FBR mulls tax reforms for capital market

KARACHI: The Federal Board of Revenue (FBR) has started consultations with stakeholders on the tax reforms for capital markets to attract more foreign and local investors, sources said on Friday.

In this connection, the FBR constituted a high level committee on capital markets tax reforms headed by Member Inland Revenue (Policy) FBR.

Other members of the committee will include SECP Commissioner Securities Market Division Shauzab Ali, Pakistan Stock Exchange (PSX) Chief Executive Officer Farrukh Khan, PSX Chief Financial Officer Ahmed Ali Mitha, and FBR chief (income tax policy) as secretary.

The sources said the committee will act as a forum till budget making exercise for the year 2021/22 to review tax policies and suggest specific short-term and medium to long term measures for the development of debt and equity market, commodity futures, mutual funds, real estate investment trusts, corporate and insurance sector, amongst others.

The committee will review and recommend all measures that impinge upon the capital markets and its stakeholders.

The sources said the committee had been authorised to invite proposals from relevant stakeholders, deliberate and finalise tax reforms. Further, the committee, on receipt of proposals, would be categorised into immediate, medium term and long term reforms and would prioritise the proposals accordingly.

The sources said the committee would submit its initial report by the end of this month. Further, necessary amendments to the tax laws would be initiated in consultation with the committee for implementation of the agreed proposals.

The stock market in its proposals for the last budget informed the government that the capital market had witnessed robust growth over the years in terms of its market capitalisation but global downturn and coronavirus lockdown brought down the market capitalisation.

Market capitalisation that rose to around Rs8 trillion earlier this year spiraled down to Rs5.7 trillion on April 1 last year as a result of coronavirus-driven global downturn.

“The government must consider adopting long term measures to promote savings and investment and development of the capital market,” the PSX said in its proposals. “The core principle of our proposal is aimed at increasing the size and depth of the capital market by incentivizing listing of new capital without impacting government revenues. Most proposals are revenue neutral and, in cases, likely to increase the government’s revenue.”

The PSX focused on removing disincentives, the incidence of double and at times multiple taxations that are penalising capital formation.

The market has immense potential for growth in coming years. However, investors need a favorable tax treatment and predictable tax environment.

Pakistan benchmark KSE-100 index gained 7.3 percent (3.6 percent in USD) in 2020. The return in USD terms was better than negative 1.8 percent in 2019. However, that was lower than the last 10-year average of 10 percent, according to Topline Research.

“The year 2020 was a story of two halves for Pakistan equities as first half witnessed a decline of 15.5 percent (USD negative 22 percent), while a robust recovery was seen in second half as benchmark index recovered by 26.9 percent (USD 33.1 percent). Just like peers, PSX rallied 60.5 percent from its bottom on March 25, 2020,” the brokerage said in a report. “Despite lower broader market return, few mid cap stocks have posted abnormal returns.”