Daily Times

ISLAMABAD: To incentivise listed manufacturing companies, the federal government has introduced 2 percent tax rebate for Shariah compliant companies through the Finance Act 2016.

The tax rebate, introduced on the suggestion of the Securities and Exchange Commission of Pakistan (SECP), is part of reforms being introduced for elimination of ‘Riba’ and for promotion and development of Islamic capital market. In this connection, a new clause 18(b) has been inserted in the Second Schedule Part II of the Income Tax Ordinance, 2001 through the Finance Act, 2016.

The State Bank of Pakistan, the SECP and the Federal Board of Revenue (FBR) will prepare a list of companies seeking to get tax rebate after screening. However, the listed companies deriving their income only from the manufacturing activities and having declared their taxable income for three consecutive years and have had paid dividends for last five consecutive years can qualify and apply for the tax rebate.

The tax incentive will attract new listings of companies on the Pakistan Stock Exchange (PSX) and add depth to the market. Moreover, it will create vibrant primary and secondary markets; capitalise the limited capital base; mobilise resources through channeling of faith-based investor savings; counter market anomalies and malpractices due to larger free-floats; create employment; and generate revenue for the national exchequer in terms of additional direct and indirect taxes.

An analysis of the data compiled for listed manufacturing companies reveals that eight companies can immediately qualify the criteria for Shariah compliance and avail 2% tax savings (as their interest-bearing debt or gearing is 0%) provided they convert their interest income from investments to income from Shariah compliant capital market equity and debt securities.

Another six companies, with gearing ratios of up to 10%, can also easily become eligible for the tax rebate subject to condition that interest income and financing be relocated to Shariah compliant modes of financing and investments. Similarly, other companies, which are leveraged by conventional borrowings, may also avail the discount in corporate tax by structuring on Islamic modes.

Though tax rebate to companies will have an impact on the national exchequer, additional funds will be available for distribution as dividends on which withholding tax can be realised. The SECP is considering additional conditions in consultation with the SBP and the FBR for the companies to maintain a minimum of 25% free-float; conduct business that is ‘Halal’, and interest-free income and financing.