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Govt Likely to Grant Incentives to Capital Market in Budget 2021-22

The government is likely to grant incentives to the capital market in the upcoming budget (2021-22) by incorporating viable proposals of the Pakistan Stock Exchange Limited (PSX) including rationalization of the capital gains tax (CGT) on disposal of securities.

Sources told Propakistani that the Ministry of Finance has received budget proposals of the Pakistan Stock Exchange Limited (PSX) for 2021-22. Finance Ministry has assigned the FBR to work out the revenue impact of each proposal before having direct meetings with the stakeholders in the coming days.

Under these proposals, the PSX submitted that Pakistan’s capital market saw robust growth over the years in terms of its market capitalization, which was around Rs. 8 trillion on January 30, 2020, but as a result of the global downturn of events due to the covid pandemic that spiraled down the market capitalization to around Rs 5.7 trillion on April 01, 2020. This has led to uncertainty and pessimism surrounding Pakistan’s national economic indicators. The first half of fiscal 2020 showed some clear signs of a path towards economic recovery, however, considering the existing situation, the journey towards sustainable long-term growth is expected to take time, the turnaround efforts are well underway.

Globally, the Coronavirus has severely increased in reach, causing major disruptions to economic activity and it has been reported that the IMF has also significantly downgraded its global growth outlook for 2020 from 3.3 percent growth previously to below zero.

Keeping in mind the chronic macro-economic stability challenges, low savings and investment rates, underdeveloped rural economy, digitalization of financial transactions, and the emerging connectivity with China and other neighboring economies, Pakistan has immense potential given the implementation of strong structural reforms in the capital market.

The government’s fiscal policies and reforms will continue to shape the path to encourage manufacturing, exports, and discourage unnecessary imports. Much work still needs to be done to enhance the ease of doing business, digitize the economy through innovation, and strengthen and diversify the export base.

It is proposed that the government should introduce a mechanism and regulatory structure for the launch of registered savings and investment accounts (RSIAs) to help channel savings towards productive investments. RSIAs will help bring capital from the large undocumented sector into the formal economy. Further, it is also crucial that firm guarantees be offered that contributions be subject to full amnesty — aside from AML and Terrorist Financing issues due diligence.

It has proposed to eliminate/reduce CGT for the next 24 months or at a minimum align rates of capital gains tax on disposal of securities with other regional exchanges and OECD countries of the world.

The tax exemption on the sale of immovable property to both types of real estate investment trust (REIT) schemes (Development and Rental), which was available prior to the Finance Act, 2015 should be resorted and made available up to June 2025.


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The PSX has proposed that the government should start funding its pension liabilities to avert a future pension crisis and encourage capital formation in Pakistan. An adequately funded pension scheme would offer old-age benefits to retired employees at public sector enterprises and government workers, without putting the burden on the annual budget. Further, it is recommended that a certain percentage of the funded pension scheme be invested in the capital markets.

The FBR should align the rates of capital gains tax on disposal of equity securities of non-residents with that of debt securities for non-resident companies having no permanent establishment in Pakistan.

All the proposals outlined are primarily designed to remove the disincentives, the incidence of double and at times multiple taxations that are penalizing 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 some cases, likely to increase the government’s revenue.

According to the documents, the core principle of our proposal is aimed at increasing the size and depth of the capital market by incentivizing the listing of new capital without impacting government revenues.

The Shariah compliance criteria under the income tax laws be modified to make it practically possible to meet them. This will help the promotion and development of Islamic capital markets by encouraging new listings of companies on PSX through mobilizing resources towards faith-based investor savings, PSX proposed.

The wordings of the laws enacted by the Sindh Revenue Board, Punjab Revenue Authority and Khyber Pakhtunkhwa Revenue Authority are overlapping. The matter being of equal relevance to all the provinces and affecting the entire Services Sector, may be placed on the agenda of the Council of Common Interests so that a sharing formula for each province can be devised.

The government must move away from short-term measures and frequent changes to tax treatment and adopt long-term measures to promote savings and investment and development of the capital market.

Documents revealed that It is also proposed to allow carry forward of losses, for 6 years rather than for 3 years as stated in Proviso of subsection 5 of section 37A of the Income Tax Ordinance, 2001.

It is proposed to reduce the rate of withholding tax on the gross income earned on MF transactions from 10% to 2.5%.

