Pakistan Mercantile Exchange Limited (PMEX) has proposed Federal Board of Revenue (FBR) to impose 5% tax on capital gains instead of the current tax of 0.05% on margins and deposits, reduce tax on import of gold and amend tax laws to enable the exchange to develop an Islamic money market, providing a platform for the Islamic Financial Institutions (IFIs) in budget (2016-17).
According to the budget proposals of the PMEX for 2016-17, Pakistan Mercantile Exchange Limited (PMEX) was established primarily to build efficiency in the agricultural commodity trade in Pakistan. Accordingly, if PMEX is provided with the recommended incentives, it can play its due role as a catalyst in documentation of the agriculture sector as well as supplement Federal Board of Revenue's (FBR) efforts to increase revenue collection.
However, PMEX over the last eight years has tried to bring such market participants to its trading platform but has been unsuccessful as the players in the value chain of agricultural commodities have no incentive to trade at the Exchange. From this perspective, PMEX has prepared certain tax proposals, keeping in mind the government's tax collection targets, which will encourage documentation of the economy resulting in increased revenue collection in the long-run from agriculture commodity trade.
A summary of PMEX tax proposals revealed the imposition of 5% tax on capital gains instead of the current tax of 0.05% on margins and deposits. Secondly, clarification on imposition of withholding tax on the settlement of futures contract at PMEX similar to the clarification issued for sales tax. This clarification by the FBR would be the corner stone to bring the agricultural commodities trade on the Exchange platform. Thirdly, reduction in tax on import of gold which would generate Rs 70 million to Rs 150 million in new tax revenue for the Government. Moreover, to document the gold sector and increase the tax revenue collection, we propose to only allow import of gold via PMEX and resultantly allow export of gold bars in unworked condition through the Exchange, which was initially imported for selling at PMEX.
Fourthly, clarification for recognition of sale for the purpose of Murabaha transactions carried out at PMEX. The issuance of such a clarification will enable the Exchange to develop an Islamic money market, providing a platform for the Islamic Financial Institutions (IFIs) to be at par with the conventional Banks in terms of treasury operations. The existence of such a money market will further propel such IFI's to achieve their industry target of 20% banking share by 2020.
It proposed that the present tax regime provides for taxation of trading at PMEX as speculative gains with exception of hedging. However, there is no mechanism whether all speculative gainers have paid their due tax. To avoid above situation, in Finance Act, 2015, section 236T was inserted making PMEX responsible for collection of advance tax @0.05%, which is unfair as loss making traders are also liable to pay same tax.
It is proposed to delete section 236T. Further, we propose to tax the annual capital gains from trading of commodity future contracts @ 5% on similar model adopted in case of Stock Exchanges. Keeping in view the model of equity market, following entities should be exempted from proposed 5% tax on capital gains: Market makers at PMEX, a mutual fund, and an approved Income Payment Plan under Voluntary Pension System; approved Pension, Provident, Superannuation and Gratuity Fund; banking company, insurance company, modaraba any other person or class of persons notified by the FBR.
Presently, capital gain on listed shares at stock exchanges in Pakistan is exempt from tax or taxed at reduced rates based on the period of holding. Period of holding beyond life of a contract is not possible in PMEX hence there can never be an exempt situation, and single rate would apply on all gainers.
Tax revenue generation: Gainers would pay tax @ 5%. Investors, currently operating in the grey forex market, would be inclined to trade on PMEX which is a regulated and organised market. As a result, there will be more trading activity at PMEX, leading to increased income for both PMEX and its brokers thereby increasing tax revenues for the government.
Promotion of tax culture: It will help promote trading on PMEX; facilitate documentation of the economy and development of organised commodity market in line with best international practices.
Corporatization of economy: Once the investors, currently operating in the grey forex market start to use the regulated & documented PMEX platform the countrywide futures market traders will corporatize and come into the documentation net. Greater National Economic Agenda: PMEX is a national institution and poised to play its due role in the national economy. A small incentive, which is also available to stock exchanges, would attract commodity traders currently operating in the grey market to trade at the documented platform of PMEX.
