Karachi, Pakistan: The Pakistan Stock Exchange (PSX) has put forward a series of significant tax proposals aimed at enhancing the growth and efficiency of the capital markets. These recommendations have been submitted to the Ministry of Finance (MoF) and the Federal Board of Revenue (FBR) for inclusion in the federal budget for the fiscal year 2024-25.

Key Proposals:

1. Permanent Tax Credit for Listed Companies: PSX has proposed a permanent 20 percent tax credit for all listed companies, conditional on maintaining a minimum free float of 25 percent. This measure aims to increase tax revenue from listed companies, promote transparency, and enhance documentation once companies are listed.
2. Capital Gains Tax (CGT) Alignment: PSX recommends aligning the rates of CGT on listed securities with those on immovable property to eliminate tax-driven distortions among different asset classes. This alignment is intended to create a level playing field and encourage investment in the stock market.
3. Tax on Derivatives and Futures: PSX suggests that CGT on all derivatives and futures contracts traded on the exchange be aligned with future commodity contracts traded on PMEX. This would provide favorable treatment for these financial instruments and promote the development of a robust derivatives market.
4. Rationalizing Dividend Tax Rates: The tax rate on dividends should be rationalized to attract more investment in stocks, which would generate higher revenue for the government. PSX argues that the current tax regime results in double taxation of corporate profits, which discourages investment.
5. Tax Treatment of Bonus Shares: PSX proposes that the tax on bonus shares be abolished, as these shares represent the capitalization of reserves rather than profit distribution. This change would align the tax treatment of bonus shares with their true economic nature.
6. Promoting Real Estate Investment Trusts (REITs): PSX emphasizes the need to incentivize REITs to document and develop the real estate sector. Proposed measures include exempting advance tax on property transfers to/from a REIT scheme and removing the sunset clause for all REIT categories.
7. Restoration of Inter-Corporate Dividend Exemption: To encourage efficient group structures and large-scale companies, PSX proposes reinstating the exemption on inter-corporate dividends for companies eligible for group taxation.
8. Tax Credit for IPOs: To stimulate public listings, PSX recommends providing a tax credit for companies engaging in IPOs. This would rationalize tax rates compared to unlisted companies and attract more businesses to the stock exchange.
9. Reinstatement of Tax Credit on Investment in Shares: PSX calls for the reinstatement of tax credits for individual investors in new shares, mutual funds, Sukuks, and life insurance policies. This measure aims to promote long-term savings and channel funds towards documented sectors.

Impact & Rationale:

PSX argues that these proposals are revenue-positive and will promote economic growth by encouraging resource allocation towards productive and documented sectors. The recent upsurge in PSX’s performance, with market capitalization increasing by almost Rs. 4 trillion and significant foreign inflows, underscores the importance of supporting the capital markets through favorable tax policies.

PSX Managing Director & CEO Farrukh Khan highlighted the crucial role of the stock market in economic growth, tax generation, and foreign investment. He stressed the need for the government to prioritize the documentation of economic activities and support the capital markets to sustain the positive momentum and economic recovery.

These proposals, if implemented, would not only enhance the attractiveness of the stock market but also contribute to broader economic objectives such as increasing the number of taxpayers, boosting savings and investment rates, and reducing wealth inequality.

The detailed recommendations reflect PSX’s commitment to fostering a favorable investment climate and supporting the government’s efforts to drive economic growth and stability.