Market players see CGT in a good light

Tax evasion at the Karachi Stock Exchange will now come with the cost of risking the investment for the long-term. Anybody willing to continue with day trading practices will still be welcome - but they will have to pay for the short sightedness in the form of Capital Gains Tax (CGT), come July 2010.
A long time in the making, the announcement to implement this tax was made after earning the confidence of the members of the stock market on Monday.
CGT will be imposed on the purchase of securities with a 10 percent charge on holdings for less than six months and 7.5 percent on stock held up to a year. Longer term investments will not be taxed under the new scheme. The CGT is expected to progressively increase to considerably higher rates in the next few years.
The fiscal constraints seem to have dictated the need for increasing revenues for the treasury. In a wider sense, the IMF programme also compels the government to widen the tax net by including sectors that remained out of the tax base despite making sizeable gains.
Although, this time round, the market players seem to have accepted the tax imposition with an open heart, there still remains a concern among them.
Aqib Elahi, an economist at BMA Funds believes that the motive of revenue generation behind the move is not the ideal one. He believes that the capital formation should have been the basic motive and the largely untapped services sector should have been taxed instead, if revenue generation is the main aim.
Consequently, the CGT may deter investors with a short term view of the market. Traders looking for quick gains will have to face an additional cost of doing business. Whether they are willing to pay the cost will best be judged after July, 2010.
On the face of it, a reduced level of volatility seems to be on the cards, but investors can always come up with a surprise, should they decide to continue with the short-term trading, covering their added cost with an increased volatility.
If the CGT does eliminate the short-term investor out of the equation, it is worth sparing a thought for the brokers as the volumes may take a big dip. What strategy would the brokers adopt is yet to be seen -increase in commission rates could well be a consequence, although, it is a bit too early to suggest that.
Market participants largely view the new tax in a positive light. Institutions with a longer term investment horizon will appreciate the reduced volatility caused by profit-taking of traders, that some say, dominate the floor at the KSE.
As investors eagerly await the procedural details of the new tax, most believe that when capital gains are taxed, losses will also be allowed to be carried forward and the tax will apply on the net gain. Transactional taxes, such as withholding tax are expected to be adjustable against the capital gains tax. It seems taxation on performance is preferred over transaction volume taxes.
Foreign investors are particularly interested in determining whether the taxation will be denominated in the foreign currency of their investment or historical rupee terms. The depreciating local currency can impact them even if they haven made gains on a particular transaction, one analyst explained.
All eyes in the market are focused on how the tax is going to be implemented. A new era of investment, away from speculation may be the order of the bourse in the coming years.