Stock market is the best available option for any government to attract foreign exchange. Investments in stock market yield either dividends or capital gain by the concerned companies and are not burden on National Exchequer as far as debt servicing is concerned. Hence investments in stock exchange have two fold benefits to the Country, increasing forex reserves without any debt servicing and secondly no impact of currency devaluation. For these benefits normally, forex starved countries give lot of special incentives to international funds.
Pakistan’s stock market was in turmoil due to political instability in 2017. Thereafter, the then PMLN in Federal Budget 2017 imposed certain taxes which has substantially increased cost of doing business. This, resultantly, made Pakistan stock exchange, which used to be the top performing market, as worst performing market of the world.
PSX Stockbrokers Association (PSA) had various meeting with the relevant departments and certain proposals for bringing in the much need momentum in stock exchange has been forwarded to Mr. Asad Umer, Finance Minister (FM) in October, 2018 followed by meeting with the Prime Minister (PM) on December 09, 2018.
Let us evaluate the impact of these proposals
It was briefed to PM that stockbrokers before demutualisation were more than 550 and reduced to 239 after cumbersome and tedious regulations. PSA termed these regulations as strangulations and requested PM to remove these as per his own agenda to increase ease of doing business.
Furthermore, PSA, specifically mentioned following points and requested PM to help them in reducing cost of doing business and attracting investors to stock market.
Without conducive environment thereby increasing ease of doing business & reducing Cost of doing business – volume generation is not possible and without generating volumes it is not possible for any of the stakeholder to survive be it Stockbrokers, PSX, SECP, FBR.
To bring back volumes in stock market following measures were identified
1. Advance tax U/S 233A of the Income Tax Ordinance, 2001 be abolished
Volumes were drastically reduced when last year (2017) GOP increased Advance Tax U/S 233A from 0.01% to 0.02%. This translated Gross tax incidence at 33% while Net tax incidence at 67%. The viability of any business with this hefty tax incidence becomes questionable. Secondly, brokerage commission is based on quantity whereas this tax is based on value.
When this cost of doing business is abolished, it will automatically increase volumes as day-traders, who trade for 5 or 10 paisas bring in the desired volume.
GOP revenues will not be compromised as volume will be doubled, if not more, attracting Capital Gain Tax (CGT).
It would be interesting to note that CGT collection for the year ended June 30, 2018 was around Rs. 1.8 b (2017: Rs. 18b) and Advance Tax for that period was approximately Rs. 1.3b (2017: Rs. 3b).
2. Huge tax refunds –
For the last ten years refunds are not being paid to stock brokers. Their Working Capital is stuck in refunds. Like civilised countries law be made that on completion of assessment, excess tax withheld be automatically refunded; This will bring in much needed liquidity to be invested in stock market.
3. Capital gain tax be rationalised with the other class of investment – immovable property
Capital gain should be equal to all class of investments, be it real estate or stock market.
Presently CGT on stocks is levied at flat rate of 15% for tax files and 20% for non-tax filers.
Whereas capital gain on immovable property is levied on slab basis i.e. if immovable property is sold within 1 year rate is 10%, sold in 2 years – rate is 7.5%, if sold in 3 years – rate is 5% and if sold after 3 years it will be tax free. This tax free incentive is normally given to retain investments in country.
PSA has recommended that CGT on stock market transactions be aligned with CGT rates applicable on immovable property.
This will bring volumes in stock market and will remove anomaly in the current statute.
4. Capital Loss on disposal of securities
Business losses all over the world, including Pakistan, are allowed to be carry forward for 6 years. However, the same is not allowed in case of loss on disposal of securities. This will give substantial relief in case of losses and will address the anomaly in the current law.
5. Capital Value Tax (CVT)
CVT was initially introduced in 2012 in place of CGT and It was to be removed after imposition of CGT. GOP imposed CGT but did not removed CVT. As a result, investors are subject to double taxation bearing additional cost i.e. both CVT and CGT. CVT is basically a tax on Capital Value and when GOP collects CGT then tax on Capital values becomes redundant and illegal. One cannot charge tax on capital value and also tax on gains arising from investments made from that capital value which has already been taxed initially. Therefore, removal of CVT is requested.
6. Tax on Dividend @15% for filers and 20% for non-filers
Tax on dividends is discouraging the Corporate Culture, documentation of economy and tantamount to tax on already tax paid income. It may please be reduced to 7.50% for fillers and 12.5% for non-tax filers. This will attract investors to invest in stock market and non-tax filers to tax net.
7. Tax on inter corporate dividends
Tax on inter corporate dividends is discouraging the Corporate Culture and Holding Company Concept and may please be completely abolished;
8. To encourage listing on Stock Exchange,
a. Corporate Tax for Listed Companies needs to be reduced so that some incentive is created for companies to get listed.
b. Definition of term “SECURITY”
PSA brought the decision of Sindh High Court (216 PTD 1813/2016 SLD 1141 dated 04-03-2016). In this judgement, learned Court gave a ruling that to claim Capital gain tax exemption, which was then available, shares of a company shall be securities at the time of acquisition.
GOP should take notice of this change in definition of the term “Security“ by a court order. FBR be directed to take suitable measures to counter its disastrous affect on Corporate World. This, if not addressed, will halt the corporatization process.
9. Securities and Exchange Commission of Pakistan (SECP)
By virtue of Section 169 of Securities Act, 2015, Commissioners at SECP made exhaustive, cumbersome and tedious regulations which turned out to be strangulations and more then 50% brokerage houses chose to close operations, thereby created unemployment and narrowed competition. Killing Competition is like killing growth and therefore immediate action required to address ease of doing business. Complete working paper has already been submitted to Securities and Exchange Commission of Pakistan (SECP) to bring in ease of doing business.