Budget proposals: PSX wants govt to reduce rate of capital gains tax

Says it will result in increase in investor base and trading volumes

KARACHI: The Pakistan Stock Exchange (PSX) has proposed the federal government to  decrease the rate of the capital gains tax (CGT) in addition to reducing the number of CGT tiers for the holding period of securities.

In its budget proposals for 2016-17, the PSX has suggested that the CGT rates should be decreased to 10% where the holding period of a security is less than six months. The CGT rate should be 8% in the case of a security whose holding period is more than six months but less than 12 months. There should not be any CGT in case the holding period exceeds 12 months, according to the PSX.

The government has revised CGT rates frequently after the imposition of the tax in 2010-11. Currently, the CGT is charged at 15%, 12.5% and 10% for holding periods of less than 12 months, 12-24 months and two-four years, respectively. No CGT applies on the sale of a stock with more than four years of holding period.

“The imposition of such a tax for holdings for up to four years was not witnessed in any country and is considered quite discouraging for investors,” the PSX said in its budget proposals.

National Clearing Company of Pakistan (NCCPL), which collects the levy and deposits it in the national kitty, has generated over Rs6 billion in CGT for the federal government in 2014-15. Its collection was over Rs4 billion for July-December 2015.

Benefits of tax cut

The PSX said there will be an increase in the investor base and trading volumes as a result of the reduction in CGT rates and rationalisation of holding periods. “We anticipate that there will be no loss of tax collection on account of the rationalisation of the tax on capital gains on the disposal of securities.”

With regard to the income tax rate, the PSX has demanded that the difference of the tax rate between listed and non-listed companies should be at least 5%. In the last federal budget, the government had reduced the corporate tax rate from 33% to 32% for all companies without any regard to their status of publicly traded entities. In the past, the government had a lower rate of income tax for listed companies as opposed to non-listed companies in order to incentivise the latter to opt for a public offering.

The proposed difference in the tax rates of the two kinds of companies will promote better corporate disclosures and higher returns for equity investors besides broadening the corporate-sector tax base, the PSX said.

In addition to different tax rates for listed and non-listed companies, the PSX has also asked the government to notify a new rate of income tax for entities that choose to get listed on a soon-to-be-functional Small and Medium Enterprises (SME) board on the bourse.

Companies will have relatively easier terms, such as lower paid-up capital requirement, to get listed on the upcoming SME board of the PSX. A reduced rate of tax for such listed companies should be introduced at 20%, the PSX demanded, to encourage relatively small companies to seek public listings.

The PSX has also demanded extended tax credit for companies that opt for a listing along with the withdrawal of the provision that treats bonus shares as shareholders’ income.

Published in The Express Tribune, March 17^th, 2016.

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