Revision of CGT regime on securities' disposal Government reviewing SECP, PSX proposals

The government is reviewing proposals of the Securities and Exchange Commission of Pakistan (SECP) and Pakistan Stock Exchange (PSX) Limited on the revision of capital gains tax (CGT) regime on disposal of securities in coming budget (2018-19).
Sources told Business Recorder here on Wednesday that the Federal Board of Revenue (FBR) has received budget proposals pertaining to the CGT on securities from SECP, PSX and Pakistan Stock Exchange (PSX) Stockbrokers Association (PSA). Budget makers are analyzing proposals of all three stakeholders and its revenue implications.
According to the sources, the SECP had proposed a flat rate of 15 percent capital gains tax (CGT) for filers (20% for non-filers) for holding period of up to 3 years on disposal of securities in budget (2018-19).
Pakistan Stock Exchange (PSX) Limited has observed that the frequent changes in Capital Gain Tax regime is detrimental to the growth of capital market and dampens the investor base having negative impact on Foreign Institutional Portfolio Investment (FIPI).
Pakistan Stock Exchange (PSX) Stockbrokers Association (PSA) has proposed to the Ministry of Finance to rationalize Capital Gain Tax (CGT) on disposal of securities to make it compatible with CGT on disposal of immovable property in budget (2018-19). Capital Gain Tax (CGT) on disposal of securities is excessive. Immoveable properties have become a dumping ground of black money. Investment in securities can neither be manipulated nor can be made out of black money.
The investors in stock market, if not better, deserve the same treatment as the investors in real estate. The existing rates would show that CGT on disposal of securities is excessive and discouraging for the investors. By linking the holding period with a particular date (1st of July), securities held for even 4 years 11 months and 27 days do not qualify for zero rate of tax.
After the introduction of higher rate of tax and reducing the holding period of CGT, collection has gone down. For the fiscal year 2016-17 it was Rs18 billion and for FY 2017-18 it is slightly Rs1 billion up to February 2018. This clearly reflects not only loss of revenue but it has also hit capital formation which is essential for industrialization and job creation, Pakistan Stock Exchange (PSX) Stockbrokers Association (PSA) added.
The SECP has proposed that a flat rate of 15% CGT for filer (20% for non-filer) is proposed for holding period of up to 3 years. Zero percent CGT should be applicable on disposal of securities held for more than 3 years in line with the regime of CGT applicable on disposal of immovable property taxable under Section 37 of the ITO 2001.
The decline in CGT collections during the period from July 2017 to November 2017 is apparently due to the fact that since tax exemption advantage on holding period no more exits, therefore, the investors tend to go for short-term holdings thereby encouraging day trading/ punter trading in the capital market. The re-introduction of holding period advantage on holdings more than 3 years would boost up investment in capital market resulting in higher capital gains and higher collections of CGT. The changes brought via Finance Act, 2017 of removing the exemption of CGT on holdings over 4 years has had a negative effect on CGT collections as only Rs1.2 billion collections against CGT have been reported from July 2017 to November 2017; compared to the Rs17 billion for the entire 2017.
The decline in CGT collections during the period from July 2017 to November 2017 is apparently due to the fact that since tax exemption advantage on holding period no more exits, therefore, the investors tend to go for short-term holdings; thereby encouraging day trading/ punter trading in the capital market.
Reintroduction of holding period advantage on holdings more than 3 years would boost up investment in capital market resulting in higher capital gains and higher collections of CGT, the SECP proposal added.
Pakistan Stock Exchange (PSX) Limited proposed, prior to July 2010 the capital gains on disposal of securities were fully exempt from tax. Stakeholders agreed for the imposition of Capital Gain Tax on short-term trading of securities. The Finance Bill, 2010 imposed CGT in three tiers of holding period with progressive rates. However, amendments were brought by the Finance Act, 2012 and Finance Act, 2015 in respect of rate of tax and holding period. The Finance Act, 2016 inadvertently modified and imposed tax irrespective of holding period at the rate of 7.5% instead of the stated intention of the finance minister, who in his budget speech stated that the maximum taxable holding period for Capital Gain on securities may be extended from 4 to 5 years, PSX said.
The frequent changes in Capital Gain Tax regime is detrimental for growth of capital market and dampens the investors' base since it discourages trading of securities and not helping in correct price discovery. The Foreign Institutional Portfolio Investment (FIPI) has also been negatively impacted. Following is the detail of FIPI:
The CGT is not in line with the taxability on other asset class ie there is no tax on gain on disposal of immovable property, if the holding period is three years or more. The PSX has proposed that the four tiers of holding periods and proposed rates of tax may prescribed: Where holding period of a security is up to twelve months, proposed tax rate for tax year 2019 is10%; where holding period of a security is more than twelve months and up to twenty four months, proposed tax rate for tax year 2019 is 9%; where holding period of a security is more than twenty four months and up to thirty six months, the proposed tax rate for tax year 2019 is 8% and where holding period of a security is more than thirty six months, proposed tax rate for tax year 2019 is 0%.
The Capital Gain from short-term trading is generating about 64% tax. Present rate of 15% is very high because no expenses are allowed against such income nor the unadjusted losses are allowed to carry forward.
Proposed amendment: In Division VII, Part I of the First Schedule, the following new table shall be inserted in place of existing table:
TAX YEARS 2019, 2020 & 2021:
Where holding period of a security is up to twelve months, tax rate is 10%; where holding period of a security is more than twelve months and up to twenty-four months, tax rate is 9%; where holding period of a security is more than twenty-four months and up to thirty six months, tax rate 8% and where holding period of a security is more than thirty six months, tax rate 0%.