960407

Budget proposals

KSE wants tax

exemption on bonus

shares

RECORDER REPORT

KARACHI: The Karachi Stock Exchange, its budget proposals for 1996-97, has urged the government to exempt bonus shares from the 10 percent tax levied last year as it is one of the prime reasons for the current downtrend in the market.

According to the KSE proposals for the Federal Budget 1996-97 submitted to the Advisory Council, Ministry of Finance, traditionally companies issue bonus shares to shareholders when there is need to conserve liquidity for financing Balancing, Modernization and Replacement (MBR) and expansion.

Earlier bonus issue was tax exempted as an incentive to this policy of self-development. However in the budget of 1995-96 companies were subjected to 10 percent tax on bonus issue. This is one of the prime reasons for the current downtrend in the market, and is likely to discourage retention of corporate earnings.

The KSE has also proposed that in the larger interest of the capital market and development of the economy shares of listed companies be exempted from wealth tax, more so since these are risk oriented saving instruments.

The KSE said: "It is one of the great anomalies of the present system of taxation that a shareholder who does not receive any cash dividend has to pay wealth tax on his shares. When a company declares a dividend Zakat becomes leviable and once Zakat has been paid wealth tax does not have to be paid. This is an inequitable and unjust and makes share investment less attractive.

"In the case of companies with long gestation periods the situation is even worse; the shareholder has to wait for a number of years before the company becomes dividend paying; in the meantime he continues to pay wealth tax."

Tax on Income of Stock Exchanges: As Stock Exchanges are not profit-oriented entities but public service institutions and all their income is dedicated to the building up of the institutions and enhancing the value and level of services to the pubic, the KSE said, tax on the income of Stock Exchanges did not appear to be an appropriate pubic policy. "We urge that the income of Stock Exchanges may be made tax free."

Elimination of areas specific tax advantages: At present various under-developed areas of the country are enjoying disproportionate tax advantage such as exemption from sales tax (which is very significant considering the sales tax rate of 15 percent), tax holiday upto 10 years, reduced electricity tariff and concessional bank financing. The result has been that industries are set up in these areas with the sole objective of taking advantage of these concessions. Not only has this resulted in inefficient utilization of national resources but has also been responsible for creating price distortion to the disadvantage of industries set up in the tariff areas. There is no justification for a policy which develops one part of the country at the cost of another. We would urge review of this policy and restrict concessions as available at present so as to provide level playing field to all units regardless of their location.

We would also draw attention to the fact that insurance companies need to be brought at par with other investors in the matter of dividends as well. We would recommend therefore that when change is being made in the Insurance Act to accommodate the exemption on capital gains the tax liability of insurance companies for dividends received should also be reviewed.

Bearer securities: At a time when the emphasis is on documenting the economy, the existence of bearer securities defeats this policy objective. Bearer securities reward tax evasion, frustrate documentation and penalize the honest. The concessions available to bearer securities are not only inequitable but they lead to lower revenue generation at a time when resource generation is critical to the reduction in fiscal deficits.

We recommend that the issuance of bearer securities should be avoided and reliance on this vehicle to raise resources should be progressively eliminated.

The years 1996 and 1997 are expected to be very crucial as the fruits of the recent initiatives of the government are due in these years in the shape of self sufficiency in power, cement, polyester fibre and automobiles.

To further consolidate the progress already achieved we suggest the following policy orientation.

Policy orientation: The economic policies should be long term clearly articulated and free from all distortions. Investment both local and foreign is best attracted by a predetermined set of rules which extend over a period of time. The incentives available at present to securities investment should therefore continue for a further period of 5 years.

The KSE recommended that the enactment of laws and rules and regulations to introduce the concept of "treasury stock" as is prevalent in the United States. Companies should be able to use surplus liquidity to purchase their own shares when the shares are quoted at less than book value or are valued unrealistically by the market. This will help to stabilize share prices. In fact prices will increase because of increased demand for shares and the beneficial effect the reduction in the number of shares will have on earnings per share.

CLA be made autonomous: The CLA has immense responsibilities to regulate the capital market and to protect the interest of the ordinary shareholders. It has neither the resources nor the man power to be effective. The CLA must be provided the resources in the next budget. A regulatory body cannot be effective unless it is truly autonomous. We strongly recommend that the government should take all necessary measures to make CLA an independent and powerful institution.