Capital gain tax looms large

Finally, its half past the fiscal year. A few weeks from now business hubs, associations offices and corporate boardrooms would gradually start humming with pre-budget talks. As will those involved in trading and investment business on the KSE, where one popular topic would be the capital gain tax on equities.
Unlike previous years, however, it appears brokers on the bourse won create a fuss to extend the exemption this time around. "Probability is high that from July 2010 the cash starved government will finally impose capital gain tax on sale of shares," said a recently released investment note by Topline Securities. And, this understanding runs somewhat across the investment community, giving signals that the impact may be priced-in.
But even if investors are prepared for the capital gain tax, there are still two related issues which may prove to be contentious: the tax rate and the structure of slabs, if any.
Expectations wary on both fronts. While some fear a flat rate ranging between 10 - 20 percent, others expect the application in slabs with lower (5-10 percent) or no tax on holding period on more than one year - and higher tax (10-35 percent) on gains realized within a year.
Broadly speaking, most say, he lower the better, while demanding a slab-like structure, as practiced in India, to promote long-term investment and discourage short-term volatility. They also demand a pre-budget announcement so they can adjust their portfolios accordingly.
Whether the tax is announced before the budget or not, one thing seems more likely: a structural shift in investment style may be on the cards.
Retailers might shift towards more mature longer term investments after seeking sound advice and conducting proper research, than just investing solely on the basis of a ip, meaning lower trading volume and lower income for brokers.
Likewise, investment in small cap and ill-researched stocks, which is typically based on sheer punting or insider news, would ease if not cease. Possibly, this may also result in more money being channeled through the mutual funds than individual investments.
On a related note, researchers at brokerage houses and investment management firms would have to look at a much broader horizon - a test for many of those fresh out of school finance graduates.
Investors say, implementing capital gain tax in a slab-like structure may also have positive consequences on foreign investment. "In a sense, it is also a good omen, as it will persuade foreign portfolio investors to lock in longer positions than undertaking hedge-fund like speculative activities," says Ahsan Mehanti, CEO of Shahzad Chamdia Securities, who says foreign investors often stick to short-term punting, buying huge quantities one day and selling the day after.
But Mehanti, don you think that here in lies the clue; foreigners don want to stay in for the long haul because they are uncertain about Pakistans long-term economic outlook. "Unfortunately, you might be right," replies Mehanti. A move that would be a standard fiscal policy action could be a real test of confidence.