According to common perception, the stock market fell by 4.41 percent on Wednesday, ostensibly in reaction to a news in this newspaper that the Central Board of Revenue intends to test-run its software programme "nexus" based on data regarding investment in shares, credit card usage and functions held in five star hotels.
If the perception that publication of the report was the reason for the 4.41 percent fall in the KSE index is correct, then it just goes to prove that the equity market is one of the havens where the tax evaded money is parked and is in play. Therefore, it is all the more important for the tax hounds to explore this channel with vigour to broaden the tax base.
So far the government has tried to collect revenue from the bourses through indirect methods such as: Capital Value Tax and withholding tax deductions. As a matter of policy, capital gains exemption has been extended year after year on the pretext of encouraging capital formation.
Despite calls from tax payers, tax collectors and economists of all hue and colour (this newspaper included) to introduce a holding period eligibility in the Capital Gains Act, the government has thus far refrained from doing so. What fears inhibit the government we do not know, other than, it may adversely impact the privatisation process, ie off-loading of government held shares in public sector enterprises listed on the bourses.
A holding period to earn capital gain exemption in shares as well as real estate is the norm in all countries. Creation of wealth must be encouraged, but income earned must be taxed across the board irrespective of the source. It is gross injustice that income derived from the business of buying and selling shares or properties on a daily or weekly basis is left untaxed.
The unprecedented rise in KSE index and real estate prices is precisely based on the tax free income derived in these two sectors. There is too much money chasing a float of $7 to 8 billion in a market capitalisation of over $50 billion, and only a limited size developed land with infrastructure of utilities, transport and education.
Who is hurt in the process. Both the tax paying public and the national exchequer. Employed persons pay tax while receiving wages. Their marginal savings when invested in bourses remain at the mercy and whims of the big players with large credit lines from banks.
Tax evaded income is parked in real estate where the price on official record is hardly 10 to 15 percent of the market price. Investment in housing and property by the working class ends up with tax paid savings moving into the tax evaded market.
The Universal Identification Number, (software once fully operational in Central Depository Company) becomes a data source, and the tax hounds can only worry those who do not want to be exposed to the authorities. SECP wants the UIN to be a useful tool for surveillance.
The Karachi Stock Exchange would like to use it for tracking trading and for managing the risk. CDC as a custodian of shares would like brokers to submit accounts and their clients' sub-accounts. Data from CDC without National Tax Number or National Identity Card number of its account holders is useless for CBR.
Faulty or incomplete data would lead to more confusion. In the computer led technology world, the buzzword is: garbage in - garbage out. The world over tax payers declare the interest earned from banks as well as dividend income in their tax returns. This declaration can be counter-checked therefore, there is a check on misdeclaration.
The KSE index fell by 489 points on Wednesday. Some market gurus blamed the report in this newspaper for the fall. The question arises: why did the KSE index fall by 468.20 points on Monday? The market appears to be looking for excuses to correct itself. Macro-economic indicators hopefully would be good for 2005-06 but certainly lower than that for 2004-05, when everything gelled together.
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