SECP Proposes Aligning Rate of CGT on Disposal of Securities with OECD Countries

The Securities and Exchange Commission of Pakistan (SECP) has proposed the Ministry of Finance to align the rate of the capital gains tax (CGT) on the disposal of securities with other regional exchanges and Organization for Economic Co-operation and Development (OECD) countries in the budget (2022-23)

The SECP’s budget proposals for the next fiscal year revealed that the rates of CGT must be aligned with other regional exchanges and OECD countries and with the rates of CGT on the sale of immovable property.

The tax treatment of capital gains and dividends favors investment in fixed income and real estate, discouraging the flow of capital into productive areas. The CGT in Pakistan is now higher than in most regional countries and does not encourage long-term savings and investment. This will encourage documentation of real estate activity, and lead to an easing of speculative pressure on real estate property prices in Pakistan where much of the undocumented wealth has been currently flowing.

The SECP has also proposed Tax amnesty on GEM Board and listing under the Direct Listing method. The GEM board is mainly established to facilitate SMEs to raise funds from the Capital Market. As we all know that SMEs are the backbone of the economy and face difficulty in raising funds. Tax incentives would attract SMEs to raise funds from the GEM board.

An increase in the direct listing would result in increased trading activities, thereby impacting tax revenue. Moreover, it would enhance investment options for both local and foreign investors.

It would facilitate the Growth of Companies i.e. (SMEs, Startups) to get themselves listed on the GEM Board. It would encourage listing through the Direct Listing method and positively enhance the tax revenue over the medium to long term, SECP proposed.

The foreigners and non-resident Pakistanis who do not have any other source of income in Pakistan might only be making capital gains from investment in the capital market, where the tax is deducted at the source by NCCPL. Hence, payment of an additional 100% tax for not being on the active taxpayer list (ATL) may not be applicable for such investors.

The SECP has also proposed to bring Alternative Corporate Tax (ACT) treatment for non-banking finance companies (NBFCs) at par with banks. The existing provision creates an anomaly by exempting Alternate Corporate Tax from banks that are also engaged in leasing business while NBFCs engaged in the same business are subject to the charge of ACT.

This provision is discriminatory in nature. Due to competition from the commercial banks which are also engaged in leasing, the number of leasing companies has shrunk from 39 to 3 active leasing companies. The ACT can prove to be the last straw on the camel’s back for the leasing companies. In case of closure of these companies due to tax discrimination, the contribution to revenue made by the leasing companies to the exchequer would be lost.

The SECP has proposed tax exemption for Non-Profit Organizations. The NPOs are not commercial institutions and depend on very limited sources of income for the purpose of sustaining & running their routine operations. NPOs having rental income from properties other than houses are not exempt from tax. It is emphasized that all NPOs be exempted from taxes on all rental income in the forthcoming Finance Bill.

The SECP has also proposed reinstatement of tax exemption for investors in Private Funds. The core reason of this proposal is to encourage investments in the Private Equity sector that will go a long way in facilitating the availability of local & foreign capital to local businesses with high growth potential mainly within the SME sector which is the backbone of our national economy.

Investments by Private Equity firms are more than just the provision of capital as these firms also provide financial advice and strategic direction which results in rapid growth and development of Investee Companies.

As the SME sector constitutes the majority of all enterprises in Pakistan and contributes a significant portion of the GDP of the country, a number of positive outcomes include, capital availability for the SME sector, broadening of capital markets, increase in jobs, documentation of economy, capacity building and broadening the tax network etc. are likely to be observed in Pakistan’s economy with the influx of Private Equity investments.

Source: Pro Pakistani