SECP proposes 15 percent CGT for filers, 20 percent for non-filers

Securities and Exchange Commission of Pakistan (SECP) has proposed a flat rate of 15 percent capital gains tax (CGT) for filers (20 percent for non-filers) for holding period of up to 3 years on disposal of securities in budget (2018-19). It is learnt that the SECP has drafted and forwarded the budget proposal to the government on the revision of CGT regime on disposal of securities in coming budget.
The SECP has proposed that a flat rate of 15 percent CGT for filer (20 percent for non-filer) is proposed for holding period of up to 3 years. Zero percent CGT should be applicable on disposal of securities held for more than 3 years in line with the regime of CGT applicable on disposal of immovable property taxable under Section 37 of the ITO 2001.
The decline in CGT collections during the period from July 2017 to November 2017 is apparently due to the fact that since tax exemption advantage on holding period no more exits, therefore, the investors tend to go for short-term holdings thereby encouraging day trading/punter trading in the capital market. The re-introduction of holding period advantage on holdings more than 3 years would boost up investment in capital market resulting in higher capital gains and higher collections of CGT.
The changes brought via Finance Act, 2017 of removing the exemption of CGT on holdings over 4 years has had a negative effect on CGT collections as only Rs 1.2 billion collections against CGT have been reported from July 2017 to November 2017; compared to the Rs 17 billion for the entire 2017.
Collection of tax by stock exchange under section 233A of income Tax Ordinance 2001: The tax collected under the said Section 233A is considered as adjustable under normal tax regime. The corporate members subject to corporate tax should be allowed to adjust tax collected under Section 233A of the ITO 2001 from their liability under normal tax regime.
The members are bound to contribute more tax to the government's exchequer, therefore, to avoid double taxation, the members should be given the incentive of paying tax on commission income under the normal tax regime rather than under the final tax regime.
The members now being corporate entities subject to corporate tax should be allowed to adjust tax collected under Section 233A of the ITO 2001 from their liability under normal tax regime.
The members subject to tax at corporate rates are bound to contribute more tax to the government's exchequer, therefore, to avoid double taxation, the members should be given the incentive of paying tax on commission income under the normal tax regime rather than under the final tax regime, the SECP proposed.
The SECP has proposed that no tax on bonus shares be imposed as done previously before the change brought through Finance Act, 2014. Therefore, Sections 236M and 236N of the ITO 2001 be deleted. The process involving collection of tax on bonus shares is complicated and discourages realization of the amount of tax on bonus shares. No tax on the issuance of bonus shares would result in increase in issuance of bonus shares and the increase in bonus shares would result in increase in trading volume/free float and would resultantly generate additional revenue.
Inter-corporate dividend in holding company structure: The mentioned taxability is proposed to be abolished as this is not a desirable course especially for internal investment perspective and it is highly recommended to reinstate the position as existed prior to the Finance Act, 2016 (exemption available for both Group Taxation 59AA and Group Relief 59B). The imposition of tax on inter-corporate dividend in its present form has disturbed the investment strategies for almost all the major industrial groups of the country.
It is recommended to reinstate the position as existed prior to the Finance Act, 2016 (exemption available for both Group Taxation 59AA and Group Relief 593) for fair and just treatment to Groups formed under Sections 59AA and 59B of the ITO, 2001.
Sub-section 1A of Section 59B is also proposed to be abolished as main purpose to form a group was to avoid double taxation of dividend and utilize the tax losses within the group entities without limiting the assessed losses, the SECP added.