The federal government is actively exploring a range of proposals designed to significantly boost investment and strengthen the corporate sector in the upcoming budget for the fiscal year 2025-26. Among the key recommendations under serious consideration is the potential restoration of various tax credits, particularly those previously available for investments made in equity mutual funds and initial public offerings (IPOs).
Officials within the Federal Board of Revenue (FBR) have confirmed that the majority of these proposals currently under review are strategically designed to support broader economic growth while striving to minimize any adverse impact on overall revenue collection. The overarching goal of these incentives is to stimulate investment, with a particular focus on nascent startups, mutual funds, and the broader equity market, simultaneously encouraging improved corporate governance practices across the board.
Reintroducing Tax Credits for Individual Investors
One of the most prominent proposals suggests the reintroduction of tax credits specifically for individuals who choose to invest in IPOs or equity mutual funds. This particular incentive is expected to be highly beneficial for salaried individuals, offering them a tax-efficient avenue to grow their savings. Beyond individual financial gain, such a measure aims to promote greater financial inclusion and deepen participation within Pakistan’s capital markets. Critically, these tax credits would also serve as a mechanism to channel household savings into the more productive sectors of the economy, fostering real economic activity.
Incentivizing Private Equity and Venture Capital
To further support innovation and accelerate job creation, the government is also considering a significant move to exempt income earned by Private Equity and Venture Capital Funds from income tax. This exemption, however, would come with a crucial condition: these funds would need to operate as “pass-through vehicles,” meaning they would be required to distribute at least 90% of their income as dividends to their investors. Additionally, the proposals include a recommendation to reduce the current 25% tax on dividends paid by such funds to a more aligned 15%, ensuring fairness across various investment platforms and encouraging more capital inflow into these critical funding sources.
Promoting Holding Company Structures
Another proposal under active review involves initiatives aimed at promoting the establishment and growth of “Holding Company” structures within the corporate landscape. By reinstating tax exemptions on dividends received from group companies, specifically under Section 59B of the Income Tax Ordinance, the government seeks to encourage greater corporate consolidation, attract more investment into these structured entities, and generally improve corporate governance standards across Pakistan’s business environment.
Boosting Insurance and Capital Market Liquidity
In a move to strengthen the insurance sector and encourage greater personal financial planning, there is a recommendation to restore tax credits for premiums paid towards both life and health insurance policies. Officials supporting this proposal argue that such incentives would cultivate a stronger culture of saving and long-term investment among the populace, simultaneously improving public access to essential healthcare services and potentially reducing the government’s direct financial burden in these areas.
Furthermore, there is a significant call to eliminate the taxation of bonus shares. Many market participants and analysts believe that the current tax on bonus shares has acted as a disincentive for listed companies to reward their shareholders through this mechanism, and has consequently slowed overall activity and liquidity in the capital market. Reversing this tax could potentially invigorate the stock market.
Ensuring Fairness in Sales Tax Adjustments
Finally, the FBR is also reportedly reviewing proposals related to input sales tax adjustments to ensure greater fairness in transactions involving discount houses. Amendments to the Sales Tax Act 1990 are being suggested to specifically allow buyers to claim input tax even when the payment for goods or services is made indirectly through a discounting arrangement, a common practice in commercial transactions.
If these proposals, particularly the revival of various tax credits, are ultimately implemented in the upcoming budget, they would signal a clear and more investment-friendly direction in Pakistan’s fiscal policy. Such measures are widely seen as crucial steps towards stimulating economic development and ensuring long-term sustainable growth for the country.
