Qudsia Bano

In a bid to ensure sustained market growth and economic stability, experts are urging the government to adopt a series of proposals put forth by the Pakistan Stock Exchange (PSX). These recommendations aim to enhance the investment climate, increase market capitalisation, and attract foreign investments, thereby contributing to the country's overall economic health. The PSX has outlined several key proposals for the federal budget of FY25, focusing on tax incentives for listed companies, reinstatement of tax credits for investments, and revisions to the treatment of bonus shares. These measures are designed to make Pakistan’s capital markets more competitive and appealing to both domestic and international investors. One of the primary proposals is to lower the tax rate for all listed companies by providing a 20% tax credit. This move is intended to bridge the significant tax rate gap between Pakistan and other countries in the Asian region. Currently, companies in Pakistan face a corporate tax rate of 39%, which includes a super tax, compared to an average of 19.8% in the region.

“Reducing the tax burden on listed companies will not only increase market listings but also promote transparency and documentation within the economy,” said Dr Farhan Khan, an economic analyst at the Pakistan Economic Forum. “A competitive tax rate is essential for attracting foreign investments and ensuring the growth of our capital markets.” In addition to encouraging IPOs, the PSX emphasises 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 redirected public funds towards undocumented sectors, undermining efforts to formalise the economy. “Reinstating these tax credits is crucial for promoting savings among small savers and the salaried class,” stated Farhan. “This will channel funds back into the stock market and government securities, contributing to economic stability and growth without significantly impacting government revenue.” Another significant recommendation involves 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.” 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. Jameel Ahmed, Governor of the State Bank of Pakistan, stressed the importance of these proposals, saying, "By implementing these measures, we will sustain the positive momentum in our capital markets, drive economic growth, and ensure long-term prosperity."

Credit: INP-WealthPk