The Federal Board of Revenue (FBR) has stopped offering the Private Funds (PF) sector any tax breaks that would have put them on an even footing with other asset classes used for pooled investments, such as mutual funds and Real Estate Investment Trusts.
The Securities and Exchange Commission of Pakistan (SECP) has described the taxation of the private funds business as a “fiscal problem” for the nation in its most recent report on the sector.
The SECP research advised that in order to regain investor trust in the industry, it is urgently necessary to eliminate the financial obstacles brought about by the Finance Act 2021.
Along with supporting the specific tax plans, it’s important to spread awareness of the fact that preserving the trust of foreign investors depends on fiscal policy continuity. Therefore, it is necessary to examine fiscal remedies for the industry on an ongoing basis, as is the case in other jurisdictions, rather than as a temporary workaround that may be revoked under pressure to limit the number of exemptions.
The study noted that the removal of clause 101 from Part I of the 2nd Schedule of the Income Tax Ordinance resulted in the withdrawal of the pass-through status that had previously been granted to PFs (ITO). In accordance with sub-paragraph (xii) of clause 11A of Part IV of the 2nd Schedule, the deletion also triggered minimum tax on PFs.
Additionally eliminated is clause 103 of Part I of the second schedule, which applied to distributions received by a taxpayer from capital gains of a PF. 37. Similar to this, proposed changes to section 47B have led to the application of withholding tax on pension funds, even if such a tax is not applicable to other kinds of funds that, according to tax law, have pass-through character. As a result, a PF is subject to the following taxing tiers.
Due to the various levels of taxation, investments made through PFs now have an inherent disadvantage. The expansion of locally domiciled PFs has been significantly constrained by this negative tax environment. It should be remembered that the first fund established under the 2015 revisions to the Private Funds Regulations debuted in 2017.
The former pass-through status with a built-in sunset provision, which FBR gave until 2024, was a source of worry for new entrants to the business who were planning on a 5-7 year fund life. Recent withdrawals have increased the uncertainty around the sector’s fiscal climate and bolstered the opinions of many international investors, who point to inconsistent policies as a major deterrent to direct local investment.
Leading audit firms have clarified for the PF industry, however, that clause (57) of Part I of the Second Schedule of ITO exempts a PE&VC Fund’s total income, other than specified capital gains, provided that the fund distributes 90% of that year’s revenue to its unitholders.
Additionally, the addition of clause (103D), Part I of the Second Schedule to the ITO has provided an exemption on dividend income and long-term capital gains derived by a PE&VC Fund that invests in businesses established in Special Technology Zones (as defined by the Special Technology Zones Authority Ordinance, 2020) for a period of 10 years from the date on which the STZA authority issued a licence to the business.
It is important to remember that the SECP has been working to implement fiscal reforms for the PF sector, in line with similar fiscal policies enacted by several other jurisdictions.ate equity and venture capital funds (practices in other jurisdictions for fund level tax on PE&VC Funds. Interestingly, in some jurisdictions such as Israel, which has emerged as a venture capital investment destination, in addition to pass-through status, the investee companies in which a venture capital fund makes an investment were also granted a ten-year tax holiday.
