Post on 13-Apr-2016
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FEDERAL BUDGET PROPOSALS 2016-1
.:
■ ENABLING INVESTORS
DISCOVER NEW GROWTH OPPORTUNITIES
TABLE OF CONTENTS
TAX PROPOSAL
DESCRIPTION PAGE #
EXECUTIVE SUMMARY I
INTRODUCTION 9
I FEDERAL EXCISE DUTY ON STOCK BROKERS SERVICE 12
2.1 CAPITAL GAIN TAX ON DISPOSAL OF SECURITIES UNDER SECTION 37A OF THE ORDINANCE
13
2.2 OPT out OPTION FOR FOREIGN CLIENTS 15
3.1 REDUCED RATE OF TAX FOR LISTED COMPANIES 16
3.2 REDUCED RATE OF TAX FOR SMALL AND MEDIUM ENTERPRISES (SME 18
3.3 TAX CREDIT ON LISTING ON STOCK EXCHANGE 19
4 TREATMENT OF BONUS SHARES AS THE INCOME OF SHAREHOLDERS 20
5 TAX ON INTER-COMPANY DIVIDEND 21
6 CAPITAL VALUE TAX (CVT) ON CAPITAL MARKET 22
7 ALTERNATIVE CORPORATE TAX (ACT) 23
8.1 SALE OF IMMOVABLE PROPERTY TO A REIT SCHEME 24
8.2 ADVANCE TAX ON DIVIDEND 24
9 PENALTIES FOR NON-FILING OF RETURN OF INCOME AND STATEMENTS u/s. 114(4), 115, 116 and 165
25
EXECUTIVE SUMMARY
We are presenting following proposals for the Federal Budget 2016, directed towards providing an
impetus to create an investment friendly environment which we hope would spur investment,
enhance industrial activity and economic growth in the country:-
1. I FEDERAL EXCISE DUTY ON STOCK BROKERS SERVICES
Prior to the 18th amendment, the Federal Excise Duty (FED) was charged by FBR
under the sales tax mode which was duly paid to the Federal Government by the
KSE Stock Brokers.
The Sindh Revenue Board was constituted in the year 2010 and the Government of
Sindh promulgated the Sindh Sales Tax on Services Act, 2011 (the Act). The Act
introduced tax on the "Stock Brokers Services" under PCT 9819.000. The stock
brokers are duly complying the provincial laws in letter and spirit.
At the time of passing of 18th Amendment and Budget for FY beginning July 01,
2011, the FBR in its website and other public announcements has disclosed that it
will withdraw FED on Services and relevant FED laws.
However, contrary to the above, FBR issued show cause notices to the stock
brokers for charge of FED in Sale Tax Mode for the years 2010 to 2014 on the basis
that provision for levy of FED on services of stock brokers under Table II of the First
schedule to the Federal Excise Act, 2005 has not been omitted from Federal Excise
Act, 2005.
The KSE Stock Brokers Association approached the Honourable Court of Law and
was granted an interim Stay Order whereby the actual Suit is pending for decision.
It is therefore submitted that such an instance has created a situation of Double
Taxation at exorbitant rate of 31% on services rendered by stock brokers. It has
affected the credibility of the Government.
It would not be out of place to mention that it is imperative for the matter to be
resolved at the earliest since any coercive measures for recovery of demanded FED,
would surely have a detrimental impact on the country's Capital Market, more so
considering that the huge effort is underway by the Government of Pakistan to
bring strategic partner for the newly integrated Pakistan Stock Exchange.
—U~ Page 1of26
Proposal
It is proposed that the provision for levy of FED on services of stock brokers under
Table II of the First schedule to the Federal Excise Act, 2005 may be withdrawn
retrospectively for the promotion and betterment of the capital market and in the
interest of justice & equity.
2. 1 CAPITAL GAIN TAX (CGT)
2.1 ON DISPOSAL OF SECURITIES UNDER SECTION 37A OF THE ORDINANCE
Prior to l day of July, 2010 the capital gain on disposal of securities were fully
exempt from tax and after extensive deliberation between the Government and the
capital market stakeholder, it was agreed that there will be three tiers of holding
periods.
We strongly believe that the current Capital Gain Tax regime needs to be re-visited
so that the growth of the capital market can be attained with appropriate tax
reforms. We also feel that adverse frequent changes in the rate of tax and holding
period have not been considered by the investors healthy for the growth of capital
market. With reduction in tax rates and rationalization of holding period, there shall
be increase in investor base and trading volumes. We anticipate that there will be
no loss of tax collection on account of rationalization of tax on capital gain on
disposal of securities.
Proposal
We recommend the following with three tiers of holding periods and proposed
rates-
Page 2 of 26
2.2 OPT OUT OPTION FOR FOREIGN CLIENTS
Under Rule (5) of the Eight Schedule of the Income Tax Ordinance, 2001 any
person may Opt-Out from the CGT regime enforced by the National Clearing
Company of Pakistan Limited (NCCPL) after obtaining prior approval from
Commissioner Inland Revenue. The NCCPL regulatory framework on CGT does not
have any distinction with respect to locals or foreigners in terms of Opt-Out
Option.
The Federal Board of Revenue (FBR) vide S.R.O. 161(1)/2015 dated 23 February,
2015 has inadvertently prohibited foreigners from exercising Opt-Out Option by
inserting new proviso to sub rule (2) of Rule 13N of the Income Tax Rules, 2002,
which is is contrary to Rule (5) of the Rules.
In order to further broaden the investor base of the capital market and providing
a level playing field, it is imperative that the OPT OUT option for foreigners is also
made available to them.
Proposal
We propose to omit the proviso and Explanation to sub rule (2) of rule 13N of the Income Tax Rules, 2002.
