Persons deriving taxable capital gain Brokers should ensure advance tax payment: FBR

ISLAMABAD: The Federal Board of Revenue has observed that brokerage houses and brokers of the stock exchanges have not been given any responsibility to ensure payment of advance tax on quarterly basis by persons deriving taxable capital gain as per provisions of the sub-section (5B) of section 147 of the Income Tax Ordinance 2001.

Sources told Business Recorder here on Friday that most of the individual investors have not filed their income tax returns for the Tax Year 2011 and paid negligible amount of tax under Income Tax Ordinance 2001. These individual persons are also not paying the advance tax under sub-section (5B) of section 147 of the Income Tax Ordinance 2001. There is a need to amend the section 37A of the Income Tax Ordinance 2001 for holding stock exchanges and brokerage houses responsible to withhold tax from any amount of capital gain arising from sale of securities held for the periods as mentioned in the concerned provisions of the Income Tax Ordinance 2001.

Explaining the taxability of capital gains on disposal of securities under section 37A and section 147 of the Income Tax Ordinance 2001, sources said that the capital gain arising from sales of securities such as share of a public limited company, voucher of PTC, Modaraba certificates etc. was subjected to tax by insertion of Section 37-A in the Income Tax Ordinance 2001 vide Finance Act 2010. However, the tax was not levied on security which was held for the period of more than one year.

According to sources, the capital gain u/s 37-A of the Income Tax Ordinance 2001 is treated as a separate block of income. The loss on disposal of securities in a tax year is adjustable against again from any other securities chargeable to tax u/s 37-A, but the loss was not to be carried forward to the subsequent tax year. For Tax Year 2011, where the security is held for less than six months, the rate of tax is 10 percent where the security is held for more than six months and less than one year, the rate of tax is 7.5 percent for Tax Year 2011.

As per provision of sub-section (5B) of Section 147 of the Income Tax Ordinance 2001, a person deriving taxable capital gain is required to pay advance tax @ 2% of the capital gain on quarterly basis where the security is held for less than 6 months and 1.5% of the capital gain on quarterly basis where the security is held for more than 6 months but less than 12 months. However, there is no responsibility of the brokerage house or of the stock exchange in this respect. This is the main lacuna in the provisions of Section 37-A because the market share of the individual persons in the stock market is more than 57% but are not paying advance tax u/s.147(B) of the Income Tax Ordinance and also most of them have not filed returns for the Tax Year 2011, sources explained.

Sources further said that the negligible tax has been paid on this score. The tax department has sought information from the Karachi Stock Exchange (KSE) regarding capital gain earners during the period July 1, 2010 to 2011 to be submitted to FBR for circulation among field formations for necessary action.

There is an urgent need to change the provisions of law as contained in Section 37A and hold responsible stock exchange / brokerage houses to withhold tax from any amount of capital gain arising from sale of securities held for the periods as mentioned above, sources added.