Gradual implementation of CGT proposed
KARACHI (February 13 2010): The Karachi Stock Exchange (KSE) has proposed to the government to implement capital gain tax, initially at the rate of 5 percent in the next fiscal year, and gradually increase it to 10 percent by 2014-15. In its proposals for the federal budget 2010-11, the KSE has proposed gradual progressive capital gain tax implementation, initially at the rate of 5 percent, and to be elevated to 10 percent.
This schedule would apply to both equity and derivative products, it said. It has been proposed that the CGT should be implemented initially at the rate of 5 percent for the fiscal year 2010-11; 6 percent for 2011-12; 7 percent for 2012-13; 9 percent for 2013-14 and 10 percent for 2014-15.
The KSE has proposed that the capital gains tax introduced must be rational with the competitors for Pakistan to remain an attractive destination for portfolio investment. The holding period for exemption of capital gains shall be increased to 180 days or more for the year 2010-11 and for 2011-12; 270 days or more for 2012-13 and 2013-14 and 360 days or more for the year 2014-15.
Effective from July 1, 2010, capital gain tax for investors should be imposed only where the capital gains fall in the category of short term capital gain (holding period is less than 180 days.) The tax shall be applicable on all equity and derivative products, provided all other under-mentioned taxes currently applied on stock market transactions are removed.
These include withholding tax at 0.01 percent on purchase value of shares traded from members in lieu of their commission, withholding tax at 0.01 percent on sale value of shares traded from members in lieu of their commission, withholding tax at 0.01 percent on sale value of shares traded from members, withholding tax at 10 percent mark-up of COT/CFS from members (CFS & CFS MK-II at present stands discontinued).
Moreover, it is important to note that the rationale for removal of the above-mentioned withholding taxes is clear because of the implementation of federal excise duty (FED) on commission of brokers with effect from July 2009. However, it would not be out of place to mention that earlier the Finance Minister, on July 6, 2009 during a visit to the KSE, had announced that under sub-section (2) of Section 233A, of the Income Tax Ordinance 2001, the applicability of minimum tax would be changed to adjustable tax and under clause (c) of sub section (1) of section 233A of the Income Tax Ordinance 2001, the applicability of withholding tax on sale would be withdrawn/omitted to eliminate double taxation.
It was proposed that the government implement an effective date of July 1, 2010 which imposes a capital gains tax on securities purchased on July 1, 2010 and thereafter. The holding period of inventory (shares) as at June 30, 2010 will be deemed as over 6 months old and hence no capital gains tax will be levied irrespective when such inventory/shares are being disposed/sold. This should be a direct tax with no withholding as per international practice.
It has been proposed that CGT would be applicable only if the holding period is less than 180 days at the time investment is cashed out (redeemed and not reinvested) and the capital gain falls in the category of short term capital gain. It was also proposed that the capital gains and losses for non-residents are to be calculated in terms of the currency in which such investment is made as capital gain for investment in shares by a non-resident in US dollars are to be made in US dollars instead of Pakistani rupee.
It is therefore proposed that a proviso similar to section 48 of the Indian Income Tax Act 1961 be inserted in Section 76 of the Ordinance relating to cost of investment for the purpose of determining of capital gains. It is also suggested that redeemable capital which includes TFCs may be removed from the scope in order to develop the secondary market for these securities. In order to facilitate a speedy corporatisation and demutualisation of the KSE, certain exemptions are required in the Income Tax Ordinance, 2001 as well as Stamp Act.
The KSE focused its tax proposals on the CGT because it is a significant change to the current taxation regime and is committed to working with the government to implement a long term and effective tax policy. The capital gains, except banking companies, have been exempt from taxation and this exemption is due to be withdrawn from tax year 2010 and onwards. With the introduction of capital gains tax, all other taxes and levies related to purchase and disposal of securities would be abolished, with the exception of federal excise duty (FED) on brokerage services.
In view of the possible pressure being created in the market due to the uncertainty of how tax on capital gains will be imposed, KSE management has worked out what it believes will be a fair basis for imposing the tax and would urge the government to announce the proposed structure at the very earliest.