3. PROPOSALS FOR ENCOURAGEMENT OF LISTINGS OF COMPANIES ON STOCK
EXCHANGES
3.1 REDUCED RATE OF TAX FOR LISTED COMPANIES
The Finance Act, 2015 had reduced corporate tax rate from 33% to 32% for all the
companies. In past it is observed that reduced rate of tax for the listed companies in
comparison to other companies has served as an incentive to the companies for
enlistment which helped in improving documentation of the economy, effective
corporate governance, which resulte in growth and positive impact on the overall
economy of the country.
We are hopeful that reduction in tax will help in promoting better corporate
disclosures, excellent returns to equity investors, broadening of corporate sector
tax-base, discovery of price and enhancement of revenues for the national
exchequer by way of taxes from a greater number of companies.
Page 3 of 26
Proposal
We therefore suggest that the difference of tax rate between listed and non- listed
companies should be atleast 5%.
3.2 REDUCED RATE OF TAX FOR SMALL AND MEDIUM ENTERPRISES (SME)
A well functioning SME segment at the stock exchanges offers a range of benefits
including greater access to growth capital for innovative SMEs, documentation,
good governance, new jobs through entrepreneurship, more investment
opportunity for domestic portfolio investors and local venture capitalists. We are
hopeful that such listed companies will help in increasing tax revenues for the
country.
Proposal
The capital market is under a process to introduce companies' on SME board, therefore, in order to encourage it is proposed that reduced rate of tax for such
listed companies' be introduced at 20%.
3.3 TAX CREDIT ON LISTING ON STOCK EXCHANGE
The Finance Act 2011, introduced a tax credit equal to twenty per cent (20%) of the
tax payable under section 65C of the Ordinance for the tax year in which a company
opts for enlistment in the registered stock exchange in Pakistan, we consider this
tax credit is very insignificant and not enough to attract new listing.
Proposal
Therefore, it is proposed that the tax credit under section 65C of the Ordinance
equal to twenty per cent of the tax payable to the companies for opting for enlistment in any registered stock exchange in Pakistan be allowed up-to five year
from the tax year in which company is listed.
4. 1 TREATMENT OF BONUS SHARES AS THE INCOME OF SHAREHOLDERS
The Finance Act, 2014 introduced tax on the value of Bonus shares as "Income from
other sources".
It is also pertinent to submit that in the period i.e. from July 01, 2013 to June 30,
2014, 71 companies announced bonus shares amounting (at Face Value) to over Rs.
19.1 billion, whereas, in the year 2014-15 only 17 companies have announced
bonus shares amounting (at Face Value) to over Rs. 3.4 billion (Approx.) and the
Government has not fetched significant revenue under this head. For the period
July 01, 2015 to December 31, 2015, 11 companies announced bonus shares
amounting (at Face Value) to over Rs. 1.4 billion.
1&6:~ Page 4 of 26
We are also of the view that the value of bonus shares, the amount of any bonus
declared, issued or paid by a company to its shareholders is not "income" at all and
it is just an accounting treatment.
Proposal
It is therefore, proposed that the amendment made in Clause (29) of Section 2 and sections 236M and 236N of the Ordinance through the Finance Act 2014 may be withdrawn.
5. I TAX ON INTER-COMPANY DIVIDEND
Double or multiple taxations reduce the benefits to beneficiaries of the dividend
and has in fact become a hindrance and deterrent for offering dividends by a listed
company.
When a company (corporate shareholders) receives such dividend it becomes part
of its distributable profit, hence when such part of profit is distributed as dividend
to its shareholders it again attracts withholding tax at 12.5%, therefore resulting in
multiple taxation whenever a dividend is paid by a company to its shareholders.
Therefore, the above scenario of dividend shows how double/multiple taxation
occurs.
This Clause 103A of Part I of the Second Schedule to the Ordinance, exempts any
income derived from inter-corporate dividend; but the same is available to such
inter-corporate dividend which are within the group companies entitled to group
taxation under Section 59A or Section 59B of the Ordinance. The former USA
Attorney General, Robert H. Jackson, then Assistant General Counsel of the
Treasury, made the statement in presenting the Treasury view that
"Inter-corporate dividends are largely unnecessary transfers brought about and multiplied by complex corporate structures"
Proposal
It is therefore, proposed that the dividend paid by a company to another company be exempted from tax.
Page 5 of 26
6. 1 CAPITAL VALUE TAX (CVT) ON CAPITAL MARKET
At the time of introduction of Capital Gain Tax, it was principally agreed between
the capital market stakeholders and they were assured that CVT on the purchase
value of any modaraba certificates or any instrument of redeemable capital as
defined in the Companies Ordinance 1984, or shares of a public company listed on a
registered stock exchange in Pakistan shall be withdrawn.
Therefore, rightfully on July 01, 2009, the CVT on shares traded on the stock
exchanges was withdrawn however inadvertently CVT on any instrument of
redeemable Capital was not withdrawn;
The FBR was then approached, who instead of removing the CVT on redeemable
Capital, re-imposed CVT on shares of a public company alongwith CVT on modaraba
certificates or any instrument of redeemable capital vide Finance Act, 2012.
Proposal
It is proposed that in order to rectify this anomaly and to facilitate the development of capital market, CVT should be withdrawn on the purchase value of any shares of a public company listed on a registered stock exchange in Pakistan or modaraba certificates or any instrument of redeemable capital as defined under the Companies Ordinance, 1984, or as provided for in clause (E) and (F) of sub-section (2) of section 7 of the Finance Act, 1989.
7. I ALTERNATIVE CORPORATE TAX (ACT)
A new concept of Alternative Corporate Tax (ACT) has been introduced through the
Finance Bill 2014 by inserting new section 113C of the Ordinance. Under this
concept of taxation, where corporate tax falls short of 17% of accounting income,
ACT is required to be paid as minimum tax.
Sub-section (11) of section 113C provides that "the commissioner may make adjustments and proceed to compute accounting income as per historical accounting pattern after providing an opportunity of being heard."
