KARACHI - The Karachi Stock Exchange has recommended a phased-manner implementation of Capital Gain Tax (CGT) on capital assets and share trading at local bourses including equity and derivative products that must be started at an initial rate of 5 per cent from the financial year 2010-11 and be elevated to a rate of 10pc in FY2014-15. The KSE, in its federal budget 2010-11 deliberations, proposed that holding period for exemption of capital gains in the upcoming financial year be increased to 180 or more days. The KSE demanded of the government to eliminate withholding taxes to reduce the cost of doing business. It also urged the government to announce the proposed structure of CGT at the very earliest that would mitigate the element of uncertainty being prevailed among investors and brokers about the potential implementation of CGT. About the applicability of CGT, KSE budget document said effective from July 1st, 2010, capital gains tax for investors should be imposed only where the capital gains fall in the category of Short Term Capital Gain (holding period is less than 180 days.) The tax shall be applicable on all equity and derivative products, provided all other under mentioned taxes currently applied on stock market transactions are removed. a) Withholding tax at 0.01pc on purchase value of shares traded from Members in lieu of their commission (Minimum Tax) u/s 233A. b) Withholding tax at 0.01pc on sale value of shares traded from Members in lieu of their commission (Minimum Tax) u/s 233A. c) Withholding tax at 0.01pc on sale value of shares traded from Members (Minimum Tax) u/s 233A(c. d) Withholding tax at 10pc mark-up of COT/CFS from Members, (CFS & CFS MK-II at present stands discontinued) (Adjustable) u/s 233A. Citing an analysis that found only 2 countries in MSCI Frontier Markets and 3 countries in MSCI Emerging Markets have imposed a capital gains tax, KSE said the introduction of CGT must be rational with such competitors for Pakistan to remain an attractive destination for portfolio investment. The KSE also proposed that the government should implement an effective date of July 1, 2010, which imposes a capital gains tax on securities purchased on July 1, 2010 and thereafter. The holding period of inventory (shares) as at June 30, 2010 will be deemed as over 6 months old and hence no capital gains tax will be levied irrespective when such inventory/shares are being disposed/sold. This should be a direct tax with no withholding as per international practice. According to a KSE document , scope of capital gains tax is ltd to capital gains arising from transactions undertaken by the investors undertaking equity transactions directly and investors dealing in listed equity derivative products would be required to pay the capital gains tax along with their annual tax returns in the same manner as described above. CGT would be applicable only if the holding period is less than 180 days at the time investment is cashed out (redeemed and not reinvested) and the Capital Gain falls in the category of Short Term Capital Gain. The KSE also proposed that trading in all debt securities, including but not limited to Treasury Bills, Pakistan Investment Bonds (PIBs), National Saving Bonds and Term Finance Certificates listed and traded at a Stock Exchange of Pakistan (through an automated system). To promote exchange traded funds, authorized participants shall be exempt from capital gains tax to the extent of shares surrendered by them for the purchase of ETF units. In terms of calculating gains for non residents, KSE proposed that a provision similar to section 48 of the Indian Income Tax Act 1961 be inserted in section 76 of the Ordinance relating to cost of investment for the purpose of determining of capital gains. The implementation of this proposal will help attract foreign investment into Pakistan as investment would not be exposed to losses stemming from depreciation of the Pakistani rupee, KSE budget proposals document said. It is therefore suggested that redeemable capital which includes TFCs may be removed from the scope as provided for in clause E referred above in order to develop the secondary market for these securities. At present, the debt securities, though listed at the Stock Exchange, are not actively traded and the capital value tax collection hinders the growth in the secondary market for debt securities. Hence, the said amendment has been proposed in order to promote and facilitate the development of secondary market for debt instruments document added.