May 13, 2003	Tuesday	Rabi-ul-Awwal 10, 1424

KARACHI, May 12: The Karachi Stock Exchange on Monday urged the government to extend tax rebate for the listed companies besides other concessions to encourage the listing of the companies with the stock markets and deepening of the capital market.

The Karachi Stock Exchange, in its budget proposals, emphasized the need to expedite privatization programme of leading state-owned enterprises, particularly listing of government owned companies. This will encourage more direct investment in the country which is badly needed to promote more industrialization and create new job opportunities, the KSE maintained.

Demanding the exemption of capital gain tax, KSE noted that this tax incentive is the most critical factor for ensuring investment in the equity market. Without this tax incentive it will not be possible to lure investors towards equity market for broad basing investments and industrialization. Just as capital gains are exempted from tax, capital losses are also not allowed to be set off against other income, it argued.

Presently, this exemption is available up to assessment year 2004-2005. Although there is still one more fiscal year to go, we suggest that this exemption of capital gains tax be perpetuated in order to promote equity investment in the country for its rapid industrialization. Such an announcement if made at the earliest will send positive signal to investors who plan their investment strategies on long term basis.

This year, the principle of double taxation has also been accepted in the US and taxing dividend income is considered to be double taxation and the US President has, therefore, proposed to withdraw this tax in the US.

A company though a separate entity in law is in fact a composite body of its shareholders and any tax payable by the company is actually tax collectively paid by its shareholders. Since dividend is paid out of the taxed earning of the company, any further tax on distributed amount is double taxation and therefore inequitable and unfair.

Insurance sector has been a major institutional player in the capital market and has provided it with much needed liquidity and stability. Tax exemption on capital gain on sale of shares allowed earlier to this sector was withdrawn from July 1, 1997. The Karachi Stock Exchange urged the government to restore the status of exemption of their capital gains to bring them at par with other investors. It noted that the insurance sector is now regulated by Securities Exchange Commission of Pakistan (SECP) and is subject to more accountability.

The government had taken an excellent step with the structural changes in the National Saving Schemes (NSS) with regard to pension funds, provident funds, insurance companies, trusts and others. These changes have set the stage for long term investors to invest using long term instruments available in the capital markets.

However, a number of guidelines, which come under the purview of government departments and regulators, have not been revised to reflect the new reality. For example, the Employee Provident Fund (investment in listed securities) Rules caps investment in listed securities at 30pc, similarly, EOBI and SLIC use government guidelines which prevent or greatly restrict the ability to invest in IPOs, listed securities, TFC’s and other market instruments. These rules should be replaced by a code, which puts the onus on the respective trustees and board to ensure investment consistent with best investment practices.

Income of Stock Exchanges is being taxed since 1995, which retards investment in infrastructure and operations especially that in Information Technology (IT).

The tax is retrogressive and “we urge the government to restore the earlier tax exemption status of the Stock Exchanges,” it demanded.

The KSE suggested that this tax exemption should be allowed for conversion from individual to corporate at any time in future which will help in professionalisation of brokerage houses as well as to help them enhance their exposure and render full brokerage services for the investors.

It may be pointed out that the tax is presently levied even where conversion is only on paper and where the same individual member continues as Chief Executive and principal shareholder of the new company’s entity.—APP