Budget to unveil incentives for capital market
By Zamir Haider
ISLAMABAD: The government is likely to introduce a major incentive package in the forthcoming federal budget for fiscal year 2003-04 to broaden the capital market base and promote foreign and local portfolio investment.
“In order to encourage investments in mutual fund sector the government is likely to increase the ceiling on investment allowance to Rs 300,000 from existing Rs 100,000,” sources in the Central Board of Revenue (CBR) told Daily Times.
“Equity market is the only money-spinning channel available to the general public. Therefore, it is proposed to increase to Rs 300,000,” the source said.
A provision has been proposed in sub-clause (i) of clause (b) of sub-section (2) of section 80 of Income Tax Ordinance, thereby urging the government to include individual as a single member company.
Single member company shall mean a company incorporated under the Companies Ordinance 1984 (XLVII of 1984) which has only one member or shareholder. The sources said that as these companies would be formed by only one person (member) these should not be treated differently than a taxable individual, who should be given tax status as well. “This is believed that this would promote incorporation of companies and consequential documentation of economy,” the source said.
These sources said that it is also being considered to bring Term Finance Certificates (TFCs) at par with other national saving schemes and bank deposits as far as tax treatment is considered. Presently, under clause (7) of Part II of the Second Schedule of the Income Tax Ordinance the profit on national saving schemes or post office saving account is taxed at the rate of 10 percent, and it is 20 percent on TFCs. “The forthcoming Federal Budget is expected to do away with this distinction and all types of profit on debt may be taxed at 10 percent as final discharge of tax liability.”
The government had granted tax exemption to venture investments for a period of seven years effective from July 1, 2000.
It is also being proposed that under Clause (101) of second Schedule part I of Income Tax Ordinance, profits ands gains derived by a venture capital company or a venture capital fund for a period of 10 years from the date of registration under the Non-Banking Finance Companies (Establishment and Regulation) Rules 2003. It was required to be done due to the fact that Venture Capital Rules have been substituted by Non-Banking Finance Companies (Establishment and Regulation) Rules 2003, therefore, reference to repealed rules has to be substituted by the new rules.
In order to provide level playing field to Non-Banking Finance Companies (NBFCs), modarabas, leasing companies and investment banks, it is being considered that they may also be allowed tax exemption on profit under section 30 of Income Tax Ordinance 2001 on non-performing debts, like it is allowed to banking companies and development finance institutions (DFIs).
Presently, the NBFCs and Modarabas face the problem of paying taxes on profit accrued on over dues, as similar deduction is not allowed to them.
The government is also likely to provide level playing field to housing finance companies by bringing it at par with House Building Finance Corporation (HBFC) and other banks by allowing tax deduction to housing finance companies established under the license issued by Securities and Exchange Commission of Pakistan (SECP). This would promote investment by private sector in housing finance, since deduction in computing income chargeable under the head “Income from Property” in respect of interest on loans obtained for construction of property would be allowed to private sector housing companies. Similarly, it is being considered that a person shall be entitled for tax credit for a tax year in respect of any profit or share in rent and share in appreciation of value of house paid by the person in the year on a loan by housing finance companies established under the license issued by SECP. Earlier a person was only entitled tax credit on the loan obtained from scheduled banks of HBFC under Section 64 of Income Tax Ordinance 2001.
It is also being proposed that the tax allowance under Section 63 (2) on amount paid as insurance premium should be increased from existing 5 per cent to 10 per cent.
The government is likely to exempt from tax the investor protection fund and clearing house protection fund created by stock exchanges to ensure the integrity of the Capital markets and protect the interest of investors. “It is being proposed that any contribution received from members in respect of investor protection fund and clearing house protection fund established by a stock exchange be added in clause (142) in Part I of Second Schedule of Income Tax Ordinance,” sources said.
It is proposed that private mutual funds should be excluded from the definition of Sahib-e-Nisab, as the government has already exempted National Investment (unit) Trust and Investment Corporation of Pakistan (ICP) Mutual Funds form the definition of Sahib-e-Nisab. Sahib-e-Nisab means a person who owns or possesses assets not less than nisab. The proposed amendment will extend the similar treatment across the industry by bringing the investors of private and public sector collective investment schemes (mutual funds) at par and create a level playing field for all the participants. Collective investments schemes (mutual funds) are pool of funds contributed by individual investors who are required to pay Zakat on dividend received by them form the schemes. Subjecting the schemes to pay Zakat effectively means payment of Zakat twice by investors, on the same assets.