Commodities futures: section 153 shall not apply to contracts settlement: SECP

The Securities and Exchange Commission of Pakistan (SECP) has proposed that the provisions of section-153 (withholding tax) of the Income Tax Ordinance 2001 shall not apply to settlement of futures contracts in a commodity futures exchange.
In its budget proposals to the Federal Board of Revenue (FBR), the SECP has proposed that being a Central Counter Party (CCP), all buyers buy contract from and Pakistan Mercantile Exchange Limited (PMEX) and sellers sell to PMEX. However, as PMEX is the market and not the actual seller, withholding of tax by buyer in the name of PMEX is not possible. Disclosing the identity of actual seller to buyer would jeopardise the concept of futures exchange. Moreover, there may be many buyers vs. one sellers or inverse, as for deliveries, open long positions are matched with open short positions. Further, the price as per contract for delivering seller may not necessarily be the buy price for the delivery taking buyer due to trading of the same contract during the contract duration.
Under section 153(5)(f) of the Income Tax Ordinance 2001, withholding is not required against the purchase of assets under lease and buy back agreements by a modaraba, leasing company, banking company or financial institution. Considering these as financing transaction; therefore, requirement of withholding of tax has been removed. The same transaction cost structure is applicable for trading on PMEX, there from removing withholding tax requirement on deliveries is proposed leaving buyer and seller liable for tax on their respective income.
Trading at PMEX and Murabaha Transactions is specifically excluded from the definition of "supply" under Sales Tax Act. (SRO 445 (1)/2004 dated June 12, 2004. The same treatment is required for transactions on settlement of contracts. Removing applicability of withholding on deliveries through PMEX would encourage trading on PMEX and documentation of activities primarily due to reasons that quality of commodity and payment would be guaranteed and price would be the best prevailing, SECP added.
Presently, almost all the trading in PMEX is carried out by individuals. Further, very few transactions go into delivery, but due to individual buyers, withholding is not required. However, to develop the market and attract corporate entities, withholding tax provisions need to be clarified on deliveries through PMEX. Out of 2,691,614 contracts traded during Jul'11 to March'12, only 13,578 have ended with delivery. In light of the above reasons, addition of clause is needed in Part-IV of Second Schedule of the Income Tax Ordinance 2001, SECP added.