Pakistan’s government is mulling over a proposal to reinstate tax exemptions for Private Equity (PE) and Venture Capital (VC) Funds in the upcoming budget. This move aims to boost startup investment and revitalize the country’s capital markets.

Sources familiar with the discussions say Securities and Exchange Commission of Pakistan (SECP) has proposed the tax breaks, with Federal Board of Revenue (FBR) currently reviewing them. The proposal argues that the minimal revenue impact – estimated at only Rs. 3 million – is far outweighed by the potential benefits for startups.

The proposed exemption would apply to PE and VC funds that distribute at least 90% of their income. Proponents believe this will encourage investment in early-stage businesses and facilitate the restructuring of struggling companies.

Pakistan previously offered tax breaks for both PE and VC funds, similar to a three-tiered system seen in developed markets. These exemptions were withdrawn in the 2021 Finance Act, leading to what some see as “unjustified taxation.”

The new proposal seeks to restore tax benefits at the fund level. This, according to its supporters, will attract greater participation in Pakistan’s private funds market, leading to a deeper and more robust capital market overall. This, in turn, could stimulate investment across the economy.