ISLAMABAD - The Securities and Exchange Commission of Pakistan (SECP) has recommended the Federal Board of Revenue (FBR) to freeze the Capital Gains Tax (CGT) rate at existing levels in order to simplify calculation and achieve smooth implementation of the said tax, it was learnt on Saturday.

The SECP has said that to simplify calculation and achieve smooth implementation of CGT, it is proposed to freeze the CGT rate at existing levels and a new clause 27 be introduced in Part II of the 2nd Schedule: “ (27). The rate of tax specified in Division VII of Part-I of the First Schedule shall be 10% on capital gains arising on securities held for the period up to six months and 8% on capital gains arising on securities held for a period of above six months to one year, for any person any amount invested in the stock markets in Pakistan on or after April 1, 2012 till June 30, 2014”.

The SECP also recommended that as the documentation is not available to substantiate the gains made from capital markets (CM) transactions during the exempt period, it is proposed that applicability of section 111 of Income Tax Ordinance 2001 (ITO) requiring unexplained income or assets may be deferred for funds invested in CM till June 30, 2014. Post June 2014 higher or peak value of an investor’s portfolio between now till then, should be treated as income generated from the CM and part of investor’s wealth.

It is further proposed to abolish the WHT under the section 233A to rectify double taxation anomaly and to freeze the CGT rate at the current rate applicable for the year 2011-2012.

In a letter, a copy available with The Nation, written to the Chairman Federal Board of Revenue, the Chairman SECP has said that CGT is not in the interest of the economy as it has adversely impacted tax revenue collection as well as trading volume at capital markets (CM). Besides these CGT has adversely affected investors’ sentiment, capital formation and overall functioning of the CM.

The letter further stated that securities trading remained exempted from CGT for 36 years (since 1974) till June 2010. Imposition of CGT on securities trading from July 1, 2010 has not only impacted the tax revenue (less than 10 per cent of figure of three years ago) but has also reduced average traded value to the lowest level during the last ten years.

The SECP letter also said that as CM remained exempted from CGT for past 36 years, which created an anomaly in shape of un-documented gains accrued through transactions in the CM during this period. Even though the requirement of filing of tax returns was there, yet it was neither followed by CM nor implemented by the FBR. This led to a situation where CM investors ended up with legitimate but undocumented gains. Abrupt change from exempt regime without factoring this anomaly has forced investors to withdraw funds from CM.

Similarly, another issue is cumbersome calculation and documentation requirements embedded in CGT regime. Prior to CGT imposition, CM remained under the presumptive tax regime under which tax was deducted and deposited by the exchange. Similarly, continuation of withholding tax after CGT is double taxation i.e. taxing both turnover and net income. Equity demands that with imposition of CGT, WHT on turnover should be done away with.  

To simplify and ensure timely deposit of the tax revenues centralized collection mechanism at National Clearing Company of Pakistan (NCCPL) is recommended. NCCPL shall act as a withholding agent to deduct and deposit the CGT from investors’ transactions. At the end of every month, NCCPL shall deposit the amount deducted from investors making capital gains after adjusting for the investors suffering capital losses (i.e. on net aggregate basis) with FBR. NCCPL shall also provide investors wise monthly report of CGT deducted and deposited for each investor to FBR and issue a certificate to the investors (at year end) of the amount deducted.

Investors will file tax returns, including the CGT deposited, based on the certificate provided by NCCPL and would be exempted from CGT record maintenance requirements under CGT Rules. FBR will benefit with immediate CGT revenue stream from the CM while for investors this would entail no tax avoidance and no interface with FBR. 

The SECP recommends following amendments are needed in Part III of Income Tax Rules of 2002 that included Rule 13H “payment of tax on capital gain” clause (3) shall accordingly be amended and Rule-13J “liability of broker” shall be deleted. Ruls-131 of CGT Rules shall therefore not be applicable for individual investors.

According to the SECP said, the proposed amendments in CGT regime bear following advantages: documentary trail of undocumented income, no presumptive regime, correction of anomaly where exempt gains in past were not documented, higher revenues for the government, broadening of tax base, depth in trading volume, efficient prices discovery and higher possibility for privatisation.