Govt restores slab-based CGT

Increases capital gains tax to 15% on sale of shares within one year of purchase

KARACHI:

In line with the years-old demand of the Pakistan Stock Exchange (PSX), the government has notified the restoration of slab-based capital gains tax (CGT) on the sale of shares with effect from
July 1, 2022.

The rate of CGT has been linked with the holding period of stocks by the investors, meaning the tax rate will continue to fall with the increase in holding period of shares purchased on or after July 1, 2022.

There will be no CGT if shareholders opt to sell stocks after six years from the date of purchase, according to a notification available on the PSX’s official website.

The government has, however, increased the rate of CGT to 15% on the sale of shares within one year from the date of purchase compared to 12.5% earlier, according to the notification issued by the National Clearing Company of Pakistan Limited (NCCPL) on Thursday.

NCCPL is responsible for computing, determining, and collecting CGT from investors at the PSX, mutual fund management companies, and Pakistan Mercantile Exchange (PMEX) and depositing them with the FBR on a monthly basis since April 2012.

Besides, the government has silently withdrawn exemption of CGT on shares purchased before July 1, 2013, Pakistan Stockbrokers Association (PSBA) former general secretary Adil Ghaffar said while talking to The Express Tribune.

The NCCPL notification says shareholders would pay 12.5% CGT on the sale of the securities acquired on or before June 30, 2022. “This slab allows the government to collect CGT on those shares as well that were purchased before July 1, 2013,”
Ghaffar added.

“Therefore, the government would record no reduction in collection of CGT amount on disposable of shares during the current fiscal year 2023 and over the next five-years amid it has increased the rate of CGT to 15% for the first year and withdrew CGT exemption on shares purchased till June 30, 2013.”

Federal Board of Revenue (FBR) former chairman Shabbar Zaidi said the other day that majority shareholders sell stocks within one year from the date
of purchase.

His statement also suggests the government would continue to collect higher amounts under the revised CGT regime, as the rate of CGT has been increased to 15% for the first year
from 12.5%.

The government would collect CGT in the range of 15 to zero percent from investors appearing in ATL (active taxpayers list), depending upon the holding period, according to the notification.

For investors not appearing in ATL, the rate of CGT would remain double in all the slabs starting from 30%.

To recall, the government charged a uniform 12.5% CGT on the sale of share in profit irrespective of any holding period during the previous fiscal year ended on June 30, 2022.

The government has restored the slab-based CGT regime after the PSX said in its budget proposals for FY23 that “a reduction or a time-bound elimination of CGT will be a big headline incentive to attract new local and foreign shareholders without any significant loss of tax revenue and in fact over some time is likely to be revenue positive.”

PSX said that the CGT collection was merely Rs1.3 billion last year and Rs2.1 billion in the prior year. “Moreover, brought forward losses amounting to Rs270 billion are available to be adjusted against future capital gains, therefore CGT collection will continue to be negligible…Currently, carry forward of losses is allowed up to a period of
three years.”

Ghaffar estimated CGT collection in a range of Rs25-50 million in the full fiscal year 2022, as the stock market has continued to remain under selling pressure most of the time during the year due to homegrown, international, and
geopolitical issues.

The CGT is collected only on those shares which are sold in profit, meaning the price of a share should be higher at the time of sales compared to the price
of purchase.

CGT rates

The CGT would be collected at the rate of 12.5% on shares purchased on or after July 1, 2022, where the holding period exceeds one year but does not exceed two years. The investors not appearing in ATL would pay 25% for the same holding period in
this slab.

The rate would continue to cut down by 250 basis points in each of the forthcoming holding years and would reduce to zero in the seventh year of the holding at the Pakistan Stock
Exchange (PSX).

The government would continue to collect CGT at a uniform rate of 5% from future commodity investors at the Pakistan Mercantile Exchange (PMEX).

The rate of CGT would vary between 25 to zero percent on mutual funds depending upon the holding period and nature of investors whether they are individuals
or corporates.

Published in The Express Tribune, July 23^rd, 2022.

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