EQUITY investors have been spooked by budget uncertainties on two issues, which outweigh all of their other concerns. The first is regarding the government’s decision over the capital gains tax, and the second over the corporate tax rate.

In its proposals for the federal budget 2015-16, the bourse highlighted that capital gains on the disposal of securities was fully tax-exempt until July 2010. But the government, after prolonged deliberations with stakeholders, reached an agreement to levy the capital gains tax (CGT) based on the holding period of the securities.

While the Karachi Stock Exchange wants no change in the CGT rate of 12.5pc on securities with a holding period of less than six months, it has proposed that the tax on the sale of securities that were held between six and 12 months be reduced from the current 12.5pc to 10pc in 2015-16.

Similarly, it has asked for the elimination of the CGT on the sale of securities that are held for over a year but less than two years; these sales are currently taxed at 10pc.

The bourse has also asked the government to reduce the corporate tax rate for listed companies from 33pc to 25pc, to attract more companies towards public listing. Out of 62,571 companies currently registered with the Securities and Exchange Commission of Pakistan, only 557 are listed.

The Karachi Stock Exchange has asked the government to reduce the corporate tax rate for listed companies from 33pc to 25pc to encourage public listing

“The corporate tax rate in Pakistan is higher than most other regional countries. The average tax rate on corporate income in Asia is 22.89pc. In Pakistan, however, it goes up to 40pc due to multiple taxes on the corporate sector, such as 2pc workers welfare fund and 5pc workers participation fund,” the bourse affirmed in its proposals.

Most believe that Finance Minister Ishaq Dar is unlikely to agree to the demand of a big 8pc cut in the corporate tax rate.

Meanwhile, the market is rife with rumours over the CGT issue. The fear of an increase in the CGT is sitting so heavily on investors’ minds that trading volumes have almost dried up. And even the higher-than-expected discount rate cut of 100 basis points by the SBP failed to lift investors’ confidence, as most of them are loathe to take fresh positions until the dust settles after the announcement of the budget next Friday.

The corporate tax rate is already slated to be cut by 1pc. There is also a likelihood of the government deciding to incentivise companies to go public by giving an additional 1pc tax relief to listed companies only — Former KSE chairman Arif Habib

Former KSE chairman Arif Habib says he does not expect big surprises in the budget. However, he admits that the market is worried over the possibility of an increase in the CGT from 10pc to 12.5pc and from 12.5pc to 15pc, as well as a hike in customs duties. He believes that the government might want to tide over the decline in tax revenue due to the sharp fall in oil prices by enhancing the customs duty.

On the brighter side, he believes that the tax on bonus shares is likely to be scrapped as companies have virtually halted issuing bonus shares, causing losses for investors.

“The corporate tax rate is already slated to be cut by 1pc. There is also a likelihood of the government deciding to incentivise companies to go public by giving an additional 1pc tax relief to listed companies only.”

Another prominent stockbroker, Aqeel Karim Dhedhi, agreed that the tax on bonus issues may be withdrawn. But he was more optimistic about the CGT issue and was confident that it would be slashed to 7.5pc.

Zulqarnain Khan, executive director of Next Capital, observed that the market has a mind of its own and it generally manages to get a whiff of what lies ahead. He believed that the slabs of the turnover tax are likely to be increased.

He added that the CGT might be brought down to a uniform rate of 7.5pc, irrespective of the holding period. “Any increase in the CGT will inevitably result in drying up of volumes and will be a major setback for the market.”

Intermarket Securities Executive Director Raza Jafri said given the improvement in macros, he did not expect a ‘revolutionary’ budget to be on its way. “It is likely to be more of the same.” He argued that since there has been no major improvement in the tax-to-GDP ratio, the government might want to continue with stability measures for one more year before leaping towards growth.

Manzoor Ahmed, chief operating officer of the country’s largest mutual fund — the National Investment Trust, with Rs95bn in assets under management — urged the government to restructure taxation measures so that it could achieve the dual objective of raising its own revenues and offering incentives for market growth.

Meanwhile, the KSE also put forth some demands that it has presented repeatedly over the last several years.

One is the mandatory distribution of 50pc of listed companies’ taxed profits through cash dividends to shareholders, where the companies hold free reserves that equal more than 40pc of their paid-up capital.

According to the KSE, this measure, which was introduced by the Finance Act 1999-2000, proved very effective as it ‘nullified the oppressive practice of controlling shareholders’.

The regulation was, however, surreptitiously withdrawn. “The compulsory distribution of dividend by listed companies should be reinstated in the upcoming budget in order to increase investor confidence,” the KSE has urged.

But major market participants do not see this happening in the budget 2015-16 for fear of a revolt by listed companies, which prefer retention over payout, citing their need for comfortable cash flows for expansion.

Published in Dawn, Economic & Business, June 1st, 2015

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