The Chairman of Securities and Exchange Commission of Pakistan (SECP), Muhammad Ali, categorically said on Wednesday that the Federal Board of Revenue (FBR) has agreed to all proposals of the SECP on capital gain tax (CGT), and revision in the CGT regime cannot be used for whitening the illegal money by making investment in the stock markets.
Sharing latest update on the proposed CGT mechanism of the SECP, he told media here on Wednesday that the revised CGT regime could not be used for whitening illegal money of stock market investors. Only legal money made during CGT exemption period of the last 36 years would be facilitated to be brought in to the stock market up to 2014.
Strongly dispelling the impression of illegal investment in the market, the SECP Chairman clarified that there is no chance of investment of illegal money in the stock exchanges due to stringent requirements following effective customer due diligence/know your customer policies in the capital markets. Even if section 111 of Income Tax Ordinance, 2001, requiring unexplained income or assets would be deferred for funds invested in capital markets till June 30, 2014, but laws of other enforcement agencies like FIA, NAB would be used to check any kind of investment on the apprehensions of illegal money.
He said that during finalising the revision in CGT regime, major concerns have been addressed. Although investors would be exempted from explaining source of investment under section 111 of the Income Tax Ordinance, 2001, the provisions of the laws of the National Accountability Bureau (NAB), Anti-Narcotics Force (ANF), Federal Investigation Agency and other national institutions would continue to apply on the source of investment.
Muhammad Ali explained in detail three CGT-related concerns highlighted by media, including investment of illegal money in stock market, people may use CGT scheme for whitening of illegal money, and exemption from source of investment could lead to illegal money coming to the market.
Clarifying these concerns, the SECP Chairman said that measures that have been taken to address these issues include that there would be complete due diligence of the investors, and last week the SECP had tightened its procedures in this regard. He ruled out any chance of misuse of the scheme for whitening illegal money through revised CGT regime and said that minimum holding period, which could be 3 months to 6 months, would address this issues and there would be more risk in minimum holding period for the investors in stock market than investment in other instruments available for whitening the illegal money.
Why anybody would come to stock market to legalise black money in the presence of cheap instruments used for legalisation of the undisclosed and unexplained investments? There are easy ways available to the public to legalise money on mere payment of 2 percent of the amount, like prize bonds, etc. In the presence of such instruments, there is no need for any person to come to the stock market for legalisation of illegal money where high risk is involved in capital market investment. In a certain withholding period of shares at stock market, the value of shares may go up or down involving high risk for the investors. Due to involvement of price risk factor why any investor would use the channel of stock market for whitening the money in the presence of other options available for this purpose, the SECP Chairman further explained.
When asked how the SECP would encourage documentation while availing exemption from disclosing source of investment in stock market under section 111 of the Ordinance 2001, he responded that the exemption from section 111 of the Income Tax Ordinance 2001 would be available up to June 30, 2014. After this period, source of investment would be probed by the tax department under the new CGT scheme.
Muhammad Ali said that the exemption from the CGT was available to the investors for the last 36 years, and investors have earned profits and created wealth from the earnings of investment in stocks. Billions of rupees made during these 36 years from stock market were legal. However, these have not been documented and new CGT regime would help document it for the first time. The wealth created by the stock market investors was legal and official because there was no CGT applicable in the past. The wealth was legal but not documented in the books of income tax department. The investors did not declare this wealth in their income tax returns. Neither the investors knew to file their income tax returns in the past nor did tax department pursue the investors to submit the returns. The investors have not cancelled their wealth but they were not asked to file their income tax returns.
When asked about FBR''''s objection on declaring NCCPL as withholding agent, the SECP Chairman said that the FBR has no objection on declaring National Clearing Company of Pakistan (NCCPL) as a withholding agent to deduct and deposit the CGT from investors'''' transactions. The FBR is not opposing proposal of working of NCCPL as withholding agent. The SECP and the FBR are closing working for the finalisation of the CGT scheme to achieve four major objectives ie documentation of economy, broadening the tax base and expanding the tax net, generation of maximum revenue, and revival of capital markets. The implementation date of the new scheme is April 2012. In this connection, there is no need to go to the Parliament for revising the CGT collection procedure. The FBR will amend the Income Tax Rules on CGT to introduce all necessary changes required for making the new system operational. For declaring the NCCPL as withholding agent, this could be done through an Ordinance. There would be also requirement of amendments in the NCCPL regulations for withholding and deduction of the due amount of tax by NCCPL being withholding agent. There is also a need to change the systems of the NCCPL for implementation of the whole scheme for deduction and deposit of the due amount of tax. To simplify calculation and achieve smooth implementation of CGT, the SECP has proposed to freeze the CGT rate at existing levels. Any further amendment in the Income Tax Ordinance 2001 for freezing the CGT rates up to June 30, 2014 could be done through Finance Act 2012 onwards.
