Stock markets: Govt unlikely to increase capital gains tax to 17.5%

May agree on a reduced rate, brokers will submit a workable proposal.

ISLAMABAD:

Amid mounting pressure from influential stock brokers, the government may postpone application of 17.5% tax on gains made by selling shares within six months of their purchase and agree on a reduced rate.

According to the Income Tax Ordinance 2001, the capital gains tax (CGT) on shares sold within six months of purchase will go up from existing 10% to 17.5% from fiscal year 2014-15, beginning July.

Sources in the Ministry of Finance told The Express Tribune that Finance Minister Ishaq Dar was willing to consider the proposal that CGT should not be increased to 17.5%.

The tax came up for discussion in a meeting of the Tax Advisory Council at the Federal Board of Revenue (FBR) on Saturday.

While declaring his intention to raise the tax rate from 10%, Dar asked representatives of stock markets to submit a workable proposal, sources said. The government may take the tax in the range of 12.5% to 15%.

If the government does that, it will have to insert an enabling clause in the Finance Bill 2014 to get the nod of parliament.

According to the original plan, which has already been amended twice by the previous government, the CGT rate for the outgoing fiscal year should have been 15%. However, the previous government struck a compromise with the brokers and agreed to freeze the tax at 10% while postponing its gradual rise to 12.5%, 15% and eventually to 17.5% on holding period of less than six months.

According to FBR officials, the CGT collection from the stock market in the first 10 months of the current fiscal year stood at Rs1.5 billion. Last year, the FBR had received Rs1.25 billion. Taxes collected from the stock market do not match the strong performance of the Karachi bourse, experts say.

Karachi Stock Exchange’s (KSE) market capitalisation rose to Rs6.9 trillion by May 8 this year, a phenomenal growth of 37% compared to the corresponding period of previous year, according to figures presented to the federal cabinet by Dar.

In terms of dollar, the market capitalisation was $70.1 billion, up 36.7%, showed official figures.

The government is reconsidering its plan following the KSE board’s decision to call for a freeze on CGT.

“If the tax burden is increased by enhancing the rate to 17.5%, it will be a setback for the capital market,” said Abdul Qadir Memon, a member of the Tax Advisory Council, who raised the CGT issue during the meeting.

He suggested that it was not the right time for the tax increase, which may also hurt government’s privatisation programme. Memon pointed out that the government had a share of about one-fourth in $70 billion market capitalisation and any tax increase would also hurt the state’s interests.

According to sources, CGT on shares sold after six months but within a year is likely to increase to 9.5% from 8% from the next fiscal year as per the law. There is no CGT on sale of securities when the holding period exceeds one year.

During the meeting, Federation of Pakistan Chambers of Commerce and Industry (FPCCI) President Zakaria Usman hurled allegations at the FBR and chartered accountants.

Talking to The Express Tribune, Usman said corrupt elements in the business community were getting huge benefits in connivance with the corrupt taxmen. In an effort to improve the situation, he said, the FPCCI had presented a shadow budget to the government.

Published in The Express Tribune, May 18^th, 2014.

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