The government should introduce a mechanism to remove the double taxation of a company’s profits -once in the hands of the company and once in the hands of shareholders as dividends – such that the effective tax rate on dividends is on par with profit on debt. Rationalize the current tax rate on dividends to make it equal to the tax rate on profit from debt. Provided that there should be no withholding tax on dividends up to Rs. 100,000 per annum.

The applicable rate of tax on dividends by a REIT scheme should be levied as it is applicable for mutual funds.

The tax rate should be permanently lowered for listed companies, by giving a tax credit of 20% of tax payable for those companies that meet the prescribed requirements including a minimum free float of 25% throughout.

In order to encourage small and medium enterprises to get listed on the SME Board, it is proposed that the rate of tax for such listed SME companies be permanently lowered by giving a tax credit of 50% of tax payable.

It is proposed that the Government of Pakistan introduce a mechanism and regulatory structure for the launch of registered savings and investment accounts (RSIAs) to help channel savings towards productive investments.
RSIAs will help bring capital from the large undocumented sector into the formal economy. Further, it is also crucial that firm guarantees be offered that contributions be subject to full amnesty— aside from AML and Terrorist Financing issues due diligence.

At present, Pakistan’s pension scheme for government employees is an unfunded, pay-as-you-go scheme. The government of Pakistan exclusively finances the pension expenditure by obtaining a provision in the annual budget for this purpose. This has all the making of an impending pension crisis in the future and places an unfair burden on future generations.

In the case of public sector enterprises too, much of the pension liability remains un-funded. The future monetary obligations are taken to be met from future taxation, which places undue fiscal burden and responsibility on future generations. Age analysis of the population suggests growing state pension expenses given the expected increase in the older age group.

These conditions have led to increasingly stressed pension arrangements. Pension system reforms are focused on extending coverage to funded pension systems, which are professionally managed, extend to the informal sector, and facilitate switching from the existing employer schemes. While in the public sector, funds have been created at the provincial level to pre-fund the future liability.

Avoiding a looming pension crisis Governments in various countries have actively worked to provide financial security for their aging populations by maintaining adequately-funded pension funds. These pension funds invest in a diversified range of global assets including equities, bonds, mutual funds, ETFs, and even real estate, infrastructure, and alternative assets.

In Canada, the CPPIB (Canada Pension Plan Investment Board) is the government’s primary pension scheme and has grown to become one the largest pension funds in the world.

The CPPIB invests in the full stack of assets outlined above and returns are used to finance the government’s pension liabilities every year. This takes the burden of pensions away from the annual budget. The CPP fund now manages over $409.5 billion in assets, up from $128 billion in 2010.


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An actively managed government pension fund in Pakistan will also help channel investment towards capital markets since equities feature heavily at global pension funds. In Pakistan, the federal government could set up such an investment holding as a single-purpose asset management company with 100% control, and run by professional investment managers.

The government should start funding its pension liabilities to avert a future pension crisis and encourage capital formation in Pakistan. An adequately funded pension scheme would offer old-age benefits to retired employees at public sector enterprises and government workers, without putting the burden on the annual budget. Further, it is recommended that a certain percentage of the funded pension scheme be invested in the capital markets.

With Pakistan facing very high levels of poverty and the Government of Pakistan facing a rise in the old age population and having a scarcity of resources and funds to provide any old-age benefits. An adequately funded pension scheme is one of the resources which the Government of Pakistan could offer to facilitate retired public sector employees. This would result in improvement in liability management of the Federal Government Employees Pension Scheme, documents revealed.

Currently, carry forward of losses is only allowed up to a period of three years and that last year CGT collection was merely Rs. 1.3 billion. Moreover, with the falling market, tax collection will not be worthwhile at all. Therefore, it is suggested that CGT be eliminated for the next 12-24 months. This will be a big headline change, with no revenue impact, and will encourage new domestic and international investors to come into the market.

Since the current CGT rate of 15% is very high and that too is without any benefit of holding period, therefore it is proposed to reduce this rate in line with other regional and OECD countries such as Bahrain, Hong Kong, India, Malaysia, Mauritius, Qatar, UAE, New Zealand, Hungary, Norway, etc. where there is no or very low capital gain tax as compared to Pakistan.

There is no capital gains tax in countries such as Bahrain, Brunei Darussalam, Hong Kong, Oman, Saudi Arabia, UAE, New Zealand, Norway, etc. In some countries, there is an exemption on capital gains tax with some conditions. If Pakistan has reduced rates competitive to the region it can attract more foreign investment and also induce greater participation from local investors, which in turn will generate more tax revenue for the government, PSX proposals added.

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