They agreed to enhance withholding tax on brokerage commission from institutions from 5 percent to 10 percent and reduce the CVT from 0.1 percent to 0.01 percent.
The representatives of bourses told Business Recorder late on Sunday night that they have promised to collect Rs 1.25 billion in toto irrespective of any mechanism.
The 5 percent withholding tax on brokerage commission comes to almost Rs 50 million and it would make Rs 100 million if enhanced to 10 percent. This withholding tax is adjustable, which would not finally give any advantage to the CBR.
The new mechanism would not directly hurt the stock traders as compared to a sudden 0.1 percent CVT could have damaged their confidence.
Earlier, the management of the three stock markets was advised by brokers to suspend trading indefinitely or at least for two days unless an agreement is reached between the government on the issue of CVT.
Finance Minister Shaukat Aziz, realising the severity of the situation, had asked the SECP and CBR to resolve the issue after inviting chairmen and managing directors of Karachi, Lahore and Islamabad Stock Exchanges.
Consequently, a meeting was held in the SECP. Chairman Dr Tariq Hasan, Director Shahid Ghaffar represented the SECP, while Chairman Abdullah Yusuf and Member Tax Policy and Reforms M.S. Lal attended the meeting on behalf of the CBR.
After the meeting all three parties left to see Finance Minister Shaukat Aziz at his residence for getting his approval of new arrangement.
Earlier, the Lahore Stock Exchange (LSE) had called a board meeting on Monday morning while Islamabad Stock Exchange (ISE) board was also meeting unofficially.
ISE Chairman Omer Iqbal Pasha told Business Recorder that heads of all three bourses were trying to convince the policy-makers to withdraw this tax. The stock exchanges had submitted counter proposals regarding CVT, he added.
One of the proposals was to levy the taxes in some other form but not on shares, which would hurt investors. They were of the view that CBR should levy a tax giving it the same amount of tax as CBR has calculated.
As per the detailed calculations done by experts, it could cost Rs 7.2 billion per annum at present level of transactions. However, the CBR has estimated the impact would be near Rs 4.4 billion. Some other experts believe it could even go to Rs 10 billion if trading volume increases.
The lion's share of the trading runs around few big trading houses that have to pay the bulk of this tax.
In the Salient Features of Budget 04-05 Revenue Division says, "The daily turnover of shares on stock exchange is around Rs 70,000 million. Capital gains arising on such shares is exempt from tax up to tax year 2005, which is extended up to tax year 2007. Keeping in view of extensive tax-free income being generated in this business, the capital value tax on purchase of shares at the rate of 0.1 percent of the value of the shares transacted is proposed to be levied".
An official when asked about CVT said, "the free ride is over".
There has been a windfall for investors and speculators on the bourses in recent months, evoking calls for linking the exemptions of capital gain tax to a holding period. This is an indirect tax that would add to the cost of trading in shares rather than taking a part of the profit made.