Low volumes to persist as Individuals adjust to the Capital Gains Tax

Analysts believe that most of the individuals are unused to declaring their brokerage in their annual tax statement.

KARACHI: Individuals trade 54 per cent of the stock market and analysts believe that most of them are unused to declaring their brokerage accounts in their annual tax statement. Their adjusting to the Capital Gains Tax (CGT) could cause volumes to remain low for another quarter.

Most of them square their position within a day; this new levy and the documentation required may affect their trading habits, according to analysts at Topline Securities.

“This cultural change may take some time for people to adjust to; we think that the overall market depth will be affected,” said Topline Securities’ analyst, Mohammed Sohail.

He pointed out that this year’s second quarter average daily volumes were far lower than those seen in 2005 to 2007. The volumes were $38 million compared to $400-600 million in 2005-2007.

Changes

Stock markets are changing in a big way for everyone. The government is imposing a tax on capital markets to try and stabilise them. Investors have been exempt from the CGT for more than the last three decades.

Retail investors are the most active segment in Pakistan with a 54 per cent share in trading followed by companies with a 29 per cent share and foreigners with a six per cent share, according to the National Clearing Company of Pakistan Ltd’s (NCCPL) data.

Analysts at Topline Securities believe that individual investors will adjust to this big change gradually as this situation has occurred before when the Unique Identification Number (UIN) was introduced. And the UINs (Client) Level Margining System was made operational from October 1, 2009.

Companies, foreigners, mutual fund and the likes will not have a problem with filing their returns and source of income as they and most banks are already paying CGT.

All for the best

“This documentation eventually bodes well for the overall economy,” according to Sohail.

The investor and broker community tried their best to ensure that the tax was not imposed but failed and the authorities will be imposing the tax despite their attempts.

This tax is an attempt by the government to dissuade speculative buyers who do not consider shares as long-term investments and would rather try to benefit from stock prices fluctuating by selling and buying quickly.

A 10 per cent tax is planned for investors who would buy and sell within six months and a 7.5 per cent tax for those who would buy and sell from six months to a year.

“We believe that this new levy will affect volumes in short run but may not necessarily cause a bearish spell,” said Sohail.

Published in the Express Tribune, June 18^th, 2010.