Withdrawal of tax on bonus shares to boost portfolio investment

KARACHI: Stock brokers on Friday said withdrawal of tax on bonus shares would encourage firms to share benefits of their growth with traders leading to increase in investment and market volume, but they feared revisits in the tax reliefs by the new government.

The government, while presenting the sixth budget for the fiscal year of 2018/19 of its tenure, announced removal of tax on bonus shares issue, which is now currently at 5 percent of market value. There has been a major decline in announcement of bonus shares by listed firms since its imposition in the budget for 2014/15. Number of companies issuing bonus shares decreased to 35 from 71 during the period.

Muzamil Aslam, chief executive officer at EFG Hermes Pakistan Limited said bonus tax removal should provide boost to banks and other key sectors that frequently issue bonuses. “Mutual funds investors will opt for bonus shares issue due to tax arbitrage between bonus and dividends as earlier.”

Topline Research, in economy update, said the new government could potentially revisit the measures after the general elections announced by the government.

The budget proposed reduction in minimum dividend payout to 20 percent from 40 percent and penalty to five percent of profits from previous 7.5 percent. Currently, a company, other than banks and independent power producers, has to pay 40 percent of its profits as dividends. If it does not distribute dividend, the company is subject to 7.5 percent tax on its profits.

The budget proposed reduction in corporate tax rate to 25 percent from current 30 percent during the next 5 years. For FY2019, corporate tax rate would be reduced by one percent to 29 percent, which would result in marginal earnings growth of one percent for listed companies. Likewise, super tax is to be reduced by one percent every year. Currently, it is three percent for non-banking companies and four percent for banks. The tax is to be phased out in the next three years for non-banking companies and four years for banks.

Arif Habib, chairman of Arif Habib Corporation told The News that most of the budget proposals tabled by the Pakistan Stock Exchange have been accepted by the federal government, which would send positive signals and be good omen for the domestic as well as foreign investors.

Habib said real estate investment trusts (REITs) have been provided tax relief as REIT dividends are now subject to tax of 7.5 percent as compared to previous 12.5 percent.

The budget also made advance withholding tax (WHT) of 0.02 percent collected from stock brokers made adjustable. The WHT is a final tax liability, which is leading to higher taxes for brokers, Habib said.

Khurram Shezad, director research at Jahangir Siddiqui said the adjustable tax would be positive for the market, which should improve volumes and liquidity in the market and reduce cost to investors.

Aslam said the measures taken by the government are positive for the capital market. “Numbers of measures would boost sentiment of the investors and market to witness post budget rally instead of earlier expectation of pre-budget rally.”

He further said cuts in corporate and super tax rates are encouraging. “Super tax should have been completely abolished since no payments have been made to the government so far as issue is in the court.”