ISLAMABAD: The government has no intention to freeze the rate of Capital Gains Tax (CGT) on disposal of securities (Tax Year 2015) at existing 10 percent in budget (2014-15).
The Federal Board of Revenue (FBR) will continue with the CGT rates on stock exchanges as applicable under the Income Tax Ordinance 2001. The existing rates will not be frozen at current levels, but continue with the arrangement agreed between the government and exchanges in the past.
The rates of CGT will be enhanced as per existing income tax law without any change in the coming budget as there is no justification to freeze the CGT rates at current levels keeping in view rates specified in the income tax law. The rates will be changed as per Income Tax Ordinance 2001 and tax slabs/time lines given in the law.
The stock exchanges are showing bullish trend and positive volumes in 2013-14. Therefore, the rates of CGT as specified in the income tax law will continue in future.
In its budget proposals for 2014-15, Karachi Stock Exchange (KSE) has proposed to the Finance Ministry that the rate of Capital Gains Tax (CGT) on disposal of securities may be kept unchanged at 10 per cent (for holding period of less than six months) from Tax Year 2015 onwards.
The KSE has informed budget makers that the rate of CGT applicable to disposal of securities under Section 37 A of the Income Tax Ordinance, 2001 shall increase from 10 to 17.5 per cent from the tax year 2015.
It proposed that the rate of CGT on disposal of securities may be kept unchanged at 10pc (for holding period of less than six months) from Tax Year 2015 onwards. It is also proposed that the rates of allow ability of fixed cost applicable to determining CGT by National Clearing Company of Pakistan Limited (NCCPL) may be reconsidered and enhanced appropriately.
It may be observed that the rate of CGT shall drastically increase from 10 to 17.5 pc for the Tax Year 2015 on disposal of securities held for less than 6 months. This shall have a detrimental effect on disposal of securities and shall hinder new investment in the capital markets.
The increase in CGT will discourage trading of securities and shall result in decreased trading volumes resulting in difficulty of price discovery because of lower trading activity by the market participants, says the proposal. Moreover, the NCCPL while determining the CGT on disposal of securities allows deduction of 0.5 pc on non-proprietary trades and 0.25pc on proprietary trades in lieu of all expenses. These rates are very low and the expenses are much higher and thus are almost not considered, therefore, these deductions, more or less on gross as only the financing costs through NCCPL Leveraged Market Products are allowed, KSE added.