It is observed that companies in the initial years made substantial amount of
investment and requires huge cash flows; as such this tax is a great burden and
hindrance in their growth in the initial years.
Proposal
Keeping in view the above we propose that ACT should be made applicable on the listed companies after five years of date of their listing on the stock exchange.
________ Page 6 of 26
8. 1 TAXATION ON REIT SCHEME
8.1 1 SALE OF IMMOVABLE PROPERTY TO A REIT SCHEME
Prior to 01.07.2015 Clause (99A) of the Second Schedule of the Income Tax
Ordinance, 2001 granted exemption to profits and gains accruing to a person on
sale of immovable property to REIT Scheme.
However, the Finance Act 2015 has inserted a clause: whereby, it is provided that
the above benefit would be available only to the provisio to the above.
"Profit and gains on sale of immovable property to a Development REIT Scheme
with the object of development and construction of residential buildings shall be
exempt upto thirtieth day of June, 2020".
With the development of REIT Schemes, the Capital Market of Pakistan will grow
further
and more Investment and saving oppurtunities will be available especially to small
investors. This development will also make it possible to bring foreign investment in
Pakistan. Thus in order to have a level playing field for all REIT Schemes.
Proposal
Therefore, we propose the provislo inserted by Finance Act 2015 should be withdrawn and exemption under the aforesaid Clause shares of a public company listed on a registered stock exchange in Pakistan should be made applicable to all the REIT Schemes upto thirteith day of June, 2020.
8.2 1 ADVANCE TAX ON DIVIDEND
Advance tax on dividend under Division I, Part Ill of the First Schedule of the Income
Tax Ordinance, 2001 was applicable on Stock Fund, Money Market Fund, Income
Fund or any other fund.
The Finance Act, 2015 has inserted REIT Scheme in addition to the above.
Pakistan has large potential for development of Real Estate projects under REIT
Scheme structure. Small investors shall have oppurtunity to earn returns by way of
dividends.
However, tax on dividend would hamper the growth of REITs.
Proposal
We therefore propose that advance tax on dividend made applicable by the Finance Act, 2015 on REIT Scheme may be withdrawn.
Page 7 of 26 —4~
9. PENALTIES FOR NON-FILING OF RETURN OF INCOME AND STATEMENTS u/s.
114(4), 115, 116 and 165
Section 182(1) imposes penalties for non/late filing of return of income, statement of final
tax, wealth statement, its reconciliation and withholding statements which are very harsh
and excessive.
Generally, the main reason for levying penalties is only to educate the taxpayers and create
deterrence; so that they may file the prescribed returns and statements within stipulated
time. The intention of legislature has never to create huge demands or to achieve revenue
target through such penalties.
At the outset, the prescription of above penalty for default in submission of withholding tax
statement is not relevant as the same is not related to tax on taxable income.
Logically, imposing of penalty should have been restricted to the extent of short tax paid
with the return or statement and if there was no tax payable then token amount of penalty
should have been imposed.
Proposal
It is, therefore proposed that:-
(a) Minimum penalty of Rs.5,000/- shall be levied if any person without reasonable excuse falls in filing the return of income u/s. 114 and statement u/s. 115(4), thereafter an additional penalty higher of 0.1% per day of the tax payable u/s. 137(1) of the Ordinance or Rs.500/- per day during the period for which default continues. The maximum penalty should not exceed 25% of the tax payable u/s. 137(1).
(b) Minimum penalty of Rs.2,000/- shall be levied if a person without reasonable excuse fails in filing the wealth statement / its reconciliation u/s. 116 and withholding statement u/s. 165, thereafter additional penalty of Rs.200/- per day during the period for which default continues. The maximum penalty should not exceed 25% of the amount of tax involved.
Page 8 of 26
PAKISTAN STOCK EXCHANGE LIMITED
FEDERAL BUDGET PROPOSALS 2016-17
INTRODUCTION
Pakistan's economy is now showing clear signs of stabilization. The government has successfully
managed to stop the stagnation of economic activity and moving the country's economy towards
growth orientation. However, growth for a country such as Pakistan, needs to be investment
driven growth if it is to become self-sustaining. In order to achieve the objective of sustainable
investment driven economic growth, it is crucial that private sector be incentivized to bring the
necessary investment to the table to augment the government's laudable efforts in attracting
large infrastructure and other public investment.
It is here that the role of the capital market and its attractiveness for both companies seeking
long-term capital as well as savers looking for attractive investment opportunities becomes
crucial. The government through policy level initiatives, especially as related to taxation can play a
major role in enabling the capital market to attract long term investments into Pakistan and thus
help accelerate economic growth and employment generation.
PAKISTAN STOCK EXCHANGE
The entire process of Demutualization and Integration of the three stock exchanges of Pakistan
into a single stock exchange to be named Pakistan Stock Exchange Limited (PSX) has been
spearheaded by the Honourable Minister of Finance through the Ministry of Finance and
Securities & Exchange Commission of Pakistan whilst being closely coordinated with the Boards
and Demutualization Committees of the Karachi Stock Exchange and other exchanges of the
country.
In order to fully reap the benefits of the objectives of the PSX, it is imperative that further
measures be taken to broad base the capital markets and lift the investors' confidence. It is
envisaged that PSX will attract more listings and increase investor base which can be achieved
through implementation of various measures including those directed at covering taxation issues
of all stakeholders of the capital market.
In view of the above, under the guidance of the Taxation Committee and Board of Directors, we
present PSX proposals aimed at achieving the objectives of the Government and we are sure that
the proposals would be given special attention of the Government especially through the Ministry
of Finance and the Federal Board of Revenue.
