May 16 - 22, 20

The common complaint of investors, be they individuals or corporate, is that the government does not incorporate their suggestions in the budget. They are right but they should also be held responsible for their myopic view, insisting on micro measures, and suggesting the measures so late that the planners find an excuse for not incorporating these.

However, the blame should also go the government which, often comes up with measures that are based on conditions from the International Monetary Fund and or demands of some 'pressure groups' but are mostly adverse for the small investors.

Over the years, the brokers' fraternity has been demanding one or the other exemption in the name of small investors. However, it is also a fact that the breed called small investors has become an Žendangered species'. The market is in the grip of institutional investors, large net worth investors, and the brokers, who wear different caps i.e. market maker, liquidity provider, sponsors of listed companies, and the asset management companies. Some of the recent crises particularly 2008 one broke the back of even medium sized investors. Not because they suffered losses due to market crash but due to apathy of frontline regulators who failed in taking timely decisions and paved the way for running away of erring brokers. Many of the investors have not received their claims yet.

To begin with, the tax rate for listed companies should not be more than 10 per cent, simply because these entities pay billions of rupees taxes on import of plant and machinery and raw materials. When the goods are sold in the market, the retail price also has GST included. Income tax is deducted at source from the salaries of employees and payments to suppliers and contractors. In other words, these companies effectively play the role of 'tax collectors' on behalf of the government.

There has to be a significant difference on tax rate applicable on public limited and private limited companies. The logic is simple in case of a public limited company the number of shareholders runs into thousands and in case of private limited entity the profit goes to a few elites. At present, the difference in tax rates applicable on public and private limited companies is not enough to encourage listing. The real advantage is that annual accounts of listed companies make appropriate disclosure and adhering to the listing rules is mandatory. This makes the operations of listed companies more transparent and abiding by code of corporate governance improves the overall efficiency of listed companies.

Similarly, there should be no tax on the dividend income of the shareholders because they provide the much-needed capital. Any business that borrows from the financial institutions has to pay Kibor plus 2.5 per cent minimum, at least. Therefore, it becomes the inherent right of the shareholders to receive a minimum tax-free dividend equivalent to Kibore plus 5 per cent. Let one point be clearly understood that borrowers have to pay interest irrespective of the fact they earn profit or incur huge losses, whereas dividend is usually paid out of the profit earned during the financial year. Good companies normally retain some portion of profit for future expansion and maintaining the payout even if they incur loss in any particular year. It is on record that in the past when interest rate was hovering around 20 per cent many 100 per cent equity based companies were listed. However, the shareholders lost their life savings because prices of shares of such companies reduced to around one fourth or even less. This happened because of the failure of regulators in protecting the interest of shareholders.

It is on record that imposition of capital gains tax has failed in mobilizing any significant amount. On the contrary, volumes have reduced substantially. Karachi stock exchange touched a record single day trading of more than one billion shares, as against this daily trading volume has remained less than 250 million during the current financial year. It is therefore suggested that this tax should be withdrawn in the next budget. To facilitate the government to mobilize substantial amount, capital value tax may be re-introduced. This tax should be linked with the vale of shares and not the volume of the shares. Fixing a minimum threshold limited would require least documentation and no complicated formulas would have to be used to calculate the tax liability.

These declarations should use only one identity code, the most preferred one being the national identity card number. Since details of the person are available at NADRA portal, making false declaration or providing incorrect information can be stopped. It is true that people love to evade only because tax rate is high. If it is reduced to the minimum and submission of details is also the least, there will be no incentive for concealment.

Though the last two suggestions do not pertain to budget, they may be appropriate for the new Chairman of SECP to consider these for the promotion of corporate culture in the country. In the past, a proposal was made that if the shareholders' equity of a private limited company exceeds a benchmark, it has to go public. However, the regulators failed to enforce this under the influence of the elites who do not wish to be accountable to the shareholders at the annual general meetings (AGMs). Most of the AGMs are not more than ritual where some of the 'favorites' of the sponsors try to wrap up the meeting in few minutes.

Though some of the existing sponsors may not like it the ownership and management of public limited companies has to be separated and appointment of a professional chief executive officer should also be made mandatory. Many of the listed companies are nothing but a corporate version of sole proprietorship as entire board of directors comprises of family members. Often the nominees of asset management companies or financial institutions are there but are least interested in the affairs of the company. They consider their nomination a privilege and not a duty.