PSX suggests new tax measures for rapid growth

To achieve rapid economic growth, the capital market requires some tax measures in the federal budget of fiscal year 2016-17, representatives of the Pakistan Stock Exchange (PSX) said on Thursday, adding that market capitalisation will increase by 20 per cent and the value of government-owned shares will rise by Rs 350 billion if ‘our proposals are accepted’.

The government of Pakistan remains the biggest beneficiary of the bourse’s trading activities, the PSX representatives said during a pre-budget media briefing on the equity market’s contribution to the economy – particularly to the Federal Board of Revenue (FBR).

The purpose of the session was to create awareness of the amendments required in the existing regulations to create an enabling environment to develop the capital markets, according to PSX.

Giving details of the stock market’s contribution to the economy, the officials said the PSX contributes Rs 670 billion to the national exchequer, which is more than 20 per cent of the FBR’s total revenue.

As opposed to the private sector, which raised only Rs 34 billion in the last five years, the government, since 2003, raised Rs 453 billion including Rs 170 billion raised over the last two years through privatisation deals, the officials said – this is in addition to Rs14 billion the government earned in investment profits from National Investment Trust during FY14.

“The revenue impact of our proposals is zero,” PSX member and Arif Habib Group’s Chairman Arif Habib said, noting smaller budget deficit is in favor of the market thus their proposals protect the government’s interest for revenue generation – he, however, added the government, rather than losing, will gain more in the long term if these proposals are implemented.

Referring to the budget proposals they have submitted to the government, Habib said it would help in achieving higher value of listed shares comparable to regional countries. For example, he said market capitalisation is Rs 9 trillion, which could increase by 20 per cent or Rs 1.8 trillion if PSX’s proposals are implemented. As a result, the value of the government’s shareholding in listed companies would increase by Rs 350 billion as the government holds 20 per cent share in the market.

While government could gain a lot from these proposals, Habib said the budget proposal would have an impact of Rs 2.9 billion, which is only 0.4% of the PSX’s total tax contribution to the exchequer.

The proposal submitted by the PSX, include following tax measures:

Withdrawal of tax on issue of bonus shares; rationalisation of tax rate on capital gains; withdrawal of capital value tax; restoration of tax incentives on Real Estate Investment Trust schemes, which were partly withdrawn in the last budget; and income tax rebate for up to five years to new listing of companies on the PSX.

The officials also said there have been frequent changes in the Capital Market Tax regime, which is detrimental to attracting investors, both local and foreign. Therefore, they recommended that the taxation policy should be for a medium to long term.

The package, if approved in the budget of June 3, would also help in raising equities of approximately Rs 250 billion for privatisation, China Pakistan Economic Corridor projects and expansions, the officials said. They said lower tax rates would result in greater activity and generate more tax revenues in the long term.

PSX PERFORMANCE:

Talking about the country’s economic outlook and stock market performance, Habib said high fiscal deficit, energy shortage and war against terrorism were three major areas of concerns, but situation has improved now and investors are looking at our market positively. Giving an example, he said the stock market representatives have met large fund managers from around the world in New York City ahead of Pakistan’s possible reclassification from frontier market to emerging market in the MSCI index – which measures an equity market’s performance in global emerging markets. The feedback was very positive, he said.

This positive feedback can be attributed to various factors. In the last two and a half years, PSX was the best performing market in the region – it has given an average 26 per cent return in the last 10 years while the dividend yields and return on equity given by the PSX were the highest in the region. Pakistani Rupee was best performing currency in the region, inflation rate remained under control while interest rate has been reduced to the regional level.

LOW GDP GROWTH:

However, the PSX representative warned that the GDP growth is still a major area of concern for them – Pakistan’s GDP growth rate remained at or below 4% during the last five years, which is the lowest in the region. The cost of doing business is also on the higher side with electricity and gas tariff being sixth highest in the region. The country’s investment-to-GDP ratio also remained below 20 per cent, also lowest in the region.

The government needs to work on economic growth and focus on agriculture, construction and housing, SMEs, Large Scale Industries and infrastructure development.

The growth will not come without investment and for that to happen the country needs growth-oriented policies, the officials said adding they should tax trading, not investment.