Page 9 of 26
ROLE AND IMPORTANCE OF THE CAPITAL MARKETS
The primary role of Capital Market is to mobilize long term savings and channel them into
productive investment. In fact, in Pakistan, the single largest beneficiary of capital markets -
specifically the Stock market - has been the government itself. Because of vibrant stock market
activity, the government has been able to successfully generate over Rs. 440 billion in the last
decade through privatization of its shareholdings in various corporations via the capital market.
Based on the above, the PSX suggests that to encourage development and deepening of the
Capital Market, the government creates an aggressive, time-bound schedule in the forthcoming
budget for privatization of major State Owned Entities including government-to-government joint
ventures, such as PARCO, PIA, various development finance institutions (DFI's), Pakistan Steel, etc
through Initial Public Listings (lPO) on the Stock Exchanges. This would enable such enterprises to
access long term capital from the private sector and at the same time, the investing public will be
provided with new avenues for investment. This would also provide an impetus to the capital
markets by virtue of increased trading volumes resulting in enhanced growth and diversification of
investment avenues for the investors.
In order to channelize the savings of Non-Resident Pakistanis (NRPs) into productive investment
inside Pakistan, it is recommended that the government make suitable adjustments in SCRA
account opening and operation for NRP's who wish to invest in the stock market, so that the
process is easy and transparent without needless hurdles. This would also have a positive impact
on Pakistan's foreign exchange reserves.
Government would appreciate that the acceptance of our proposals for promulgation of workable
and implementable Rules for computation of Capital Gains on Sale of Securities; not only
enhanced the confidence of investors in the capital market as well as Government of Pakistan
(GOP); but will also generate sizeable revenue for the GOP.
The PSX continues to be a major contributor to the National Exchequer through contributions by
way of Capital Gains Tax on disposal of securities (other than banks, insurance companies and
mutual funds), Capital Value Tax (CVI), Advance Income Tax on sales & purchase of securities,
Sales Tax and Federal Excise Duty on brokerage services provided by brokerage houses and
Advance Income Tax on markup/interest/premium on Margin Trading System & Securities Lending
and Borrowing. PSX's sister concern, the NCCPL (National Clearing Company of Pakistan) has
generated over Rs. 6 billion in CGT for the Federal government in FY 2014-15 and over Rs. 4 billion
for the period July 01, 2015 to December 31, 2015.
We strongly believe that with the smooth flow of privatization process and increased investor
base, the risk of macroeconomic stability can be minimized and further growth of the economy
can be attained provided the Government ensures effective law & order situation, building up of
infrastructure to overcome shortage of electricity, gas & water; appropriate steps are taken to
check the menace of under invoicing & under declaration and make every effort to enhance tax to
Z_ Page 10 of 26
GDP ratio. We therefore propose that appropriate corrective measures with long term policies be
introduced by the Government of Pakistan to ensure that there is a level playing field for all and all
the segments of the society are contributing their due share of tax in accordance with the ratio of
their share in the GDP for the stability and development of economy of our beloved country.
Our Proposals for the Federal Budget 2016 are therefore, directed towards providing an impetus
to create an investment and business friendly environment which would spur investment,
enhance industrial activity and economic growth in the country.
Page 11 of 26
1. FEDERAL EXCISE DUTY ON STOCK BROKERS SERVICES
Prior to the 18th amendment, Federal Excise Duty (FED) was charged by FBR under the sales
tax mode which was duly paid by then KSE Stock Brokers.
The Sindh Revenue Board was constituted in the year 2010 and the Government of Sindh
promulgated the Sindh Sales Tax on Services Act, 2011 (the Act). The Act introduced tax on
the "Stock Brokers Services" under PCT 9819.000.
At the time of passing of 18th Amendment and Budget for FY beginning July 01, 2011, the FBR
in its website and other public announcements it has disclosed that it will withdraw FED on
Services and relevant FED laws.
KSE TR-EC Holders believed that the Federation had withdrawn FED on Services and the tax
was payable to the provinces only. Hence, since July 01, 2011, all KSE TREC Holders are paying
their Sales Tax on Services as commanded by the Law & Constitution to Sindh Revenue Board
(SRB) and are duly complying the provincial laws in letter and spirit.
However to the utter surprise and contrary to the above, FBR issued show cause notices
almost after five years for charge of FED in Sale Tax Mode for the years 2010 to 2014 on the
basis that provision for levy of FED on services of stock brokers under Table II of the First
schedule to the Federal Excise Act, 2005 has not been omitted from Federal Excise Act, 2005.
It is therefore believed that the FBR is demanding sales tax on services under the guise of FED
from KSE TREC Holders which was never collected by them from their clients and that such a
demand is considered clearly illegal and unjustified.
The KSE Stock Brokers Association approached the Court of Law and was granted an interim
Stay Order whereby the actual Suit is pending for decision. It is therefore submitted that such
an instance has created a situation of Double Taxation at exorbitant rate of 31% on services
rendered by stock brokers.
It would not be out of place to mention that it is imperative for the matter to be resolved at
the earliest since any coercive measures for recovery of demanded FED, would surely have a
detrimental impact on the country's Capital Market, more so considering that the huge effort
is underway by the Government of Pakistan to bring strategic partner for the newly
integrated Pakistan Stock Exchange.
Proposal
It is proposed that the provision for levy of FED on services of stock brokers under Table II of the First schedule to the Federal Excise Act, 2005 shall be withdrawn retrospectively for the promotion and betterment of the capital market and in the interest of justice & equity.
V~- Page 12of26
2. CAPITAL GAIN TAX (CGT)
2.1 ON DISPOSAL OF SECURITIES UNDER SECTION 37A OF THE ORDINANCE
The frequent changes in Capital Gain Tax Regime is detrimental for growth of capital market and
dampens the investors base since it discourages trading of securities and not helping in correct
price discovery. It would not be out of place to mention that especially the Foreign Institutional
Portfolio Investment has negatively impacted due to frequent changes in CGT regime as they have
stringent investment planning requirements and prefer to invest in markets with stable and
consistent tax structures. As such Pakistan is losing out on portfolio investment inflows relative to
many other emerging markets. This has become an important aspect with respect to Pakistan
Stock Exchange Limited, as the process for finalization of a strategic investor has initiated.
