Muhammad Ali Chairman Securities and Exchange Commission of Pakistan (SECP) has said that distortions in the taxation system is one of the major hurdles in corporatization hence SECP has strongly proposed new fiscal measures including major reduction in corporate income tax and enhancement in tax rate for partnership/proprietorship in coming budget (2012-2013) to promote listing of new companies in stock market.
Addressing CFO conference on ‘CFOs-Driving Sustainable Organisational Success’ organised by the Institute of Chartered Accountant of Pakistan (ICAP) here on Monday, Muhammad Ali said that the taxation system is not transparent and up to the mark.
The corporate sector which is more documented and making huge tax contributions to national kitty is being charged with higher tax rate of 35% and non-listed companies are enjoying documentation immunity as well as paying 25% tax with no regulatory requirement.
The partnership/proprietorship tax rate of 20-25 percent against corporatized business tax rate of 35 percent is a huge disincentive for making listing on the stock market more attractive.
It is unfortunate to note that the units not paying tax are flourishing and those paying high tax in the corporate sector have to fulfil all regulatory requirements including compliance of tax laws etc.
This is a major distortion in the existing taxation system which needs to be removed.
The Presumptive Tax Regime (PTR) is also creating distortion in the tax system.
He said that partnerships and small companies are paying 25% tax with a facility of no audit and no regulatory oversight by the SECP.
On the other hand, corporate sector is paying 35% tax with mandatory tax audit and SECP regulatory oversight.
Treatment with these two types of companies is creating distraction increasing tax evasion.
The SECP is sending this major budget proposal to the FBR.
Business friendly fiscal regime and incentives for corporatization could help achieve the goal of corporatization.
The SECP Chairman termed the un-favourable tax regime for corporate sector as main hurdle in promoting listing of companies in stock market.
The people prefer to operate as partnership/proprietorship to avoid to audit and documentation.
If the partnership/proprietorship would be converted into companies they would have to pay higher tax rate of 35 percent.
Why anybody want to document as company when he can pay lower tax rates with immunity from keeping tax record and audit.
This is a major anomaly in the taxation regime which needs to be rectified.
Muhammad Ali said that is the major budget proposal of the SECP to bring down the corporate income tax rate to encourage corportization.
Globally, tax rate on listed companies or corporate sector is low and high tax is charged from the non-listed companies.
In Pakistan, the tax regime on corporate sector is entirely different as compared to other best tax administrations.
Chairman SECP said that out of 3 million businesses in Pakistan, only 61,000 companies are registered with the SECP.
Out of 61,000 companies, only 30,000 are active and compliant companies whereas the remaining companies are dormant.
Around 63 percent of the direct and indirect taxes of corporate sector are paid by these 30,000 companies.
Only 30,000 are active companies actively engaged in business activities which constitutes only one percent of the total number of businesses of the country.
He further informed that there 650 listed companies in Pakistan and trading of only 100 listed companies takes place at stock market.
Due to the dissatisfaction vis-à-vis corporate governance investors don’t invest in the shares of 300-400 companies.
It’s time for government, regulator and companies to think about steps to be taken to remove bottlenecks so as to improve corporate governance, only this would help improve corporatization in the country, he added.
The guest of honour and keynote speaker Mohammad Ali shedding light on ‘What Accountability means to CFOs- A regulator perspective’ stressed that in modern age the role of a CFOs goes way beyond the traditional perspective.
They are custodians of stakeholders’ interests in an organisation.
He explained that the Securities and Exchange Commission of Pakistan would unveil New Code of Corporate Governance on April 10, 2012 at Karachi to replace 10 years old Code of Corporate Governance.
The new Code is aiming at protection of CFO’s with their mandatory presence in board meetings, separation of powers and role of Chairman and Chief Executive Officers with clear duties for human resource, management, protection of shareholders and audit.
The New Code of Corporate Governance has also laid down minimum qualification required for the CFOs.
The revised Code has also given protection to the CFOs.
Muhammad Ali has said that the SECP is also examining the proposal for forming an Independent Audit Oversight Board within a year’s time with maximum powers and a dedicated officer with a team of officials is to be appointed on the Board.
SECP Chairman was of the view that every business should be registered with respective authority and legislative changes are needed in the case of companies’ registration.
He said that four steps are needed in the country for corporate culture change, mainly if we are able to make our tax laws and corporate laws investor-friendly only than we shall be able to promote corporatization in the country, he explained.
He also urged upon facilitation of small companies.
He also informed that SECP is finalising a new Company Law and after consultation with stakeholders it would be submitted to the parliament for approval and hoped that new law to be enforced from 2013.
While urging achieving long term success the Chief Financial Officers of the companies should play their role and sacrifice the short-term gains in the corporate sector, for improvement in ethical standards there is important role of CFO, he maintained.
SECP Chairman further informed that SECP has already finalised a draft Code of SOEs and is in the process of finalisation of similar nature of Code for the private companies.
Vice President ICAP Nazir Ahmed Chaudhry, James Lockyer Director of Education at Association of Corporate Treasures United Kingdom and representative of banks as well as corporate sector spoke on the occasion.