The Securities and Exchange Commission of Pakistan (SECP), working in collaboration with the Federal Board of Revenue (FBR), introduced various tax-related reforms for the country’s capital markets, corporate and non-banking financial sectors.
The SECP’s strategy encompasses continuation of reforms in the capital markets and corporate sector, deepening of structural reforms through removal of anomalies constraining economic activity, and to provide a level-playing field to all the stakeholders. It recommended various amendments to the 2001 Income Tax Ordinance, notified through the Finance Act 2011-12.
The reforms were introduced through making significant amendments in the Finance Act 2011-12 that are as follow:
To promote investments in initial public offerings (IPOs), the amount of eligible investment to benefit from tax credit on investment in IPO has been increased from existing Rs 0.3 to 0.5 million. The percentage of the person’s taxable income for the year has been increased from 10 percent to 15 percent and the holding period has been extended up to 36 months. Furthermore, considering low insurance penetration in Pakistan (0.7 percent of the GDP), tax credit for premium paid would encourage long-term savings in insurance.
To encourage capital formation, the tax credit of 15 percent for the year of enlistment has been allowed to companies coming for enlistment on stock exchanges. Existing incentive of 5 percent tax credit for the year of listing was considered insufficient.
The capital value tax (CVT) on the purchase of any modaraba certificates or any instrument of redeemable capital has been withdrawn in line with the levy withdrawn from purchase of shares.
Furthermore, existing restriction of Rs 0.5 million to benefit from tax credit for contribution in voluntary pension schemes (VPSs) has been removed to provide a level-playing field to retirement schemes; VPS vis-à-vis tax-free contribution permissible to other retirement schemes (superannuation fund: 20 percent of salary, gratuity fund: 8.33 percent of salary and provident fund: 10 percent of salary). To bring parity in minimum tax treatment of VPS vis-à-vis other investment options like mutual funds/collective investment scheme (CIS), NI(U)T and real estate investment trusts (REITs), VPS has been exempted from minimum tax.
The Income Tax Ordinance has been amended to exempt withdrawal of 50 percent of accumulated balance under pension fund from income tax.
The SECP’s initiatives would help achieve the objectives to document the overall economy through corporatisation and listing, stimulate capital formation through non-banking sector, stock market, etc. and to encourage long-term savings through private pensions and insurance.