The Comparative chart in respect of holding period and tax rate for the Tax Years 2014, 2015 and
2016 is given below for the ready reference:
The imposition of such a tax for holdings for upto four years was not witnessed in any country of
the world and is being considered quite discouraging for investors. Following is the detail of
Capital Gain Tax Regime in few countries of the world:-
1.1 i._ T
1
TiTili'
Bahrain
Capital Gains Tax I
Nil
Comments1
2 Egypt Nil
3 Hongkong Nil
4 India Nil /Short term 15%
5 Indonesia 0.1% for individuals
6 Kuwait 15%
7 Malaysia Nil
8 Mauritius Nil
9 New
Zealand
Nil
Page 13 of 26
10 Netherlands Nil Nil if Participation Exemption
applies.
11 Norway Nil
12 Oman Nil
13 Philippines One half of 1% of gross selling price
14 Portugal Nil / for individuals rate 28% but
50% exemption applies
Nil subject to Particiaption
Exemption.
15 Sri Lanka Nil
16 Singapore Nil
17 Switzerland Nil
18 Turkey 20% corporates/Nil for individuals
It is worth mentioning that prior to 15t day of July, 2010 the capital gain on disposal of securities
were fully exempt from tax and after extensive deliberation between the Government and the
capital market stakeholder, it was agreed that there will be three tiers of holding periods. This was
done keeping in view the local investment trend and environment, which has not only resulted the
star performance of the stock exchanges in the country, raised our country's flag high in the
international financial market but exchequer was able to fetch reasonable amount of tax from
short term investment.
Therefore in view of the above we strongly believe that the current Capital Gains Tax regime
needs to be re-visited so that the growth of the capital market can be attained with appropriate
tax reforms. With reduction in tax rates and rationalization of holding period, there shall be
increase in investor base and trading volumes. We anticipate that there will be no loss of tax
collection on account of rationalization of tax on capital gains on disposal of securities.
Proposal
We recommend the following with three tiers of holding periods and proposed rates-
Period Proposed ITax Rates for Tax Year 2017
Where holding period of a security is less than 10%
six months
Where holding period of a security is more 8%
than six months or more but less than twelve
months
Where holding period of a security is more 0%
than twelve months
Page 14 of 26
2.2 OPT OUT OPTION FOR FOREIGN CLIENTS
Under Rule (5) of the Eight Schedule of the Income Tax Ordinance, 2001 any person may Opt-Out from the CGT regime enforced by the National Clearing Company of Pakistan
Limited (NCCPL) after obtaining prior approval from Commissioner Inland Revenue. The
NCCPL regulatory framework on CGT does not have any distinction with respect to locals or
foreigners in terms of Opt-Out Option. For ready reference the aforesaid Rule is reproduced
as under:-
"Persons to whom this Schedule shall not apply.- If a person intends not to opt for
determination and payment of tax as laid down in this Schedule, he shall file an
irrevocable option to NCCPL after obtaining prior approval of the Commissioner in the manner prescribed. In such case the provisions of rule 2 shall not apply."
The Federal Board of Revenue (FBR) vide S.R.O. 161(1)/2015 dated 23 February, 2015 has
inadvertently prohibited foreigners from exercising Opt-Out Option by inserting new proviso
to sub rule (2) of Rule 13N of the Income Tax Rules, 2002 (the Rules) reproduced as under:-
"Provided that in case of Foreign Institutional Investors, provision of the said Eight Schedule and these rules shall be applicable on capital gain derived fromt eh first day of
July, 2014
"Explanation.- For the removal of doubt, it is clarified that all Foreign Institutional
Investors shall be subject to the regime as laid down in Eighth Schedule and no exemption whatsoever from withholding tax under Eighth Schedule or under these rules is available to Foreign Institutional Investors for any reason."
It is apparent from the above that the aforesaid SRO is contrary to Rule (5) of the Rules.
In order to further broaden the investor base of the capital market and providing a level playing field, it is imperative that the OPT OUT option for foreigners is also made available to
them.
Proposal
We propose to omit the proviso and Explanation to sub rule (2) of rule 13N of the Income Tax Rules, 2002.
Page 15of26
3 PROPOSALS FOR ENCOURAGEMENT OF LISTINGS OF COMPANIES ON THE STOCK EXCHANGES
3.1 REDUCED RATE OF TAX FOR LISTED COMPANIES
It may be noted that out of 67,624 companies registered with the Securities and Exchange
Commission of Pakistan (SECP) as at June 30, 2015, only 560 companies are listed on the PSX.
SECP during the first half of current fiscal year (2015-16) registered 2,747 new companies.
There were 554 companies listed on the PSX as at December 31, 2015. We are sure that there
are lot of potential companies, to be listed on the Stock Exchanges, however, the main
reasons for lack of interest by such companies for getting listed are as follows:-
(i) The tax incentives are not available until June, 2002 there was a tax differential of 10%
for listed Companies. Unlisted Limited Companies were subject to income tax rate of
45%; whereas listed Companies 35%.. Tax rate on dividend from unlisted Companies
and listed Companies is currently at 12.5% which once again highlights that there is no
advantage to listed Companies.
(ii) The Code of Corporate Governance on the listed companies and cumbersome
regulatory reporting requirements are considered a great burden by many listed
companies.
The stock market transactions are fully documented and transparent with funds being
channelized through proper banking transactions and are being considered important
features of the market for prospective stake holders to consider to their advantage.
