“PLEASE, sir, I want some more!” the nine-year old boy told the master of the workhouse where the boys were given three meals of thin gruel a day and an onion twice a week, leaving them hungry. But the demand made the master very cross.

The words from Charles Dickens’ Oliver Twist continue to startle the “masters” whenever someone makes such demand. Regardless, the Pakistan Stock Exchange (PSX) in its budget proposals for 2020-21 has asked for more.

“Eliminate capital gains tax (CGT) for the next 12-24 months,” says the PSX. “If that is not possible, then reduce the CGT rates for (holdings of) up to 12 months at 10 per cent and remove it altogether for holdings of more than 12 months.”

The exchange says the last year’s collection of CGT was merely Rs1.3 billion. With the falling market, tax receipts would not be worth the collection effort. Introduced in 2011, CGT had different rates for different holding periods. The rate was 10pc for less than six months. It was 7.5pc for more than six months but less than 12 months. It was zero for holdings of more than one year. But all that was changed and currently the tax is levied at a flat rate of 15pc irrespective of the holding period.

PSX Chairman Suleiman Mehdi says extraordinary times call for extraordinary measures. He points out that most industries have received incentives, special packages and relaxations owing to the devastation caused by the pandemic. These measures include a steep cut in interest rates, incentives for the construction industry and an upcoming package for the agricultural sector. The PSX as a barometer of the economy also deserves a fair deal, he says.

The stock exchange has asked the government to rationalise the tax rate on dividends to make it equal to that on profit from debt instruments

The exchange has asked for a reduction in CGT as an alternative to its elimination, he adds. Mr Mehdi says investors have suffered losses in the last two years. Since the collection was minuscule last year, reviewing it will send a positive signal to foreign investors. It will force them to give the PSX a closer look as it is trading at an attractive multiple of 5.5 times forward earnings and providing a yield of 6.5pc against the regional price-to-earnings multiple of 10 and yield of 3pc. Shares were also alluring as the cost of replacement of the plants has dropped to one-third.

Khalid Mirza, chairman of the Securities and Exchange of Pakistan (SECP) Policy Board, asserted there should be separation of trading from investment with respect to CGT. “Where the shares are bought and sold like in a proprietary business, the gains fall under the income tax. But for long-term investors, such gains should be exempt from income tax.”

Regarding the second major proposal of the exchange that “a certain percentage of the funded pension scheme be invested in the capital market”, Mr Mirza concurred with the suggestion. But he cautioned that investment should be wisely made in the shares of fundamentally sound, high growth, well-managed companies. Such investment, if made fairly, wisely and reasonably, can yield dividends, he said.

Another proposal is about funding the federal government employees’ pension fund. The PSX has proposed that the government should start funding its pension liabilities to avert a future pension crisis and encourage capital formation. The bourse said an adequately funded pension scheme would offer old-age benefits to retired employees of public-sector enterprises without putting any burden on the annual budget.

“It is further recommended that a certain percentage of the funded pension scheme be invested in the capital market,” the PSX proposed. The exchange also asked for the introduction of a mechanism to remove the double taxation of a company’s profits — once in the hands of the company and again in the hands of shareholders as dividends — so that the effective tax rate on dividends is on a par with the profit on debt.

It has proposed to “rationalise the current tax rate on dividends to make it equal to the tax rate on profit from debt — provided that there should be no withholding tax on dividends up to Rs100,000 per annum”.

The rationale for such a suggestion is that a similar tax treatment on dividends from equity investment and debt instruments would provide a level playing field to equities and attract higher inflows in the stock market. Further, it would lead to an increase in the number of registered investors.

Another important matter in the budget proposals of the PSX relates to the tax credit for companies listed on the stock exchange. To encourage new listings, Finance Act 2011 had introduced tax credit equal to 20pc for the tax year in which a company opted for listing. At the moment, tax credit is given for four years from the date of listing, subject to the condition that for the first two tax years, the tax credit is 20pc of the tax payable and 10pc for the last two years.

The exchange believes that the tax credit is “very insignificant and not enough to attract new listings”. In the last five years, de-listings (including nine owing to mergers) of 42 companies outnumbered new listings of just 24. The exchange, therefore, proposed: “The tax rate should be permanently lowered for listed companies by giving a tax credit of 20pc of tax payable for those companies that meet the prescribed requirements, including a minimum free float of 25pc throughout.”

These are just a few of the long list of the PSX proposals. Finally, the exchange says that the average rate of tax in the Asian region is 21.32pc whereas the corporate tax rate is 29pc in Pakistan. The PSX avoids suggesting the tax rate, but stresses that it should be brought down “reasonably” to compete with other regional and global economies.

Published in Dawn, The Business and Finance Weekly, May 4th , 2020