PSX Urges Resolution of Provincial Sales Tax Collection Discrepancies

The Pakistan Stock Exchange (PSX) has called on the federal and provincial administrations to address the conflicting jurisdictional claims among provinces regarding the collection of sales tax on services. The PSX suggests raising the matter at the Council of Common Interest (CCI), with the expectation that this authoritative body will develop “a revenue-sharing formula for each province” to settle this significant issue.

The stock exchange clarified that provincial sales tax applies to services, including fund and asset management.

Overlapping Tax Laws

The PSX noted that the legislation enacted by the Sindh Revenue Board, Punjab Revenue Authority, and Khyber Pakhtunkhwa Revenue Authority contains overlapping provisions. Sindh’s sales tax law stipulates that sales tax is applicable where a business is registered. However, the Punjab Sales Tax on Services Act, 2012, and the Khyber Pakhtunkhwa Finance Act 2013 specify that the province where taxable services are provided is entitled to levy and collect sales tax on those services.

“We (PSX) request that this matter, relevant to all provinces and affecting the entire services sector, be placed on the CCI agenda to devise a sharing formula for each province,” the PSX stated in its budget proposals.

The three provinces impose sales tax on services at standard rates ranging from 15% to 16% of the service value. However, telecommunication services may be taxed at a rate of 19.5% in certain provinces.

The stock market’s management emphasized this issue in its budget proposals for FY26, already submitted to the Ministry of Finance, highlighting that the dispute over sales tax collection impacts the entire services sector, including PSX-listed firms.

The stock market facilitates trading in the shares of approximately 550 companies, with a total market capitalization of Rs14.73 trillion (approximately $52 billion, or 12.7% of Pakistan’s GDP for FY25).

Call to Eliminate Minimum Tax

The PSX has also advocated for the elimination of the minimum tax regime for listed entities, arguing that these companies demonstrate strong compliance with documentation requirements under various statutes.

It contends that the minimum tax discourages economic documentation. Listed companies adhere to extensive regulatory requirements, including audits, tax filings, advance tax payments, and withholding statements, ensuring their accounts align with statutory norms and promoting trust with authorities.

“However, the imposition of minimum tax adversely affects the earnings of listed companies, even when they have current and carried-forward losses.”

The PSX has also suggested an increase in the tax credit for listed small and medium enterprises (SMEs), recognizing their significant contribution to Pakistan’s employment, exports, and GDP growth, as well as providing 80% of the country’s employment.

“To encourage SMEs to list on the SME Board, we propose that the tax rate for such listed SME companies be permanently reduced by granting a tax credit of 50% of the tax payable for the initial 3 to 4 years of listing, followed by 20% of the tax payable thereafter,” it proposed.

Additionally, the PSX requested aligning capital gains tax (CGT) rates on the disposal/sale of securities with CGT rates on the sale of immovable property, aligning CGT rates for all derivatives and future contracts traded on the PSX with future commodity contracts traded on the Pakistan Mercantile Exchange (PMEX), documenting the real estate sector, promoting Real Estate Investment Trusts (REITs), and proposing tax relief for foreign investment inflows at the PSX.

To further encourage companies to list on the PSX, it has urged the government to accelerate the digitization of the payment system and documentation of the economy through technology deployment, noting that “estimates of the cash-based economy range from 35% to 50% of GDP”.