LAHORE - SALMAN ABDUHU - The new ordinance of whitening of stashed money, being implemented from next month, aimed at enhancing liquidity in the capital market by encouraging more foreign investment, besides disheartening speculative trade at the bourses.

Majority of financial market experts and industrialists appreciated the government decision, saying the purpose of the scheme is to attract new investment to the stock market, which has seen activity decline gradually since 2009.

ABM Securities chief executive Asif Beg Mirza said a tax amnesty scheme for stock market will be implemented through presidential order from April 01, and no questions will be asked about the source of investment for the shares held for more than 120 days.

He said that the amnesty had been granted to enhance the investments in the equity markets. Under the new presidential ordinance there will be no inquiry of source if investment is made at KSE for up to 4 months and no tax will be applied on it. The new ordinance will allow investors to inject money without declaring the source of income till June 2014. There will be CVT of 0.01 percent on trading of shares from April 1 also. He said that tax exemption was met with cheers and applause of the stock traders who rushed into equities lifting the volume of trade to a six-year high on Friday—the first working day following the amnesty announcement.

Former chairman of Poultry Association Abdul Basit appreciated the government decision, but pointed out that it should not be misused. He said that amnesty should not be stock investment specific rather the scheme should also promote industrialization in the country. He stated that when stashed money will be invested for industrialization, it will generate employment and enhance liquidity, leading to ultimately the fast economic growth in the country.  He urged the law makers to exempt such profit money from tax, which is reinvested in the industry, as in this way, the industrialization process will get a boost.

He called for restricting commercial as well as investment banks to enhance lending to manufacturing sector at least by 50 per cent instead of loaning other sectors. In this way the manufacturing sector will have more chances to avail loans for setting up industry, he added. He demanded of the government to avoid double taxation in corporate sector to attract foreign investment in the country.

Responding to a question, he said that a simple example is that the market value of entire Karachi Stock Market is around $30 billion which is peanuts. We need the capital to be around $500 billion with the size of the economy and through this ordinance task can be achieved, Basit added.

LSE MD Aftab Ch told TheNation that the TRG discussed the modus operandi for implementing the Capital Gains Tax (CGT) on sale of shares.

In the budget 2010/11 the government imposed 10 per cent capital gains tax on holding of shares below six months and 7.5 per cent for holding less than 12 months. However, exemption is granted on holding shares for more than one year. The tax was not implemented due to objections raised by equity markets saying it would hamper investment in the equity markets. He said that again Securities Exchange Commission of Pakistan (SECP) presented recently a set of proposals to finance ministry regarding CGT, which were accepted.

He observed: “The proposals accepted by the finance minister included: capping the present capital gains tax rate till 2014; tax immunity from declaring source of income till 2014; tax deduction by National Clearing Company of Pakistan (NCCPL); each stock member allowed exposure of Rs 50 million; and abolishing the withholding tax”.

Aftab Ch, when queried said four months would be a minimum holding period and the SECP proposals were crafted to facilitate all concerned. He said that ordinance would help deepen markets and generate volumes, attracting new investment that would help in economic and industrial growth.

He added that while investors would be enriched by bigger capital gains, the government would also be able to collect bumper cash in the form of CGT.

However, Dr Qais Aslam, an economist observed that the ordinance could have positive ramifications but it should not facilitate ‘whitening’ of ‘black money’. Alluding to the fixation of certain holding period, he said that unscrupulous elements should not be provided a conduit for undocumented wealth to be invested in stocks one day and come out clean the next day.

Muhammad Hussain Mehkari, former SVP Allied Bank, observed that stock value is basically speculating on the future value of companies - without underlying growth and given the lack of any business activity this growth will only be speculative with nothing substantial to back this up. Money will flow in - some would make money but lot of others will lose their fortunes.