Capital gains tax blues

It is a bit uncanny how stock prices have rebounded sharply after all the hoo-ha over capital gains tax that failed to convince tax authorities to ease some of the ancillary conditions.
Since the revenue department is adamant on its stance, KSEs 447-point rise in the last three days could just be a technical rebound - unless the smart money has some insight otherwise.
If KSE-100 proceeds further north from this point, one can safely assume that the sudden bearish pressure seen after the budget was either an overreaction or an attempt to sway votes in favour of the market. What exactly is the case; we will find out soon.
But while the requirement to provide the source of funding and the imposition of CGT after July 1, regardless of the date of purchase, seem appropriate, some of CGT-related proposals don .
Take for instance, FBRs refusal to allow a currency hedge to foreign investors.
Overseas portfolio investors hold about $2 billion dollars worth of investments in the countrys capital markets. Therefore failure to provide indexation of currency, as allowed by India and elsewhere in the region, could backfire.
Selling by foreign investors can not only lead to a significant decline at the bourse, but it can also add further pressure on the currency, which just recently managed to find its feet after sliding nearly 6 percent in the fiscal year to date.
Reportedly, talks between stakeholders are still underway, with broking community pushing FBR to allow currency indexation at least if foreigners re-invest.
Aside from this hitch, brokers believe that the market will eventually adjust as well. The ever-optimistic Mohammad Sohail, CEO of Topline Securities, says the new levy "may not necessarily cause a bearish spell".
Sohail, however, sees trading volume dropping sharply because of the documentation requirement, as about 54 percent of trade is done by individuals, most of whom square their positions within the day.
But perhaps the most under-debated is the silent imposition of capital gains tax on shares of KSE after its much-awaited demutualization.
For the past many years, as per the stock exchange demutualization plan, the first sale by members of shares received by them against the asset value of the exchange would be exempt from CGT.
But in the latest finance bill the exemption of gain on transfer of capital assets of existing stock exchange to new corporatized stock exchange has been withdrawn on the plea that CGT is now imposed from July 1.
The exemption provided in the demutualisation plan 2002 is given in the bill passed by the National Assembly. The demutualisation bill now awaits the approval of the Senate. Minister of Finance Hafeez Shaikh needs to overrule the penny-pinching and bean counting being done at the FBR and take a long term view.