreign investments.”

In addition to encouraging IPOs, he emphasised the need to reinstate tax credits for investments in shares, mutual funds, sukuks, and life insurance policies. “The withdrawal of these credits under the Finance Act 2022 has diverted public funds towards undocumented sectors, undermining efforts to formalise the economy.” “Reinstating Section 62 of the Income Tax Ordinance, which allows tax credits for individual investors, is crucial for promoting savings among small savers and the salaried class,” stated Saeed Ahmed Khan, Finance Manager at KTrade Securities. He said that this move would channel funds back into the stock market and government securities, contributing to economic stability and growth without significantly impacting government revenue. Another significant recommendation is the amendment of tax policies regarding bonus shares. The PSX argues that bonus shares should not be treated as income for shareholders since they represent a capitalisation of reserves rather than a distribution of profits.

“Classifying bonus shares as taxable income is fundamentally flawed,” explained Zafar Masud, Chairman of the Pakistan Banks' Association. “These shares do not increase the recipient’s resources but merely reclassify the company’s reserves. Correcting this will encourage companies to issue bonus shares, fostering a more vibrant and dynamic market,” he said. Zafar noted that the PSX also advocates for incentives to promote Real Estate Investment Trusts (REITs) and the reinstatement of exemptions on inter-corporate dividends. “REITs can play a pivotal role in documenting and developing the real estate sector, while tax exemptions on inter-corporate dividends will encourage the formation of efficient corporate group structures.” “It is imperative that the Ministry of Finance and FBR consider these proposals seriously,” urged Jameel Ahmed, the State Bank of Pakistan Governor. “Implementing these measures will sustain the positive momentum in the capital markets, drive economic growth and ensure long-term prosperity,” he said.

Credit: INP-WealthPk