The capital market blasted the federal government for adopting a 'calculator approach' while making Budget 2015-16 which envisages 2.5-10 percent increase in the rate of taxation on various equity market products. The aggregate of revenue effect from the proposed taxation measures amounts to Rs 253.2 billion.
Unveiled by Finance Minister Ishaq Dar in the National Assembly Friday afternoon, the government's proposed fiscal plan, if passed into law, would see a 2.5 percent increase in the rate of capital gains tax (CGT) presently ranging from zero to 12.5 percent depending on the shareholding period. The rates for securities held up to 24 months would be 15 percent, 12.5 percent for 12-24 months and 7.5 percent for 2-4 years. Also, the resource-constrained government would be adding 2.5 percent to the current 10 percent tax on dividend income made on the country's stock market. In case of non-filers this rate would swell from 15 to 17.5 percent, five percent of which would continue to be adjustable.
This change in the tax rate would not apply to mutual funds. The listed companies, which do not distribute cash dividends within six months of the end of the said income year or distribute dividends to such an extent that its reserves, after such distribution, remain in excess of 100 percent of its paid-up capital, would be liable to pay 10 percent tax.
Other prominent tax proposals that would significantly affect the stock market included levy of 0.6 percent adjustable advance income tax on banking instruments and other modes of transfer for non-filers.
Also, "affluent and rich" individuals, association of persons and companies having earned over Rs 500 million in tax year 2015 would be paying a one-time levy at a rate of 4 percent for banking companies and 3 percent of income for others. Besides, the government tends to enhance to Rs 1.5 million the limit of tax credit for new individual investors. Also, the limit of 15 percent tax credit for enlistment would be increased from 15 to 20 percent.
A three-year income tax exemption has been proposed on capital gains of persons selling a property to a Real Estate Investment Trust (REIT) development scheme formed for the development of housing sector. If a development REIT Scheme for the development of housing sector is set up by June 30, 2018, for the first three years the rate of income tax chargeable on dividend income of such REIT shall be reduced by 50 percent. However, reacting to Dar's budget speech, the stock brokers appear to have ignored the incentives part and are concerned about the possible impacts of the policymakers' upward revision in the existing taxes.
"This is a difficult anti-stock market budget which would not only erode volumes but also trim the (KSE-100) index at least by 5,000 points," viewed Aqeel Karim Dhedi, chairman AKD Group. The business tycoon whereas lauded the proposed one percent cut in corporate tax and incentives for housing sector, he termed 2.5 percent raise in CGT and dividend income tax as "destructive" for the market volumes.
"The price discovery would be adversely impacted," AKD told Business Recorder adding that the new budget would especially hit the banking scrips hard. Arif Habib, chairman Arif Habib Group, also sees a negative impact on the otherwise booming equity markets of the proposed tax-laden budget.
"I think the impact would be negative as the banks have been discouraged and the attraction of investors towards capital market would be hurt," said the businessman who hailed the government for incentivising the real estate and agriculture sectors. Basharatullah Khan, general secretary of KSE Stockbrokers Association, flayed the federal finance minister for presenting a "non-economist's" budget. "We see here a 'calculator approach' at work to collect revenues without caring for its impact on the economy," he said.
The broker said while the investors needed certainty to be able to devise long-term business policies the government had constantly been changing the CGT rates according to the shareholding periods. "Do it once and let people decide their long-term business course," said Khan who foresees a very adverse impact of the proposed increase in the taxation rates. Also, he slammed the economic managers for ignoring KSE's proposal to withdraw the "heavy" five percent bonus tax which, he claimed, had kept the listed companies from declaring bonus for investors throughout FY15.
The fiscal plan, Khan said, seemingly was focused more on revenue collection and less on the fulfilment of its core objective of giving a long-term direction to the economy. "The approach here is short-term as affluent builders are being favoured at the expense of the stocks market, the country's most documented sector," the broker said. Ahsan Mehanti, director at Arif Habib Corporation, foresees the stock market to feel the heat of the tax-heavy budget. "The investors would go away from the market which once again may become volume-starved," the analyst opined. Especially, Mehanti said, the 3-4 percent "super tax" on the affluent and rich entities would badly affect the blue-chip companies. "We have on KSE-100 plus blue-chip companies having (posted) more than Rs 500 million income (in FY15)," he maintained.
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