He further said that the revision in CGT regime has been fully endorsed by the FBR as it has been finalised in consultation with its top officials and it would help documentation of money invested in stock market, help stop tax avoidance and tax evasion.
Explaining the functioning of the new system of the CGT, the SECP Chairman further elaborated that the taxpayers would be required to file income tax returns under the new scheme and the deducted tax would be dully reflected in the returns. The SECP has further proposed that NCCPL shall act as a withholding agent to deduct and deposit the CGT from investors'''' transactions. The NCCPL shall also provide investor-wise monthly report of CGT deducted and deposited for each investor to FBR and issue a certificate to the investor of the amount deducted. The investor will file tax return, including the CGT deposited, based on the certificate provided by NCCPL.
The NCCPL would be declared as withholding agent to document all transactions of stock market for the CGT purposes. In this way, all investments of the stock market would be documented for the FBR. No investor can escape from the system of the NCCPL and this would be the most appropriate way to deduct tax on all stock market transactions.
When asked about the status of withholding tax on stock market transactions, Muhammad Ali said that the withholding tax would be abolished under the new scheme as tax would be collected on profit and not on transactions. In other words, the transaction-based tax would not be applicable under the new CGT regime.
Following imposition of the CGT on stock market, the tax collection from stock market has been drastically reduced from Rs 4-5 billion per annum to only Rs 300 million. During the last three years, the stock market has been destroyed and investors are not interested in making investment in capital market due to sudden imposition of the CGT. The listing of new companies on the stock exchanges has also been decreased due to the CGT. The announcement of the Minister of Finance on the CGT at Karachi had a positive impact on the market and the trading volume has started increasing at the stock exchanges. The SECP wanted to place a CGT collection system which would ensure increase in trading volumes without comprising revenue collection, the SECP Chairman explained.
He further highlighted that when CDC account would be opened, all bank requirements would apply on such account, and there is no logic in fearing that illegal money would come into the stock market. He also dispelled the impression that revision in CGT regime would negate any proposal of Financial Action Task Force of the Anti-Money Laundering, and said that as a safeguard, all proposals of FATF have been made part of the revised scheme.
The SECP Chairman explained that all transactions recorded by the National Clearing Agency would help stop tax evasion and tax avoidance. The CGT would be applicable on profit only as against the earlier practice of profit and loss both. It has been proposed that the rate of tax shall be 10 percent on capital gains arising on securities held for a period up to six months, and 8 percent on capital gain arising on securities held for a period above six months to one year for investments made in the stock markets up to 2014.
He said that before imposition of CGT, tax collection from stock market was Rs 5 billion. That has came down to Rs 300-400 million. The revision in CGT regime would help bring in huge investment back into the stock market and this would help document the wealth, broaden the tax base, and increase in the tax proceeds. The major target that would be achieved through this revision in CGT regime is to revive the stock market, and help businesses to arrange capital required for their growth. The average turnover of the stock market has declined after imposition of the CGT and there is an effort to get it back to its earlier turnover. Some 500 million shares were traded in the stock market at the time when market was performing well and now these volumes have declined to 150 million shares. The SECP wants to bring the volume back to 500 million shares, or even higher, and this would result in higher tax collection from stock market.
He said that imposing minimum tax on money earned from other sectors, if invested in stock market after the revision of CGT regime, would make investors stay away from the market. He also said that placing any kind of cap on such kind of investment in stock market would be against the spirit of the stock market. Explaining the reason for introducing revised CGT regime from April 1, 2012, the SECP Chairman said that SECP, FBR and NCA have to revise their rules and regulations and these could be revised and implemented during a transition period of the last three months of the ongoing fiscal year (2011-12).