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