KARACHI: Finance Minister Miftah Ismail has directed that a meeting be held immediately to consider the matter of state-owned enterprises (SOEs) declaring healthy dividends as it would “result in income and taxation revenue for the government”, according to a statement by the Pakistan Stock Exchange (PSX) on Tuesday.
“Some immediate steps that can be taken include increasing dividends by profitable SOEs,” read the statement released after the PSX hosted a meeting with the finance minister.
“Presently, while some of the SOEs are extremely profitable, their payout ratio is a meagre 18%. The participants urged that this should be raised to 50%.
“Given the imminent board meetings, there was an urgency for guidance for SOEs to declare healthy dividends, which would result in dividend income and taxation revenue for the government, giving it fiscal space towards reducing circular debt as well. The finance minster agreed and directed that a meeting be held immediately with the relevant ministry and all relevant stakeholders to consider this matter,” the statement added.
The participants of the meeting included heavyweights like PSX Chairperson Dr Shamshad Akhtar, Securities and Exchange Commission of Pakistan (SECP) Chairman Aamir Khan, PSX Managing Director and CEO Farrukh H. Khan, Federal Board of Revenue (FBR) Chairman Asim Ahmad, State Bank of Pakistan (SBP) Deputy Governor Dr Inayat Hussain, Special Secretary Finance Awais Manzoor among others.
Those representing the private sector featured Arif Habib Group Chairman Arif Habib, Pakistan Stock Brokers Association (PSBA) & AKD Group Chairman Aqeel Karim Dhedhi, Bank Alfalah Limited CEO Atif Bajwa; NBP Funds CEO Dr Amjad Waheed, Arif Habib Corporation Director Nasim Beg, and Pakistan Business Council (PBC) CEO Ehsan Malik.
The meeting involved discussion on proposals presented by the PSX to the finance minister for the sustainable development of the capital markets.
The follow-up meeting came after Miftah’s visit to PSX on August 5, when the finance minister said that the government will continue to suppress imports for the next three months at the cost of slower economic growth.
During the meeting, the PSX MD re-emphasised that the situation in the capital markets needs to be addressed on war-footing basis.
“The participants pointed out that the market valuations presented compelling opportunities for entities like State Life Corporation and Employees’ Old-Age Benefits Institution (EOBI) to invest in listed equities for the benefit of their policy holders and pensioners.”
The PSX statement added that key points addressed at the meeting included matters related to Pakistan’s macro-economy, capital markets, taxation and non-tax measures. In terms of the macroeconomic situation prevailing in the country, the participants emphasised that government’s funding should be strong and taxation measures should be equitable.
“Movements in PKR/USD exchange rate have been too volatile and changes to this effect should be gradual. With regard to the interest rates, it was pointed out that interest rates in almost all countries of the world are negative and that this must be taken into account in context of interest rates in Pakistan.”
Miftah said Pakistan would witness macroeconomic stability with the IMF programme resuming before end of August as all conditions have been met.
“Furthermore, the balance of payments position is now well under control,” the finance minister was quoted as saying in the statement.
“With increased hydel power, lower energy demand and lower oil prices, Pakistan may even have balance of payments surplus in coming months.”
With regard to tax measures, Miftah stated that fiscal discipline will be strictly followed and all additional expenditures will be fully funded by tax measures.
Balance of payments position is now well under control. With increased hydel power, lower energy demand and lower oil prices, Pakistan may even have balance of payments surplus in coming months: Finance Minister Miftah Ismail, as quoted in the PSX statement
“The 10 percent Super Tax is only imposed for one year while alternative revenue streams are developed. Advance-to-deposit ratio (ADR)-linked tax on banks will not be imposed retrospectively and tax revenues from the retail sector are expected to be significantly more compared to last year.”
With respect to the capital markets, it was discussed in the meeting that urgent actions be taken to mitigate the impact of macro developments for sustained and secular growth of the capital markets.
The PSX statement stressed that as perhaps the largest stakeholder in the market, the government will benefit directly by developing better funding alternatives, improved documentation and higher tax revenue, as well as avail the broader benefits that accrue to an economy on account of having developed capital markets. It was emphasised that the two biggest obstacles to capital markets growth are “tax incentives given to other asset classes and KYC requirements in the stock market, which are not consistently applied to other asset classes”.
