PSX suggests CGT relief for foreign investors
RECORDER REPORT
ISLAMABAD: Pakistan Stock Exchange Limited (PSX) has proposed to budget makers to exempt capital gains tax (CGT) levy on disposal of securities for foreign investors in budget (2019-20) and bring changes in tax laws to remove the disincentives and double/multiple taxation hurting capital formation in the country.
According to the budget proposals of the PSX for the next fiscal year, Pakistan’s capital market has seen robust growth over the years in terms of its market capitalisation, which now stands at over Rs 8.1 trillion. While the past year has seen a host of challenges during a time of weakening balance of payments coupled with political uncertainty, the recent setbacks in the stock market also reflect the narrow investor base in the country.
Keeping in mind the chronic macroeconomic stability challenges, low savings and investment rates, underdeveloped rural economy, digitalisation of financial transactions and the emerging connectivity with China and other neighbouring economies, Pakistan has immense potential given implementation of strong structural reforms in the capital market. Reforms aim at helping the economy in raising money for infrastructure and housing sectors through long-term debt instruments, enhancing efficiency of the commodities market to support rural economy, revamping the non-bank financial sector and development of financing institutions and increasing the access of capital market to the marginalised areas to have a real impact on lives of the poor people. A special emphasis will be needed to support small and medium sized enterprises through a secondary trading market with nominal regulatory burden, PSX said.
As much as favourable tax treatment, investors need a stable and predictable tax environment.
When making a long-term investment decision, they need to know what tax treatment their investment will receive over the term of their investment horizon. Otherwise, they may simply decide not to invest or adopt short-term trading strategies (like most investors unfortunately tend to do). The government of Pakistan must consider adopting long-term measures to promote savings and investment and development of the capital market.
In order to achieve its objectives, PSX wishes to present proposals for the federal government’s Budget 2019. These proposals essentially focus on some impediments and disincentives that have crept into the development of the capital market, as well as the documented corporate sectors.
All the proposals outlined by the PSX are primarily designed to remove the disincentives, the incidence of double and, at times multiple taxation that are penalising capital formation, which is essential for Pakistani corporate sector to be able to compete effectively in the world. Most proposals are revenue neutral and in cases, likely to increase the government’s revenue.
The core principle of PSX proposal is aimed at increasing the size and depth of the capital market by incentivising listing of new capital without impacting government revenues. “In view of the above, we are presenting the following proposals for consideration of the Ministry of Finance and the Federal Board of Revenue,” the PSX added.
The PSX proposed that it is observed that most countries do not impose capital gains tax on disposal of securities by foreigners. Bangladesh, Malaysia and many other countries do not levy CGT on transactions of disposal of securities conducted by foreigners. Even in countries that do have CGT on foreign investors, the rules are distinctly different from those that apply to domestic investors, in order to provide an attractive tax environment and avoid double taxation.
One important reason for not imposing such tax is that most of the countries have double taxation treaties. In Pakistan, foreign investors file income tax returns regularly and pay taxes in accordance with the provisions of the Income Tax Ordinance, 2001 or reduced rates provided under treaties executed with such countries. Foreign investors should be given preferential tax rates as they might still be required to pay taxes in their home country where they are considered as resident taxpayers.
In line with the practice in peer markets and to attract foreign capital to Pakistan, it is proposed to exempt the imposition of capital gains tax on disposal of securities for foreign investors, the PSX added.
The exemption of CGT on foreign investors would facilitate substantial capital inflow by relaxing the cumbersome and time-consuming account opening and registration process for foreigners as they get discouraged and overwhelmed with the current registration structure and look for better investment alternatives in region/markets.
Pakistan has taxation treaties with a number of countries thus foreigners would be liable to pay taxes according to the treaty. Taxing foreigners would burden them which would not only increase their cost of business but most importantly discourage them from investment in Pakistan’s capital market.
It is proposed that the proviso to sub-rule 2 of Rule 13N of Income Tax Rules, 2002 shall be omitted, the PSX added.
