Tax system flaw forces brokers to pay 12% levy

State minister assures stockbrokers the anomaly will be removed soon


Salman Siddiqui March 06, 2019
Representational image. PHOTO: REUTERS

KARACHI: The Pakistan Stock Exchange (PSX) and stockbrokers have approached the government, seeking removal of a taxation flaw, which emerged when the finance minister removed advance withholding tax on brokers’ turnover in the second mini-budget in January.

On the request of the PSX and stockbrokers, Finance Minister Asad Umar presented a demand before lawmakers for removing the advance withholding tax (WHT) of 0.02% on the sale and purchase of shares at the stockbrokers’ level. The tax was removed with the objective of boosting trading activities at the stock market.

“The removal of the tax (Section 233A of Income Tax Ordinance) has, however, automatically invoked another tax (under Section 233), requiring the stockbrokers to pay 12% tax on their commission varying between Rs0.05-0.20 per share,” PSX Stockbrokers Association General Secretary Adil Ghaffar told The Express Tribune.

A PSX delegation comprising Chairman Sulaiman S Mehdi and office-bearers of the stockbrokers association called on Minister of State for Finance Hammad Azhar on Tuesday and informed him about the taxation system flaw.

“The minister has assured us that the anomaly will be removed through a circular to be issued by the Federal Board of Revenue (FBR) within a week or so,” he said.

“The imposition of the new tax has killed the very objective of reducing the cost of stock trading and boosting trading activities at the bourse,” he said.

“As per prevailing taxation rules, the advance WHT on stockbrokers has been removed with effect from February 1 and we (stockbrokers) have become liable to pay 12% tax on commission from February 1 till the anomaly is fixed,” he said.

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Further tax cuts in budget

The minister told the delegation that the government wanted to boost trading activities at the stock market. To achieve the objective, he said, the government would present before parliament a proposal for removing the Capital Value Tax (CVT) of 0.01% - collected from stockbrokers - in the budget for the next fiscal year 2019-20, which would be presented in a couple of months. The minister also informed the delegation that the government would propose in the next budget to introduce different tax rates under the Capital Gains Tax (CGT) regime. The rates will be applicable according to the shareholding duration at the time of sale.

The new slab-based CGT system will be similar to the ones applicable to property sales at present. If an owner sells property within one year of purchase, 10% CGT is collected; if he sells after one year but within two years, the tax rate is 7.5%; if a property is sold after two years but within three years, the tax rate is 5% and there will be no tax if a property is sold after three years.

Focus turns from lower tax rates to ease of capital flow

The minister assured the stockbrokers that the government would amend definitions of shares and securities in order to remove the difference between the two and dismantle barriers in the way of attracting listing of new companies at the PSX.

He said a court of law in a case gave judgement recently according to which if someone purchased shares in a company before it was listed, they would be called “shares” and if someone acquired shareholding after the company’s listing, it will be called “securities”.

The prevailing law allows traders selling securities to take benefit of tax exemptions available at the PSX, but not to the traders who buy shares and want to sell them after the listing at the exchange.

“The difference in definitions of the two and different taxation treatment are hindering the listing of new companies,” he said.

Published in The Express Tribune, March 6th, 2019.

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