We understand that a reduced rate of tax for newly listed companies versus unlisted
companies will provide an impetus for attracting companies to list on the capital market, thus
increasing its role in long term investment formation in the country. It is anticipated that with
a reduced rate of tax for newly listed companies, there shall be a potential to attract new
companies which will also improve the documentation of the economy.
With the introduction of tax reforms and tax incentives in place for newly listed companies, it
will induce other corporate entities to raise long term funds from the capital market which
also widens the scope for medium sized enterprises to raise money where they find difficulty
in obtaining funds from the banking sector.
The capital market shall become more broad based with new company listings and attracting
more investors thus they will have more alternatives to participate in Pakistan's corporate
sector. This will help capital market to generate more revenue and contribute more to the
national exchequer. Thus with increase in number of companies listed on the stock exchange
will eventually increase tax revenue.
Furthermore, with the government's increase in pace of privatization of its entities, the stock
market will attract investors and not only increase the market size but also will strengthen the
Page 16 of 26
advantages of the potential buyer of the stock market. It is not out of place to mention that
with increase in number of listings and broadening of investor base, Pakistan Stock Exchange
Limited in view of the Demutualization Act will become more attractive to a potential buyer
as it is the only stock market of the country.
Karachi Stock Exchange in its proposal for Federal Budget 2015 had proposed that in order to
attract more companies for listing, the tax rates for the listed companies may be reduced to
25%. However, the Finance Act, 2015 had reduced corporate tax rate from 33% to 32% only
for both listed and non-listed.
The average worldwide tax rate has declined since 2003 from 30% to 22.9% in 2015. The
average rate of tax on the corporate incomes in the Asian region is 20.6% in 2015; whereas in
Pakistan due to multiplicity of the taxes for the corporate sector it goes up-to 39% (32% normal tax +2% Workers' Welfare Fund +5% Workers' Participation Fund). Following is the
comparative study of rate of tax on incomes of corporate sector in various countries:-
Country Corporate
Rate
Pakistan I
Imts]iiI Tax
32%
Comments
I
Austria 25% Canada 25%-31% China 10-25% Malaysia 20%-25% India 30%-40% Netherlands 20%-25% Singapore 17% Sri Lanka 28% Thailand 20% Turkey 20% United Kingdom 20% United States 15%-35% Vietnam 22% Rate applicable to enterprises
operating in oil and gas and
natural resource sectors is 32%
- 50%, depending on project.
It is felt that reduced rate of tax for the listed companies will serve as an incentive to the
companies for enlistment which will help in improving documentation of the economy growth
and will have positive impact on the overall economy of the country.
This will also help in promoting better corporate disclosures, excellent returns to equity
investors, broadening of corporate sector tax-base and enhancement of revenues for the
national exchequer by way of taxes from a greater number of companies.
Proposal
We therefore suggest that the difference of tax rate between listed and non- listed companies should be atleast 5%.
_____ Page 17 of 26
3.2 REDUCED RATE OF TAX FOR SMALL AND MEDIUM ENTERPRISES (SME)
Small and medium sized enterprises (SMEs) are important for social stability, equitable
growth and poverty alleviation, and form the backbone of the working middle class in most
countries. The SME sector is vital to the world economy, and small business is the
powerhouse of employment, innovation and entrepreneurial spirit.
The role of small and medium enterprises is worldwide acknowledged for their unique
contribution to the economic development. Both the developed countries and the ones in
course of development realize that the SMEs and the entrepreneurs play a vital role in the
industrial development of a country.
An essential attribute of small and medium enterprises consists in the fact that they
constitute an important source of jobs. Two thirds of the newly created jobs are owed to the
small and medium sector. The costs associated to the creation of a job in a small or medium
enterprise are less compared to the ones involved in the creation of a job in a big enterprise.
The accomplishment of products and services at lower costs than the big companies.
Another important aspect is the fact that they generate to a greater extent the technical
innovation applicable in the economy. In the case of OECD member countries, the SMEs
represent more than 95% of the enterprises in most countries and they hire more than half of
the employees in the private sector. In the New Zeeland, for instance, nine out of ten
companies hire less than ten people. This is utterly important considering the number of
employees in this area, which is more than the double compared to the year 1997. Most
OCED governments promote the entrepreneurship and consider the development of SMEs by
countless policies and programs.
Pakistan has the 10th largest labour force in the world andis well endowed with energy and
minerals. The government is focusing on a number of initiatives including specialized training,
incentives for extraction and value addition, development of adequate infrastructure facilities
near mining sites and learning from best practices in other countries regarding development
of the mineral sector. Small and Medium Enterprises (SME) constitute 90% of all enterprises
in Pakistan, employing 80% of non-agricultural labour force and constituting around 40% of
GDP, according to Pakistan Economic Survey, 2013-14. Further, according to recent SBP study,
lending to SME's by banks is fairly limited with stringent conditions and collateral
requirements which many SME's are unable to provide.
PSX has therefore developed rules and regulations, which envisage relatively easier listing
requirements and will enable a large number of SME's to be listed on the SME segment of
PSX. The SME listing has been successfully launched in Turkey, Brazil, India and several emerging economics.
There is a significant fiscal tax credit benefits in Spain, Kenya, Brazil and Argentina for the
SMEs.
Page 18of26
A well functioning SME segment at the stock exchanges offers a range of benefits including
greater access to growth capital for innovative SMEs, new jobs and technological
development through entrepreneurship, more investment opportunity for domestic portfolio
investors and local venture capitalists, and an expanded mechanism for recycling public funds
to promote SMEs.
Proposal
The capital market is under a process to introduce companies' on SME board, therefore, in order to encourage it is proposed that reduced rate of tax for such listed companies be introduced at 20%.
3.3 TAX CREDIT ON LISTING ON STOCK EXCHANGES
The Finance Act 2011, introduced a tax credit equal to twenty per cent (20%) of the tax
payable for the tax year in which a company opts for enlistment in any registered stock
exchange in Pakistan. We consider this tax credit very insignificant and not enough to attract
new listing.