“These obstacles are resulting in an AML- and tax-driven distortion among asset classes which is detrimental to efficient allocation of scarce resources in Pakistan; hence creating challenges on both demand and supply sides for the capital markets,” the statement said.
In terms of taxation, the participants of the meeting pointed out that even though the stock market is undoubtedly one of the most documented sectors of the economy, however, income of listed companies is subject to double tax, at the company level and later on dividends distribution level as well, whereas unincorporated businesses are subject to substantially lower taxes.
It was emphasised that this inequity in taxation is discouraging corporatisation and documentation.
The points made to encourage corporatisation and documentation included tax rate for unlisted companies and Associations of Persons (AOPs) be logically higher than for listed companies, restoration of tax credit for newly-listed companies as the immediate revenue impact is very small.
“In the medium term this will be a revenue positive measure since the FBR will collect both Capital Gains Tax (CGT) and higher income tax from both the listed companies and other companies in the supply chain of the listed companies, provide a small tax rebate to any listed company that pays more than 50% of profits as dividends, reinstate exemption on inter-corporate dividend under clause 103c for group relief which will significantly improve capital formation and investments, and grandfather tax position of companies at the time of new listing on PSX, particularly for smaller companies listing on the GEM Board of PSX.”
A key concern expressed at the meeting was the treatment of CGT.
“The Finance Bill 2022 addressed this issue through introduction of reduced rates based on holding period. However, the final Amended Finance Bill 2022 has again created tax disparity between securities and immovable properties. This was termed unfair and against the stated policy of GoP.”
The participants also stressed that in terms of non-tax measures, SOEs like State Life, DFIs like Pak Kuwait, PPP, and CPEC projects be encouraged to list and raise debt from the capital market.
“This will allow the GoP to release their equity and reinvest it in new projects, while growing the size of the market, a key metric to be included in the MSCI Emerging Markets Index.”
Additionally, it was pointed out that Direct Listing procedure developed by SECP and PSX can be used to achieve this without any significant sale of shares by GoP.
The participants in the meeting further emphasised that all measures/ schemes introduced by GoP, MoF, FBR and SBP should be available on better terms for listed companies such as concessional financing schemes for SMEs, that GoP use the capital markets for further Sukuk and debt issues for itself and other GoP-controlled entities, that the term ‘Advances’ for the purpose of calculating ADR under the Income Tax Ordinance, 2001 must include investment in all kinds of Corporate Sukuks/ TFCs, that investment limit for small retail investors, with easier AML requirements in Sahulat Accounts be increased to Rs.2.5 million with SECP fully clarifying AML requirements for Sahulat Accounts, that reforms in NSS are extremely important to eliminate distortions in the financial sector and to create significant savings for the GoP.
“The finance minister was highly receptive to all the points discussed. In particular, he asked the FBR to immediately review any discrepancies in the CGT regime and the issue of tax credit for newly listed companies. He asked SECP to review the investment limit and AML requirements for Sahulat Accounts. He also directed the MoF to review listing of DFIs, procedure for issuance of debt/ Sukuks in the capital markets and interest rate setting of NSS instruments.”
Three committees set up
For a thorough review of all matters, the finance minister also set up three committees.
“The first committee was set up to share the perspective of the private sector with the SBP and the Monetary Policy Committee on interest rates, the second one was set up to coordinate with the PBC and PSX on all the tax issues and the third committee was set up to coordinate the review of listing of DFIs, debt & Sukuk issuance, reform of NSS and explore development of a market for exchange rate forward dealing which all market participants can access,” the PSX statement added.
In the first committee, SBP Deputy Governor Dr Inayat Hussain will coordinate with representatives of the PSX and PBC.
In the second committee, Member Tax Policy, Afaque Qureshi, will coordinate with the PBC and PSX on all tax issues
In the third committee, Special Secretary Finance Awais Manzoor will coordinate along with Nasim Beg from the private sector
The finance minister committed to review progress and meet with the stakeholders again within two weeks.