Mattias Martinsson, Chief Investment Officer and co-founder of Tundra Fonder, a Swedish mutual fund investing in frontier markets like Pakistan, has expressed serious concerns over rumors of high taxes on capital markets in the upcoming budget announcement on June 12.
In a social media post addressed to Prime Minister Shehbaz Sharif, Martinsson emphasized the detrimental impact of the capital gains tax (CGT) on Pakistan’s investment climate. “For years, we have repeatedly called for Pakistan to abandon its counterproductive capital gains tax, and replace it with a turnover-based tax like Vietnam has (10bps when selling),” Martinsson stated.
These concerns were underscored by the KSE-100 Index’s sharp decline, which saw a drop of over 2,000 points on Friday, dipping below the 72,000 mark as investors reacted to the tax hike rumors.
Martinsson argued that a turnover tax would be simpler to collect and would generate more revenue for the Federal Board of Revenue (FBR). He also highlighted the administrative challenges faced by foreign investors under the current CGT system. “It takes about 1-2 months for a new foreign investor to get access to Pakistani equities, with the major hassle being the monthly tax collection, requiring a local tax advisor,” he noted.
Comparing market turnovers, Martinsson pointed out that Vietnam’s daily turnover is between $500 million to $1 billion, compared to Pakistan’s $50 million to $100 million. “When we started investing in Vietnam back in 2013, turnover was $100-200 million a day,” he shared.
Martinsson highlighted that the annual CGT collection in Pakistan is around $10 million, questioning if it is worth discouraging foreign investors for such a minimal amount. He stressed the importance of the equity market in valuing unlisted investments, noting that low valuations in the equity market set a high required rate of return for all investments, making Pakistan less attractive to foreign investors.
“Pakistan’s biggest problem is the structural balance of payment deficits,” Martinsson said. He urged the government to focus on increasing exports and attracting Foreign Direct Investment (FDI) by making the market more appealing.
He compared the required returns on investments in India, which are below 10%, to those in Pakistan, estimated at over 30%, questioning why Pakistan does not strive to maximize its attractiveness to investors to achieve higher valuations for large projects.
Martinsson concluded by emphasizing Pakistan’s potential for a vibrant equity market, citing a strong local investor base and historically high earnings growth. “What if the focus was to bring back Pakistan to that point? Make the cake bigger, and there will actually be something to collect for the state – and the people,” he stated, urging the government to abandon CGT for foreign investors once and for all.