Proposal
Therefore, it is proposed that the tax credit under section 65C of the Ordinance equal to twenty per cent of the tax payable to the companies for opting for enlistment in any registered stock exchange in Pakistan be allowed up-to five year from the tax year in which com any is listed.
Page 19 of 26
4 TREATMENT OF BONUS SHARES AS THE INCOME OF SHAREHOLDERS
The present treatment of bonus shares as income of the shareholder is very detrimental to the
growth of the capital market and has hampered the issuance of bonus shares by listed
companies.
Under the present scheme of taxation that has prevailed in Pakistan and adopted from the
Income Tax Act, 1922, the value of bonus shares or the amount of any bonus declared, issued
or paid by a company to its shareholders was always excluded from the definition of "income"
due to the reason that shareholder does not derive any income from the receipt of bonus
shares. Comparative jurisdictions also support the view that bonus share do not per se
represent income under the Ordinance. However, the Finance Act, 2014 introduced tax on the
value of Bonus shares as "Income from other sources".
It is also pertinent to submit that in the period i.e. from July 01, 2013 to June 30, 2014, 71
companies announced bonus shares amounting (at Face Value) to over Rs. 19.1 billion,
whereas, in the year 2014-15 only 17 companies have announced bonus shares amounting (at
Face Value) to over Rs. 3.4 billion (Approx.) and the Government has not fetched significant
revenue under this head. For the period July 01, 2015 to December 31, 2015, 11 companies
announced bonus shares amounting (at Face Value) to over Rs. 1.4 billion.
Moreover the Bonus shares issued does not increase the resources of that recipient against
any payment of consideration, therefore it cannot be termed as income in the hand of
recipient and distribution by the issuer resultantly applying a tax on such issue does not fall
under the ambit of the Ordinance, as it is merely an accounting treatment of reclassification of
reserves of the issuing company, resulting in diluted earnings per share amounts for profit or
loss to such ordinary equity holders.
We further understand that taxability of bonus share brought attention of taxation authority
when it was observed that few of the Collective Investments Scheme distributed profits
through bonus shares in order to comply with the provision of Clause (99) of the Second
Schedule to the Ordinance. Since the appropriate cognizance in respect of exemption to any
income derived by a Collective Investments Scheme or REIT scheme under Clause (99) of Part I
of the Second Schedule has already been taken care and the value of bonus shares, the
amount of any bonus declared, issued or paid by a company to its shareholders is not
"income" at all and it is just an accounting treatment;
Proposal
It is therefore, proposed that the amendment made in Clause (29) of Section 2 and sections 236M and 236N of the Ordinance through the Finance Act 2014 may be withdrawn.
Page 20 of 26
S TAX ON INTERCOMPANY DIVIDEND AND DIVIDEND RECEIVED BY A COMPANY
Double or multiple taxations reduce the benefits to beneficiaries of the dividend and has in
fact become a hindrance and deterrent for offering dividends by a listed company. The
former USA Attorney General, Robert H. Jackson, then Assistant General Counsel of the
Treasury, made the statement in presenting the Treasury view that
"Inter-corporate dividends are largely unnecessary transfers brought about and
multiplied by complex corporate structures"
We appreciate that the Government has made strenuous efforts to introduce taxation
reforms and to bring the present tax regime in line with international best practices. The
concept of holding companies has helped many economies of the world to grow. This concept
is available in Pakistan, but has not grown as envisaged, because of certain issues and
anomalies relating to holding company concept under the existing laws and regulations in
Pakistan. For example tax on inter- company dividend which in fact is a double or multiple
taxations. For instance, when a company earns profit it pays tax at 32% (Tax Year 2016)
before distributing dividend to its corporate share-holders, at the time of distribution of
dividend to its shareholders, it further withholds tax at the rate of 12.5% on such dividend.
When a company (corporate shareholders) receives such dividend it becomes part of its
distributable profit, hence when such part of profit is distributed as dividend to its
shareholders it again attracts withholding tax at 12.5%, therefore resulting in multiple
taxation whenever a dividend is paid by a company to its shareholders. Therefore, the above
scenario of dividend shows how double/multiple taxation occurs.
This scenario of double/multiple taxation has in fact become a hindrance and deterrent for
offering dividends by the company. Although Clause 103A of Part I of the Second Schedule to
the Ordinance, exempts any income derived from inter-corporate dividend; but the same is
available such inter-corporate dividend which are within the group companies entitled to
group taxation under Section 59A or Section 59B of the Ordinance.
Proposal
It is therefore, proposed that the dividend paid by a company to another company be exempted from tax.
Page 21 of 26
6. CAPITAL VALUE TAX (CVT) ON CAPITAL MARKET
Effective July 01, 2004, a registered stock exchange in Pakistan was obliged to collect Capital
Value Tax (CVT) at the rate of 0.01% on transactions, of the purchase value of any modaraba
certificates or any instrument of redeemable capital as defined under the Companies
Ordinance 1984, or shares of a public company listed on a registered stock exchange in
Pakistan transacted through its automated trading system.
At the time of introduction of Capital Gain Tax, it was principally agreed between the capital
market stakeholders and they were assured that CVT on the purchase value of any modaraba
certificates or any instrument of redeemable capital as defined in the Companies ordinance
1984, or shares of a public company listed on a registered stock exchange in Pakistan shall be
withdrawn.
Therefore, rightfully on July 01, 2009, the CVT on shares traded on the stock exchanges was
withdrawn however inadvertently CVT on any instrument of redeemable Capital was not
withdrawn.
The FBR was then approached; who instead of removing the CVT on redeemable Capital re-
imposed CVT on shares of a public company alongwith CVT on modaraba certificates or any
instrument of redeemable capital vide Finance Act, 2012.
