For less than 12 months: Proposal put forward to increase Capital Gains Tax to 12.5%

Tax not applicable on sale of stocks after holding period of 2 years.

KARACHI:

The government has proposed to increase the capital gains tax (CGT) rate on the trade of securities with a holding period of less than 12 months by 2.5% in 2014-15.

Addressing the budget session on Tuesday, Finance Minister Ishaq Dar proposed that the CGT rate on the sale of shares within a year of their purchase should be increased to 12.5% while the hike on the sale of stocks with a holding period of more than 12 months, but less than 24 months, should be 10%.

CGT will not be applicable to the sale of stocks after a holding period of two years, Dar proposed.

CGT is calculated on the basis of the amount that exceeds a share’s purchasing price. This means an investor will be required to pay Rs1.25 in CGT in case he sells a share for Rs110 within a year of buying it for Rs100.



Contrary to the general perception, CGT applies to investors, not brokers. Increasing the CGT rate is expected to discourage investors from active buying and selling of shares, thus reducing overall stock market liquidity.

In the outgoing fiscal year, the CGT rate on the sale of securities is 10% for the holding period of less than six months and 8% for the holding period of six to 12 months.

Originally, the CGT rate applicable to shares with 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. There was no CGT on the sale of securities after holding them for a year.

However, the government kept the rate unchanged at 10% for the last two years. It meant the CGT rate was supposed to go up by 7.5% to 17.5% in one go in 2014-15. But instead of raising it substantially at once, the government has proposed to increase it by 250 basis points for 2014-15.

Speaking to The Express Tribune, Topline Securities CEO Mohammad Sohail said the stock market is likely to react positively to the less-than-expected increase in the CGT rate.



Similarly, in a research note issued to its clients on Tuesday, KASB Securities said the reduction of the CGT rate from the originally proposed 17.5% to 12.5% constitutes ‘considerable lowering’ and will be received positively by local domestic investors.

The CGT collection in July-April remained Rs1.5 billion. 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 and modarabas, as they pay their CGT directly to the FBR.

Higher advance tax on interest income, dividends

The finance minister proposed that 5% additional advance tax should be deducted from the payment of dividends and income in case the recipient is a non-filer of income tax returns. Later on, they can claim adjustment of the additional tax paid in case they file their returns, he said.

However, the additional tax on income will not be deducted if someone’s total income on interest is less than Rs500,000, it is proposed.

Foreign institutional investors

Currently, foreign institutional investors are not required to file their returns nor are their taxes on capital gains collected. The budget envisages that foreign institutional investors be brought under the tax regime, thus broadening the tax regime.

Published in The Express Tribune, June 4^th, 2014.

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