The board of the Karachi Stock Exchange (KSE) has decided to approach the Ministry of Finance, Federal Board of Revenue (FBR) and Privatisation Commission to prevent a major hike in the capital gains tax (CGT) rate, which is scheduled to take effect in the new fiscal year.
In a meeting held on Friday, the KSE board decided that authorities concerned will be asked to withhold the planned increase of the CGT rate from the existing 10% to 17.5% in case the holding period of a security is less than six months.
The CGT rate for a holding period of less than six months was due to increase from 10% in 2012 to 12.5%, 15% and 17.5% in the following years. However, the government kept the rate unchanged at 10% for the last two years, which means it is set to go up by 7.5% in one go in 2014-15.
The CGT rate is marked to increase from 8% to 9.5% in 2014-15 in case the holding period of a stock is more than six months and less than 12 months. There is no CGT on the sale of securities after holding them for a year.
Speaking to The Express Tribune after the board meeting, KSE Director Mohammed Sohail said letting the proposed rate hike take effect will hinder the stock market’s growth in the country.
“Increasing the CGT rate will be detrimental to the government’s privatisation programme, which envisages the sale of government’s stake in different companies to the general public through the stock market,” said Sohail, who also serves as the CEO of Topline Securities, a Karachi-based brokerage.
The National Clearing Company of Pakistan (NCCPL) collected Rs1.2 billion in CGT during 2012-13 from individual investors, brokers and corporate entities. The NCCPL is not authorised to collect CGT from mutual funds, banks, non-banking finance companies, insurance companies, modarabas and foreign institutional investors, as they pay their CGT directly to the FBR.
Sohail added that de-mutualisation of the stock exchange will also receive a setback if the tax rate on capital gains increases. The KSE is in the process of finding an international strategic investor for a 40% stake, which will turn it into a company limited by shares. “Volumes will drop once the CGT rate goes up, turning away potential investors,” he said.
Calling the CGT rate exorbitant, Sohail noted no other regional country taxes capital gains at a rate greater than 15%.
Published in The Express Tribune, May 10th, 2014.