PSX Demands Review of Proposed Tax Amendment for New Companies - Android

The management and the Board of Directors of the Pakistan Stock Exchange (PSX) have reviewed the proposed tax amendments reported… Read More

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The management and the Board of Directors of the Pakistan Stock Exchange (PSX) have reviewed the proposed tax amendments reported in the media with concern, and have strongly recommended a review of the same by the Ministry of Finance and the Federal Board of Revenue (FBR).

The PSX Board would like to delineate the following with regard to the proposed amendments.

Initial public offerings (IPOs) have recently been restarted after a long hiatus, and there is a robust list 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 fall into the tax net. In fact, all the activities related to the listed companies vis a vis the capital market are documented and automated to the extent that even the capital gains tax is deducted at the source by the National Clearing Company of Pakistan Limited (NCCPL) and submitted to the FBR.

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Until June 2002, there had been a tax differential of 10 percent between public/listed companies and private/unlisted companies that had been taxed at the rate of 35 percent and 45 percent respectively. Subsequently, this was changed and a new list of companies has now been given a tax credit for only four years, with the tax credit being 20 percent for the first two years and 10 percent for the next two years.

The tax incentive for new listings is a very small enticement with no significant revenue impact. Presently, only ten listed companies are availing of this benefit, which in our estimate and based on their latest audited financial statements, comes to a total tax credit of approximately Rs. 175 million per annum.

Out of these ten 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 take the initiative to get listed. This has also had a significant impact on increasing Pakistan’s documentation and tax base, and hence, also impacted the tax revenue.

It is also important to realize that a large, well-functioning capital market is a prerequisite for a modern economy, which is why it is imperative to take measures that will aid the growth of the capital markets in Pakistan.

Due to various disclosures, listing, and corporate governance requirements, listing increases the cost of a company, and a small tax incentive is consequently given to encourage companies to get listed.

The benefits of companies listing for Pakistan’s economic growth, documentation, and a positive impact on tax revenue outweigh the revenue gained from the withdrawal of the tax credit.

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Other measures negatively impacting the REITs, Modarabas, mutual funds, and intercorporate dividends have also been proposed. All these sectors need to be encouraged for economic growth and the documentation of the economy. For example, the concept of group taxation was introduced to promote corporatization and group formation and to allow corporate entities to grow into conglomerates. Pakistan’s industry needs to consolidate and grow in scale to compete against its 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 Minister for Finance recently set up a capital markets tax consultation committee, and the PSX is urging it to fully review the implications of these proposals before moving ahead.

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