SECP gets taxation regime reformed

ISLAMABAD: Working in conjunction with the Federal Board of Revenue, the Securities and Exchange Commission of Pakistan, through the Finance Act 2011-12, got the taxation regime for capital markets, corporate and non-banking financial sectors reformed.

The SECP’s strategy encompasses continuation of reforms in the capital markets and corporate sector, deepening of structural reforms through removal of anomalies constraining economic activity, and to provide a level playing field to all the stakeholders, recommended various amendments to the 2001 Income Tax Ordinance, which were notified through the Finance Act 2011-12.

The significant amendments are as follow:

Tax Credit on Investment in new shares and for life insurance premiums/takaful contributions paid: To promote investments in initial public offerings (IPOs), the amount of eligible investment to benefit from tax credit on investment in IPO has been increased from existing Rs300,000 to Rs500,000. The percentage of the person’s taxable income for the year from 10% to 15% and the holding period has been extended up to 36 months. Further considering low insurance penetration in Pakistan (0.7% of the GDP), tax credit for premium paid will encourage long-term savings in insurance.

Tax Credit for enlistment of new companies: To encourage capital formation, tax credit of 15% for the year of enlistment has been allowed to companies coming for enlistment on stock exchanges. Existing incentive of 5% tax credit for the year of listing was considered insufficient.

Removal of CVT on Purchase of Instruments of Redeemable Capital: Levy of capital value tax (CVT) on the purchase of any modaraba certificates, or any instrument of redeemable capital has been withdraw in line with the levy withdrawn from purchase of shares.

Tax credit for contribution in VPS: Existing restriction of Rs500,000 to benefit from tax credit for contribution in voluntary pension schemes (VPSs) has been removed to provide a level playing field to retirement schemes; VPS vis-à-vis tax-free contribution permissible to other retirement schemes (superannuation fund: 20% of salary, gratuity fund: 8.33% of salary and provident fund: 10% of salary).

Exempt VPS from minimum tax: To bring parity in minimum tax treatment of VPS vis-à-vis other investment options like mutual funds/collective investment scheme (CIS), NI(U)T and real estate investment trusts (REITs), VPS has been exempted from minimum tax.

Exempts withdrawal of 50% of accumulated balance under pension fund from income tax. The Income Tax Ordinance has been amended to exempt withdrawal of 50% of accumulated balance under pension fund from income tax.

The SECP’s initiatives will help achieve the objectives to document the overall economy through corporatization and listing, stimulate capital formation through non-banking sector, stock market, etc. and to encourage long-term savings through private pensions and insurance.