Capital Gains Tax to be imposed, July 1

ISLAMABAD: The National Assembly panel has said gains from sale of shares in the stock market will be subject to the Capital Gains Tax (CGT) from July 1, rejecting proposals of mighty brokers.

The National Assembly Standing Committee on Finance, in a meeting on Wednesday, approved the government’s decision to impose the tax, after a gap of 36 years, from July 1. It turned down the Karachi Stock Exchange’s proposal of exempting foreign investors from the tax and also did not accept their request not to charge the tax on conversion of a private company into a public limited company.

Karachi Stock Exchange (KSE) representatives, who were present in the meeting, asked the committee to consider a recommendation for allowing small individual investors file income tax returns annually, instead of quarterly as proposed in the budget.

“The era of free rides is over. The poor are paying taxes and the rich will also have to pay their due share,” said Federal Board of Revenue Chairman Sohail Ahmad.

The management of the Karachi Stock Exchange is lobbying hard to pressurise the government to exempt those shares from the CGT which were bought before July 1. It is also seeking exemption for foreign investors, but according to the finance ministry this will provide a cover for local investors to evade the tax.

The government proposed in the budget for 2010-11 imposition of 10 per cent CGT on sale of shares held for six months or less. For shares held from six months to a year, the tax rate will be 7.5 per cent. The government expects collection of at least Rs5 billion a year on this account compared to current meagre collection of Rs580 million from the stock market under different taxes.

The Senate Standing Committee on Finance and Revenue had already recommended the levy of the tax irrespective of the date of share purchase, and the recommendation would be honoured, said the FBR chairman.

“It is an achievement for the PPP government that it has been able to slap the tax on the stock market after almost four decades,” said Chairperson of the Standing Committee, Fauzia Wahab.

In the words of Managing Director of the KSE Board, Adnan Afridi, the government has deviated from the understanding reached with the KSE on February 22 on four issues. He said former finance minister Shaukat Tarin had agreed to impose the tax only on those shares which would be bought in the next fiscal beginning July.

“Any backing off from the agreement will hurt market sentiments, which is not good for the economy,” he said, adding over the last 10 days the market lost $3 billion and the government balance sheet fell by $1 billion.

He argued that the CGT would be a double-edged sword for foreign investors, as their investment would also come down due to depreciation of the rupee against the dollar.

Rashid Godil of the MQM and Shahid Khaqan Abbasi of the PML-N supported the proposal of linking the CGT on foreign investors to net erosion of investment on account of depreciation of the rupee.

“It will result in dollarisation of the economy and domestic investors will disguise themselves as foreign investors and evade taxes,” said Asif Bajwa, Special Secretary Finance. In that scenario, he said, the government would have to bear the depreciation cost, which is not feasible.

Shahnaz Wazir Ali of the PPP said anybody coming to Pakistan and making money should be taxed.

The FBR also refused to accept the stock market’s proposal of CGT exemption for converting a private company into a public limited company. The KSE was of the view that the levy would discourage the demutualisation process.

Published in the Express Tribune, June 17^th, 2010.