Call for reversal of proposal in Finance Bill 2022-23: Govt proposes removing tax credits on IPOs, insurance and pension funds

KARACHI: The government has proposed to remove tax credits on investment in initial public offerings (IPOs), life insurance policy, mutual fund, and health insurance in Finance Bill 2022-23.

The center also shed light on removing tax credits on contributions to an approved pension funds resulting in reducing tax liabilities.

“The removal may affect investment in mutual funds and insurance,” said Yousaf Saeed, analyst at Darson Securities

As per existing tax laws, an individual is entitled to tax credits for making investments in Initial Public Offering, Life Insurance policy, Mutual funds, health insurance or by making contributions to an approved Pension Funds resulting in reducing tax liabilities.

The Bill proposes to omit these tax credits, due to which individuals would not be able to claim tax credits and hence reduce their tax liabilities, he added.

He was of the view that the proposed amendment coupled with changes in salary tax on higher side might affect working class adversely.Saeed said the initiative was likely to affect investment in mutual funds and insurance sector, as salaried class is one of the major contributors toward investment in the mutual fund, life insurance policy, health insurance policy and pension fund, which might now not be considered as attractive products by salaried individuals, he feared.

However, he added, there is a maximum limit of Rs2 million of investment in mutual funds, and 20 percent of taxable income in pension funds. The total tax credit in a year provided by the government is about Rs1 billion for pension funds and slightly higher for mutual funds investors. “The tax benefits for investors in mutual and pension funds have been removed. We are trying to convince the government that these benefits should continue as they promote savings and investments.” The Mutual Fund Industry demanded withdrawal of the proposal, saying the step would discourage investment. The initiative might affect investment in mutual funds and insurance sector, they added.

A report of Topline Securities said tax credits available on mutual fund investment has been withdrawn as a lot of people avail tax credits by investing in fixed mutual fund. The decision if taken would prove neutral for stock market as “we may see some redemption from the equity with some of that amount made directly be invested in the stock market.”

Arif Habib limited (AHL), noted since the government has to ensure mammoth revenue collection target it therefore, hiked the Capital gains tax (CGT) on stocks to 15 percent from prevailing 12.5 percent. “Going forward, it will be reduced by 2.5 percent per annum over next six years to 0 percent.”

The government has rationalised CGT rates to promote long term investment. For holding of shares for less than 1-year tax rate of 15 percent will be charged and will reduce by 2.5 percent each year, which will become zero where holding period exceeds six years.

Though the government has increased it for the current year, AHL believed reduction will be welcomed by the market as all sorts of tax credits are removed.