In its budget proposals for the next fiscal year, Karachi Stock Exchange (KSE) has recommended to the FBR to make a distinction between listed and unlisted companies in tax treatment. It has observed that stock exchanges on the directives of SECP had introduced a Code of Corporate Governance for the listed companies, making them subject to much-desired discipline to protect their shareholders but these companies consider it a burden without any advantage to them vis-à-vis unlisted companies. The situation was so bad that out of 62,571 companies registered with the SECP as on 31st December, 2014, only 557 were listed on the KSE. The Finance Act, 2014 had reduced corporate tax rate from 34 percent to 33 percent for both listed and unlisted companies. The KSE was confident that there was a lot of potential for increasing the number of listed companies if their tax rate was reduced to 25 percent.
There was, of course, nothing unusual about the proposal of the KSE. Until June 2002, there was a tax differential of 10 percent between listed and unlisted companies, with the listed companies subjected to 45 percent and unlisted companies to 35 percent rate of tax. In the budget of 2002-03, the government decided to progressively reduce the tax rate of private limited companies with a view to removing the tax differential of 10 percent, leaving no incentive for the listed companies. Besides, tax rate on dividend income from both listed and unlisted companies is the same at 10 percent, which again highlights the fact that there wasno advantage for listed companies. Also, tax rate for corporate sector in Pakistan was much higher than other countries in the region. The average rate of tax on corporate incomes in the Asian region was 22.89 percent; whereas in Pakistan due to multiplicity of taxes for the corporate sector, it goes up to 40 percent (33 percent normal tax, + 2 percent Workers’ Welfare Fund and +5 percent for Workers’ Participation Fund).
The case for making a distinction between listed and unlisted companies for tax purposes is undoubtedly very strong and well-grounded, especially in Pakistan where there is a dire need to bring most of the business entities under the corporate fold. In Pakistan, a large part of the economy operates in the informal sector and a reduced rate of tax for formal corporate sector would provide the incentive for the informal sector of the economy to be a part of documented and regulated sector. Increased number of enlistments would improve supervision and monitoring of their activities and subject them to various other legal and corporate requirements. Also, a higher number of listed companies would have access to capital from public through floatation of their shares and investors in the country would have enlarged access to new avenues of investment. Overall, therefore, a part of the financial resources of the banks, hitherto invested in private limited companies, would be released for other productive purposes and households would have more incentive to save due to increased options for investment. All of this would help modernise the economy and raise employment levels in the country. It needs to be remembered that no business in today’s world could reap the benefits of economies of scale if its capital base is small and it is devoid of proper corporate culture. On the fiscal side, government’s tax receipts could initially decline somewhat but such a measure would be quite beneficial in terms of yielding higher levels of revenues in the long run. This is so because of an expected rise in the level of industrial and business activity in the long run and bright revenue prospects from the listed companies due to proper regulation and auditing of their activities. In short, the present proposal of the KSE, in our view, carries a great merit and needs to be considered seriously by the government in order to make it a part of the budget for FY16.