Meanwhile, a joint letter of the PMEX and the National Clearing Company of Pakistan Limited has been issued to the FBR on the issue computation, determination, collection and Deposit of Capital Gain Tax ("CGT") arising on trading of commodity futures contracts of Pakistan Mercantile Exchange Limited ("PMEX").
In order to achieve objective, the NCCPL was directed by the FBR to prepare and present a joint proposal by the NCCPL and PMEX. Accordingly, NCCPL and PMEX have conducted detailed discussions to review the process utilized in computing and collecting the CGT applicable on disposal of securities at trading of shares at PSX to include CGT on trading of futures commodity contracts of PMEX. The expected benefits to be derived by investors and Federal Board of Revenue (FBR) from the extension of CGT regime to the futures commodity contracts of PMEX were also discussed. The NCCPL and PMEX have agreed in-principle on the proposal of implementing the CGT on trading of futures commodity contracts of PMEX.
To achieve the above stated purpose, it is proposed to delete the existing section 236T. Moreover, capital gains in PMEX may be taxed @ 5% with certain exceptions eg market makers, mutual funds, pension, provident, superannuation and gratuity funds, banking & insurance companies etc as the similar exceptions are available to such entities in PSX.
The above rate of 5% is proposed keeping in view that unlike stock exchanges, holding period in case of commodity futures contract cannot go beyond the tenor of the contract which generally is three months. Therefore, there is no possibility of different slab rates depending on duration of holding period prevailing in PSX including 0%.
For this purpose, we are in the process of designing a detailed mechanism for the computation and collection of CGT, including the required changes in Income Tax Ordinance, and Income Tax Rules for inclusion of investors of futures commodity contracts of PMEX in NCCPL, CGT regime. We shall submit the same once the proposal is agreed by FBR.
The benefits of the proposals revealed availability of an accurate, standardised and centralised database catering for the computation and determination of CGT liability on disposal of securities listed on PSX and trading of futures commodity contracts of PMEX which will ultimately lead to improved documentation. The NCCPL has been computing, collecting, determining and depositing CGT for capital market investors and the same shall be extended to investors of futures commodity contracts of PMEX. Moreover, timely submission of returns to the FBR pertaining to CGT collected and deposited on trading of futures commodity contracts of PMEX similar to disposal of listed securities. Provision of accurate data to facilitate assessment of income tax returns filed by investors and to support any periodic investigations undertaken by the FBR in respect of capital gain and tax thereon with respect to futures commodity contracts of PMEX
The benefits of the proposals disclosed that similar to the capital market investors, unit holders of mutual fund will be able to obtain direct adjustment / refund of tax on capital gain/loss on future commodity contracts and listed securities based on the net tax liability determined during the year by NCCPL for the entire portfolio.
This will simplify the process of income tax return filing being followed by investors of PMEX. A consolidated annual CGT certificate will be developed and issued to investor depicting the CGT computed and collected in relation to futures commodity contracts and listed securities. This annual certificate will serve as conclusive evidence with respect to CGI amount collected and deposited.
Customer Support Service department, of NCCPL, well versed with the CGT regime, shall be available to facilitate the investors of futures commodity contracts with respect to their queries and concerns pertaining to computation, determination and collection of CGT. Furthermore, detailed reports showing the inventory comprising of listed securities and futures commodity contracts and CGT computation shall also become available to the investors, thereby, minimising the requirements to maintain records.
Direct access to the FBR through NCCPL for resolution/clarification of anomalies and difficulties faced by investors with respect to CGT regime. The prompt reply of the FBR would enable us to timely initiate the requisite system development and regulatory changes to ensure implementation of regime by July 01, 2016 after promulgation of Finance Act. 2016, the letter added.
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