Finance minister to visit KSE today

KARACHI: Federal Minister for Finance, Economic Affairs, Revenue and Statistics Dr Abdul Hafeez Shaikh, accompanied by the Chairman of Securities and Exchange Commission of Pakistan (SECP), Mohammad Ali, would visit the Karachi Stock Exchange on Saturday (Jan 21).

The minister would exchange views with the members at 3:30 in the afternoon. There was a rush of blood as the announcement was made at the KSE on Friday morning.

Equities all across the board galloped with the KSE-100 index running up 367 points to highest 11,516, but pulling back 100 points and close at 11,775.

The investors were enthused by the hope of a change of heart on the part of Federal Board of Revenue (FBR) in regard to thelong held grievances of investors in equities over the Capital Gains Tax (CGT).

The Friday’s announcement at the Exchange pointed to a possible solution. “The reason for the visit is to appraise members of the Exchange about the progress made between the SECP and the FBR with regard to CGT as well as other important issues related to capital markets,” the KSE said.

To fuel the fire of optimism, investors noted that the visit was following on the heels of the Jan 13 letter written by the SECP tothe FBR.

A copy released at the stock exchanges, stated, in brief, that there was “a general consensus in discussion between the SECP and the FBR that: “maintaining status quo on CGT was not in the interest of the economy as it had adversely impacted tax revenue collection as well as trading volume at capital markets (CM).

Besides CGT had adversely affected investor’ sentiments, capital formation and overall functioning of the CM.

SECP proposed revamp of CGT regime in a manner which not only addressed issues as well as met the overall objectives of FBR, SECP and CM.

In Pakistan, securities trading had remained exempt from CGT for 36 years, since 1974 till June 30, 2010.

Imposition of CGT from July 1, 2010 had not only impacted the tax revenue (less than 10 per cent of figure three years ago) but it had also reduced average traded value to the lowest level during the last ten years.

The adverse impact on price discovery; withdrawal of investors; business viability; capital formation and resource allocation were also explained by the SECP.

Regarding “The Issues in CGT implementation and Objectives of Stakeholders,” the Regulator had stated that since the CGT had remained exempt for past 36 years, it had created an anomaly in shape of un-documented gains accrued through transactions in the CM during that period.

Even though the requirement of filing of tax returns was there, yet it was neither followed by CM nor implemented by FBR.

This led to a situation where CM investors ended up with legitimate but undocumented gains.

Abrupt change from exempt regime without factoring this anomaly had forced investors to withdraw funds from CM. The other issue was the cumbersome calculation and documentation requirements embedded in CGT regime.

Prior to CGT imposition, CM was under the presumptive tax regime under which tax was deducted and deposited by the Exchanges. And lastly continuation of withholding tax (WHT) after CGT was double taxation, i.e. taxing both turnover and net income. Equity demanded that with imposition of CGT, WHT on turnover should be done away with.

SECP recommendation on measures in CGT regime that could address the issue and achieve objectives of all stakeholders included the following: As the documentation was not available to substantiate the gains made from CM transaction during the exempt period, SECP proposed that applicability of Section 111 of Income tax Ordinance 2001, requiring unexplained income or assets may be deferred for funds invested in CM till June 30, 2014; and to freeze CGT rate at the current rate applicable for year 2011-12. To simplify calculation and ensure timely deposit of tax revenue generalised collection mechanism at National Clearing Company of Pakistan was recommended. The apex regulator also discussed advantages and disadvantages of its proposed ‘way forward’.

The SECP nonetheless highlighted “The tax collection by the Government from CGT and other income, for all times to come once an investment is made and documented will be far greater than one time upfront charge.” “The ‘way forward’ would not only retain overall spirit of CGT regime but also achieve various stakeholders’ objectives and revive CM”, the chief regulator concluded.

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