New CGT regime to spur trading at PSX

Investors will have more liquidity as FBR agrees on once a year collection

Investors now have more liquidity to trade shares of listed firms at the Pakistan Stock Exchange (PSX) following the agreement of the Federal Board of Revenue (FBR) to collect capital gains tax (CGT) - a tax to be paid on the sale of shares in profit only - once a year instead of collecting the tax on a monthly basis.

Investors are liable to pay the tax at 15% on the sale of shares in profit. The tax rate for non-tax return filers is 30%. They are allowed to adjust losses on sale in three years period.

The National Clearing Company of Pakistan Limited (NCCPL), on behalf of the revenue board, had been collecting CGT every month from investors at the stock market since the last several years. However, it used to adjust losses once in a year; at the end of fiscal year in June.

“The collection of CGT every month and adjustment of losses once in a year was unnecessarily causing a shortage of liquidity in the hands of investors. First, there is no rule which demands a collection of CGT every month (but once in a year) or the losses should also have been adjusted monthly,” a stockbroker told The Express Tribune.

“FBR, through NCCPL, was estimated to collect Rs4 billion in CGT for the period July-August 2020 in September, but deferred it after successful negotiations with the stockbrokers,” the broker added.

This means investors now have additional Rs2 billion per month to invest at the local bourse. This may help increasing trading activities and determine a true value of shares at the bourse.

NCCPL informed the market participants through a notification at the outset of October that “NCCPL has taken up the matter related to the manner of adjustment of brought forward capital losses with the FBR and it is expected that the FBR will shortly issue a clarification on the matter. Accordingly, NCCPL will inform timelines for collection of CGT to market participants once FBR advises NCCPL in this respect.” The stockbroker recalled that the market had started going under selling pressure sometime around in October after NCCPL notified collection of CGT for July-August period.

“The market underwent selling pressure as investors pulled out investment to prepare for CGT payments,” he said, adding that the development, that FBR and NCCPL had deferred the tax collection, helped the market bounce back later on.

CGT collection goes up when the market is in buying mode, while the collection shrinks or becomes negative when the majority of the investors dump their holdings.

The benchmark KSE-100 index closed in the green for six months out of the 11 months since January 2020 and closed down during the remaining five months. The fluctuation in the index must have impacted CGT collection each month accordingly.

PSX had lost around 37%, or 16,000 points, to the then five-year low at around 27,000 points in March compared to 43,000 points in January after the government imposed a country-wide lockdown in the wake of the Covid-19 outbreak in February.

Later on, it recovered to over 42,000 points in September following a drop in Covid-19 cases, a massive cut of 625 basis points in the benchmark interest rate to 7% during March-June and a notable recovery in the domestic economy. The benchmark index closed at 41,068.82 points, up 261.73 points or 0.64% on Monday.

Published in The Express Tribune, December 1^st, 2020.

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