According to sources, the SECP has also proposed that a uniform rate of capital gains tax (CGT) be applicable on disposal of securities irrespective of holding period. Instead of different CGT rates, a uniform rate be applicable on disposal of securities. Pakistan Stock Exchange (PSX) has proposed revision in capital gain tax (CGT) regime on disposal of securities in budget (2017-18). The budget proposals of the PSX for 2017-18 revealed that prior to July 2010 the capital gains on disposal of securities were fully exempted from tax. Stakeholders agreed for the imposition of capital gain tax on short-term trading. The Finance Bill 2010 imposed CGT in three tiers of holding period with progressive rates. However, amendments were brought by the Finance Acts, 2012 and 2015 in respect of rate of tax and holding period.
The Finance Act 2016 inadvertently modified and imposed tax irrespective of holding period at the rate of 7.5 percent instead of the stated intention of the finance minister, who in his budget speech stated that the maximum taxable holding period for capital gain on securities may be extended from 4 to 5 years. The comparative chart in respect of frequent changes in holding period and tax rate for the tax years 2011 to 2017 is also available. The frequent changes in capital gain tax regime is detrimental to the growth of capital market and dampens the investors base since it discourages trading of securities and does not help in correct price discovery. The Foreign Institutional Portfolio Investment (FIPI) has also been negatively impacted.
Despite frequent changes in holding period and rate of tax, the capital gain tax on disposal of securities has not been increased. The CGT is not in line with the taxability on other asset class ie there is no tax on gain on disposal of immovable property, if the holding period is three years or more.
The PSX has proposed three tiers of holding periods and proposed rates of tax may be prescribed: Where holding period of a security is less then six months, the proposed tax rate for tax year 2017 would be 10 percent; where holding period of a security is more than six months or more but less than 12 months, the proposed tax rate for tax year 2017 would be 8 percent and where holding period of a security is more than 12 months, the proposed tax rate for tax year 2017 is zero percent. The PSX said that the capital gain from short-term trading is generating about 70 percent tax on capital gain.
Copyright Business Recorder, 2017