Pakistan Stock Exchange Limited (PSX) has recommended the government to take major measures for the documentation of a cash-based economy, ranging between 35-50 percent of the Gross Domestic Product (GDP), for digitizing the payment system in Pakistan.
The Ministry of Finance and the Federal Board of Revenue (FBR) have received budget proposals from the Pakistan Stock Exchange (PSX) for the next fiscal year.
In order to support the documentation drive, digitization of the payment system is a must in today’s world. Estimates of the cash-based economy range from 35 percent to 50 percent of GDP. Technology is now available to digitize a huge portion of these cash transactions and thus allow for proper assessment of the economic activity pool.
It is therefore imperative that the government devise a policy for comprehensively digitizing the payment system and provide incentives to the private sector to rapidly adopt it, PSX recommended.
In view of strong structural reforms in the capital market, companies in Pakistan have immense potential to raise funds from the capital market. This will result in greater documentation of the economy and increased tax revenue. At the same time this will help to grow the capital markets, provide attractive investment opportunities and hence improve the savings and investment rates in Pakistan, added PSX.
Listed companies become part of the documented, regulated and formal corporate sector. Hence, PSX is continuously endeavoring to encourage listings.
It is proposed that in order to encourage companies to list, their tax status should be grandfathered at the time of listing application i.e. no new cases for past tax returns should be opened, except for such pending cases on which proceedings have already been initiated under the Ordinance, before the date of listing application, will continue as per the provisions of law.
It is well known that a large part of Pakistan’s economy is undocumented and a significant number of companies operate in the informal sector. This will encourage such companies, particularly SMEs, to become documented and start paying taxes, without the fear that past tax returns or lack of them will be questioned.
Moving forward they will be documented and paying full tax. Hence, this will be a significant revenue-positive measure, it added.
Capital Gains Tax
The PSX has proposed that the capital gains tax (CGT) rates on listed securities should be brought in line with the CGT on the sale of immovable properties.
This is essential to eliminate the tax-driven distortion between different asset classes. Moreover, CGT on all derivatives and futures contracts traded on the PSX to be taxed in line with future commodity contracts traded at the PMEX.
In order to attract and encourage foreign investment into the capital market, it has been proposed to offer tax relief to foreign investors in terms of exemption of capital gains and dividends earned on such investment, in line with similar tax relief offered for investment in government securities. The tax exemption on inter-corporate dividends between companies eligible for group taxation should be restored, it proposed.
The PSX has also proposed that the government’s first and foremost role is to comprehensively document all economic activity in the country. The financial sector including the capital markets is few of the well-documented sectors in the economy, along with companies listed on the stock exchange.
At the same time, whether it is the rest of the service and trade sector, the real estate sector, or the agricultural sector — which together constitute the bulk of GDP — all have to be documented in order to have a realistic picture of actual economic activity and the taxation potential therein. Unless this is done, fiscal deficits will remain the bane of economic development, holding back the country’s progress.
Finally, in order to fashion a proper policy, appropriate data collection methodology and data analytics expertise is imperative.
In this regard, PSX has recommended that the Federal Bureau of Statistics be made into an autonomous body with sufficient resources, powers and accountability to the parliament to provide independent surveys, statistical studies and assessments based on global best practices.
Unless data integrity is established, policies based on flawed data and estimates thereof will not achieve desired objectives, it added.
It concluded that fiscal discipline and tax measures have a direct and profound impact on the structure and functioning of the capital markets. The stock market is one of the most documented sectors of the economy and over the decades the government has perhaps been the biggest beneficiary from it. It is imperative for the growth of Pakistan’s economy to create a conducive environment that will help to attract more companies and investors to the capital markets.
All capital market participants are fully documented; hence developing the capital markets is fully aligned with FBR’s efforts to increase the tax base in Pakistan.
An efficient, equitable and broad-based tax system and a culture of corporatization are interdependent. In addition, a broad-based capital market helps to achieve important economic and social objectives like increasing the number of taxpayers, savings and investment rates, and reducing wealth inequality.
Source: Pro Pakistani