Good times are rolling on for the Pakistan stock market. Investors, or at least those with plenty of cash to spare, are making tonnes of money as share prices rock to new highs.

Last week, the benchmark KSE-100 index roared past the 48,000-point level — last seen four years ago on June 15, 2017. In May alone, the index gained as many as 3,929 points.

Under such circumstances, the country’s economic managers and taxmen could be licking their lips, wondering about their share in the pie. But Finance Minister Shaukat Tarin, traders say, has already promised he’ll levy no new taxes.

In its budget proposals presented on May 21, the Pakistan Stock Exchange (PSX) has “asked for more”. The core principle in drafting the budget proposals, the PSX said, was to increase the size and depth of the capital market by incentivising new listings and increasing the investor base without impacting government revenues.

‘Energy and resources should be be directed towards capital formation to ensure that tax-paid money doesn’t leave for more lucrative offshore destinations’

Key points of the proposals included reforms in the capital gains tax (CGT), rationalisation of tax rates for listed companies and small and medium enterprises (SMEs), introduction of savings and investment accounts, documentation of the real estate sector and promotion of real estate investment trusts (Reits) as well as the introduction of long-term and consistent tax policies.

Tariq Iqbal Khan, former chairman of the National Investment Trust (NIT), said the need of the hour was to divert energy, resources and efforts towards capital formation so that the tax-paid money did not leave for more lucrative offshore destinations.

Admitting that the cost of living was rising, he said the habit of savings must be inculcated in the masses. “Growth in savings should match the growth in per capita income,” he said. Mr Khan believed the tax rates on dividends from companies should be reduced. This will enable major investors who receive fairly high sums from companies as dividends to plough back the money and promote industrial growth.

He reckoned that the oil sector needed a better deal in that respect. These companies have to pay taxes and gas development surcharge while shareholders in those companies also pay for gas that “goes missing”. The former NIT chief also said refineries were being squeezed. “There should be the minimum rate of return on their operating fixed assets so as to make funds available with refineries for reinvestment.”

Saqib Sharif, finance instructor at Karachi’s Institute of Business Administration (IBA), said the Growth Enterprise Market was launched in 2016, but not a single SME had been listed on the counter so far. That was despite some incentives provided to such potential businesses. “A further reduction (or rationalisation) in taxes for at least three to four years for newly listed firms should be made to encourage the listing of SMEs.”

Moreover, the implementation of the direct listing initiative for small businesses can also bear fruit. “The SECP has proposed this initiative, but it’s actual implementation is yet to be seen,” Professor Sharif said. He also lamented that the promotion of Reits was totally ignored unlike peer countries where such schemes were thriving. He reckoned that the major problem in the country was a lack of documentation of the real estate sector and weak regulation on property rights.

“If the government’s focus shifts towards improving the documentation of the real estate sector and strengthening laws related to property rights, it will facilitate SMEs in obtaining funds through mortgage loans and more Reit listings on the PSX,” he said, adding that the recent circular of the SBP about Reits was a step in the right direction.

Tahir Abbas, head of research at Arif Habib Ltd, shared some of the proposals that his brokerage house had drafted for the upcoming budget. They asked for the corporate tax rate to be reduced through a 20 per cent tax credit for listed companies that maintain a free float of at least 25pc at all times. While recommending the waiver of tax on dividends to avoid double taxation, the brokerage alternatively asked for the removal of the withholding tax (WHT) on dividends paid to small investors defined as those earning dividend income of up to Rs0.6 million per annum.

Other suggestions include the rationalisation of tax on dividends from Reits and the exemption of CGT from all categories. To encourage the introduction of new Exchange Traded Funds (ETFs), tax incentives ought to be brought on a par with those available for investment in new shares.

Shehzad Chamdia, former PSX director, observed the tax net must be broadened. He believed the country had the capacity to collect taxes to the tune of Rs12 trillion against Rs4-5tr currently being raised annually. “The tax-to-GDP ratio should improve to 20pc from the current 9-10pc,” he said. The government ought to revert to the previous policy of a gradual reduction in corporate tax rates to bring it to around 26pc. In order to promote and encourage companies to tap the capital market for the mobilisation of funds, the corporate tax rate on listed companies should be lower than that on unlisted companies.

Mr Chamdia termed double taxation on dividends a major anomaly. It is included in corporate income, taxed at the regular rate and is taxed later once again at minimum 15pc in the hands of shareholders. “The tax on dividends to shareholders, if at all, ought to be no more than 7.5pc to provide an incentive over the tax rate of 10pc levied on savings and fixed deposit accounts,” he suggested.

Published in Dawn, The Business and Finance Weekly, June 7th, 2021