FBR issues CGT rules on securities trading

The Federal Board of Revenue (FBR) here on Wednesday issued Capital Gain Taxation (CGT) rules on securities'' trading incorporating all amendments proposed by the Securities and Exchange Commission of Pakistan (SECP) to facilitate investors of stock exchanges. It has been reliably learnt here on Wednesday that the FBR has issued SRO 1119(I)/2012 dated September 12, 2012 to notify CGT Rules on Securities'' Trading.
The provisions of the new CGT rules will be applicable from April 24, 2012. On the request of the SECP, the FBR has made necessary changes in the CGT rules to make smooth the process of collection of the CGT from stock market investors. The SECP had recommended certain changes in the CGT rules for documentary trail of un-documented income; correction of anomaly where exempt gains in past were not documented; higher revenue for the government; broadening the tax-base; depth in trading volume; efficient price discovery; efficient capital formation and resource allocation; higher possibility for privatisation and attraction of foreign portfolio investment.
Taking into account the suggestions of the SECP, the FBR was able to finalise the viable CGT rules which have now been notified by the tax authorities. The SECP has thoroughly analysed international tax models where CGT were operative and guided the FBR for finalisation of the rules to facilitate smooth collection through an automated system without causing inconvenience to the stock market investors, sources said.
Sources said that the issuance of these rules and amendments to the Income Tax Ordinance 2001 were made to remove the anomalies identified in the previous CGT regime. The matter was raised by the SECP keeping in view the difficulties faced by investors while complying with the taxation provisions. New amendments have been introduced in collaboration with FBR, NCCPL, CDC and other stakeholders. These changes will have a positive effect on the investors'' confidence, stock market trading volumes and will ensure 100 percent collection of tax on securities'' trading, sources said.
The FBR has issued amendments to the Income Tax Rules 2002 relating to the Capital Gain Taxation (CGT) on securities'' trading vide SRO 1119(I)/2012 dated September 12, 2012. These rules were earlier issued for public consultation on July 20, 2012. The amendments to the Income Tax Ordinance 2001 were made on April 24, 2012 through The Finance (Amendment) Ordinance, 2012. The provisions of the new rules will be applicable from April 24, 2012.
Sources said that under SRO 1119(I)/2012, three new rules 13N, 13O and 13P are introduced. Rules 13N gives detailed procedure for the computation, determination, collection and depositing of Capital Gain Tax on securities trading. The Rules-13O contains the periodic forms which will be filled to FBR and Rule 13P explains and clarifies provisions regarding the computation of capital gains and tax payable thereon under the Eighth Schedule of Income Tax Ordinance, 2001.
Sources said that prior to issuance of the notified CGT rules, the SECP has objectively analysed the situation by looking at the global trends, impact of CGT on the capital market, issues with present CGT regime and proposed revamped CGT regime in a manner which meets overall objectives of FBR, SECP and capital market.
According to the global analysis of the CGT conducted by the SECP, the CGT regime is in place in many developed jurisdictions, like Australia, Canada, Brazil, China, France and Germany, however it encompasses all asset classes such as; securities, immovable properties, collectibles, and other personal assets. While in developing jurisdictions the CGT applicability varies from jurisdiction to jurisdiction.
The SECP had informed the FBR that the CGT regimes across the globe have evolved differently as per each country''s political, fiscal and economic environment. The securities are usually brought under CGT regime after a country has achieved certain level of capital market depth, investor outreach, and adequate capital formation and documentation. The capital market remained exempt from CGT for past 36 years. This created an anomaly in shape of un-documented gains accrued through transactions in the capital market during the period. Even though the requirement of filing of tax returns was there, yet it was neither followed by capital market nor implemented FBR.
This led to a situation where capital market investors ended up with legitimate but un-documented gains. Abrupt change from exempt regime without factoring this anomaly has forced investors to withdraw funds from capital market. Another issue is cumbersome calculation and documentation requirements embedded in CGT regime. In order to simplify ensure deposit of the tax revenue, centralised collection mechanism at National Clearing Company of Pakistan (NCCPL) was proposed by the SECP and subsequently endorsed by the FBR, sources added.