KARACHI: Pakistan Stocks Exchange (PSX) has presented its proposals for the Federal Budget 2016-17 directed towards providing an impetus to create an investment friendly environment, spur investment, enhance industrial activity and economic growth in the country.
PSX has proposed that the provision for levy of FED on services of stock brokers may be withdrawn retrospectively for the promotion and betterment of the capital market and in the interest of justice & equity.
Prior to the 18th amendment, the Federal Excise Duty (FED) was charged by FBR under the sales tax mode which was duly paid to the Federal Government by the KSE Stock Brokers.
The Sindh Revenue Board was constituted in the year 2010 and the Government of Sindh promulgated the Sindh Sales Tax on Services Act, 2011 (the Act). The Act introduced tax on the “Stock Brokers Services” under PCT 9819.000. The stock brokers are duly complying the provincial laws in letter and spirit.
At the time of passing of 18th Amendment and Budget for FY beginning July 01, 2011, the FBR in its website and other public announcements has disclosed that it will withdraw FED on Services and relevant FED laws.
However, contrary to the above, FBR issued show cause notices to the stock brokers for charge of FED in Sale Tax Mode for the years 2010 to 2014 on the basis that provision for levy of FED on services of stock brokers under Table II of the First schedule to the Federal Excise Act, 2005 has not been omitted from Federal Excise Act, 2005.
The KSE Stock Brokers Association approached the Court of Law and was granted an interim Stay Order whereby the actual Suit is pending for decision.
Such an instance has created a situation of Double Taxation at exorbitant rate of 31 percent on services rendered by stock brokers. It has affected the credibility of the Government.
It would not be out of place to mention that it is imperative for the matter to be resolved at the earliest since any coercive measures for recovery of demanded FED, would surely have a detrimental impact on the country’s Capital Market, more so considering that the huge effort is underway by the Government of Pakistan to bring strategic partner for the newly integrated Pakistan Stock Exchange.
Pakistan Stocks Exchange has proposed that Capital Gains Tax (CGT) slabs should be revised and the CGT rate should be 10 percent where holding period of a security is less than 6 months, rate should be 8.0 percent where holding period of a security is more than 6 months or more but less that 12 months and CGT should be zero on securities held for over a year.
PSX proposed that in order to further broaden the investor base of the capital market and providing a level playing field, it is imperative that the ‘OPT OUT’ option is also made available for foreigner investors.
Country’s integrated bourse has suggested that the difference of tax rate between listed and non- listed companies should be at least 5.0 percent.
The Finance Act, 2015 had reduced corporate tax rate from 33% to 32% for all the companies. In past it is observed that reduced rate of tax for the listed companies in comparison to other companies has served as an incentive to the companies for enlistment which helped in improving documentation of the economy, effective corporate governance, which results in growth and positive impact on the overall economy of the country.
Reduction in tax will help in promoting better corporate disclosures, excellent returns to equity investors, broadening of corporate sector tax-base, discovery of price and enhancement of revenues for the national exchequer by way of taxes from a greater number of companies.
The capital market is under a process to introduce companies’ on SME board, therefore, in order to encourage it is proposed that reduced rate of tax for such listed companies’ be introduced at 20%.
A well functioning SME segment at the stock exchanges offers a range of benefits including greater access to growth capital for innovative SMEs, documentation, good governance, new jobs through entrepreneurship, more investment opportunity for domestic portfolio investors and local venture capitalists. PSX is hopeful that such listed companies will help in increasing tax revenues for the country.
It is proposed that the tax credit under section 65C of the Ordinance equal to 20 percent of the tax payable to the companies for opting for enlistment in any registered stock exchange in Pakistan be allowed up-to five year from the tax year in which company is listed.
PSX is of the view that the value of bonus shares, the amount of any bonus declared, issued or paid by a company to its shareholders is not ‘income’ at all and it must not be considered income for the purpose of taxation.
Double or multiple taxations reduce the benefits to beneficiaries of the dividend and has in fact become a hindrance and deterrent for offering dividends by a listed company.
When a company (corporate shareholders) receives such dividend it becomes part of its distributable profit, hence when such part of profit is distributed as dividend to its shareholders it again attracts withholding tax at 12.5%, therefore resulting in multiple taxation whenever a dividend is paid by a company to its shareholders. Therefore, the above scenario of dividend shows how double/multiple taxation occurs.
It is therefore, proposed that the dividend paid by a company to another company be exempted from tax.
In order to facilitate the development of capital market, capital value tax (CVT) should be withdrawn on the purchase value of any shares of a public company listed on a registered stock exchange in Pakistan or modaraba certificates or any instrument of redeemable capital.
A new concept of Alternative Corporate Tax (ACT) has been introduced through the Finance Bill 2014 by inserting new section 113C of the Ordinance. Under this concept of taxation, where corporate tax falls short of 17% of accounting income, ACT is required to be paid as minimum tax.
Sub-section (11) of section 113C provides that “the commissioner may make adjustments and proceed to compute accounting income as per historical accounting pattern after providing an opportunity of being heard.”
It is observed that companies in the initial years made substantial amount of investment and requires huge cash flows; as such this tax is a great burden and hindrance in their growth in the initial years.
Keeping in view the above PSX propose that ACT should be made applicable on the listed companies after five years of date of their listing on the stock exchange.