Proposal
It is proposed that in order to rectify this anomaly and to facilitate the development of capital market, CVT should be withdrawn on the purchase value of any shares of a public company listed on a registered stock exchange in Pakistan or modaraba certificates or any instrument of redeemable capital as defined under the Companies Ordinance, 1984, or as provided for in clause (E) and (F) of sub-section (2) of section 7 of the Finance Act, 1989.
Page 22 of 26
7. ALTERNATIVE CORPORATE TAX (ACT)
A new concept of Alternative Corporate Tax (ACT) has been introduced through the Finance
Bill 2014 by inserting new section 113C of the Ordinance. Under this concept of taxation,
where corporate tax falls short of 17% of accounting income, ACT is required to be paid as
minimum tax.
Sub-section (11) of section 113C provides that "the commissioner may make adjustments and proceed to compute accounting income as per historical accounting pattern after providing an opportunity of being heard."
It is observed that companies in the initial years made substantial amount of investment and
requires huge cash flows; as such this tax is a great burden and hindrance in their growth in
the initial years.
Proposal Keeping in view the above we propose that ACT should be made applicable on the liste
companies after five years of date of their listing on the stock exchange.
w6r
Page 23 of 26
8. TAXATION ON REIT SCHEME
8.1 SALE OF IMMOVABLE PROPERTY TO A REIT SCHEME
Prior to 01.07.2015 Clause (99A) of the Second Schedule of the Income Tax Ordinance, 2001
granted exemption to profits and gains accruing to a person on sale of immovable property to
REIT Scheme.
However, the Finance Act 2015 has inserted a clause: whereby, it is provided that the above
benefit would be available only to the provisio to the above.
"Profit and gains on sale of immovable property to a Development REIT Scheme with the
object of development and construction of residential buildings shall be exempt upto thirtieth
day of June, 2020".
With the development of REIT Schemes, the Capital Market of Pakistan will grow further and
more Investment and saving oppurtunities will be available especially to small investors. This
development will also make it possible to bring foreign investment in Pakistan. Thus in order
to have a level playing field for all REIT Schemes.
Proposal
Therefore, we propose the pro visio inserted by Finance Act 2015 should be withdrawn and
exemption under the aforesaid Clause shares of a public company listed on a registered
stock exchange in Pakistan should be made applicable to all the REIT Schemes upto thirteith day of June, 2020.
8.2 ADVANCE TAX ON DIVIDEND
Advance tax on dividend under Division I, Part Ill of the First Schedule of the Income Tax
Ordinance, 2001 was applicable on Stock Fund, Money Market Fund, Income Fund or any
other fund.
The Finance Act, 2015 has inserted REIT Scheme in addition to the above.
Pakistan has large potential for development of Real Estate projects under REIT Scheme
structure. Small investors shall have oppurtunity to earn returns by way of dividends.
However, tax on dividend would hamper the growth of REITs.
Proposal
We therefore propose that advance tax on dividend made applicable by the Finance Act, 2015 on REIT Scheme may be withdrawn.
-kL- Page 24 of 26
9. PENALTIES FOR NON-FILING OF RETURN OF INCOME AND STATEMENTS u/s. 114(4), 115,
116 and 165
Section 182(1) substituted through Finance Act, 2010 and explanation has been inserted
through Finance Act, 2011; whereby, penalties for non/late filing of return of income
statement of final tax, wealth statement, its reconciliation and withholding statements
specified under aforesaid section are very harsh and excessive.
Generally the main reason for levying penalties on commitment of offences is only to educate
the taxpayers and create deterrence; so that they may file the return/statement within
stipulated time. The intention of legislature has never to create huge demands or to achieve
revenue target through such penalties. The quantum of penalties raised through substitution
of section 182(1) read with the explanation is very harsh and unfair. It is also unjustifiable and
illogical to impose such huge penalties; which may create harassment among the taxpayers
rather to facilitate them.
The Finance Act, 2011, an explanation has been inserted whereby for the purpose of this
entry, it has been declared that the expression "tax payable" means tax chargeable on the
taxable income on the basis of assessment made or treated to have been made under Section
120, 121, 122 or 122C of the Ordinance.
At the outset, the prescription of above penalty for default in submission of withholding tax
statement is not relevant as the same is not related to tax on taxable income.
Consequent to insertion of the said explanation, it has been noted that the tax authorities
have invariably started levying penalty for a single day of default on the basis of tax payable in
the return without taking into account the taxes already paid/deducted. Further, the tax
authorities are now imposing this penalty for prior years/periods as well, which is against the
established principle that any amendments putting additional burden can operate only
prospectively. This situation is causing a serious hardship to the taxpayers, as now due to this
explanation, the tax authorities are using the explanation as tax collection avenue instead of a
deterrent.
Logically, imposing of penalty should have been restricted to the extent of short tax paid with
the return, as was held by the appellate authorities before insertion of the said explanation,
and if there was no tax payable then token amount of penalty should have been imposed, as
was the case before substitution of section 182 of the Ordinance.
ME
Page 25 of 26
Proposal
It it, therefore proposed that:-
(a) Minimum penalty of Rs.5,000/- shall be levied if any person without reasonable excuse
fails in filing the return of income u/s. 114 and statement u/s. 115(4), thereafter an
additional penalty higher of 0.1% per day of the tax payable u/s. 137(1) of the Ordinance
or Rs.500/- per day during the period for which default continues. The maximum penalty
should not exceed 25% of the tax payable u/s. 137(1).
(b) Minimum penalty of Rs.2,000/- shall be levied if a person without reasonable excuse fails
in filing the wealth statement/its reconciliation u/s. 116 and withholding statement u/s.
165, thereafter additional penalty of Rs. 2001- per day during the period for which default
continues. The maximum penalty should not exceed 25% of the amount of tax involved.
Page 26 of 26