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ISLAMABAD: The procedure of capital gain on disposal of securities will remain applicable on transactions of shares of listed companies as recorded in the system of the National Clearing Company of Pakistan Limited (NCCPL).

The FBR has issued SRO 776(I)/2023 to amend the Income Tax Rules, 2002.

The FBR has also amended Income Tax Ordinance 2001 through Finance Act 2023 in this regard.

Under the amended rules, the FBR has clarified that the provisions of section 37A shall remain applicable on transactions of shares of listed companies as recorded in the system of NCCPL and reported in accordance with Eighth Schedule of the Income Tax Ordinance 2001.

Listed cos’ shares transactions as recorded in NCCPL system: Procedure of capital gain on disposal of securities to stay applicable: FBR

Under the new rules, section 37A (Capital gain on disposal of securities) shall not apply to the disposal of shares of listed companies otherwise than through registered stock exchange and which are not settled through NCCPL. For the purposes of second proviso to sub-section (1) of section 37A, “shares of a listed company” shall not include units of a mutual fund or collective investment scheme or a REIT scheme or derivative products and provisions of section 37A shall remain applicable on disposal of such units, schemes or products.

The State Bank of Pakistan shall not allow transfer or registration of repatriable shares unless prescribed certificate from the Commissioner, to the effect that the tax liability under sub-sections (6) to (10) of section 37 is discharged, is provided by the person selling the shares, the revised rules added.

A tax expert explained that the capital gains on disposal of listed securities are governed by a special system which is effectively applicable only for the transaction routed through NCCPL which is also the tax collection agent. These provisions are governed by Section 37A read with Section 100B of the Income Tax Ordinance 2001.

Through Finance Act 2023, now it has been provided that only those transactions will qualify under this section (37A) which are effectively settled through NCCPL. If they do not fall under that classification then provisions of Section 37 which provides for a different rate of tax shall apply.

Another very important change has also been made in the schedule relating to tax on capital gain on listed shares. This is effectively the correction of a mistake in the law as stood before the Finance Bill 2023.

The mistake has, however, been partly removed. As stood before the proposed amendment any capital gain on disposal of listed securities is subject to zero percent tax rate if the holding period is more than five years. Nevertheless, this provision is applicable only for shares acquired on or after July 1, 2022. For any shares acquired before July 1, 2022 the rate of tax was prescribed at 12.5%. In our view this is a wrong and discriminatory law.

These changes propose a rectificatory amendment in this provision. Now it is proposed that the rate of tax will be zero if the shares were acquired before June 30, 2013.

For the period of acquisition between July 1, 2013 and June 30, 2022 the rate of tax of 12.5% has been retained. This does not make sense. There has to be a reason why the period from July 1, 2013 to June 30, 2022 is discriminated against for the purposes of levy of tax, tax expert added.

Copyright Business Recorder, 2023

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