Pakistan Stock Exchange Limited (PSX) has recommended to the Finance Ministry to review the mechanism for payment of capital gains tax (CGT) on disposal of securities and align the rates of capital gains tax on disposal of securities with the rates of CGT on immovable property.
According to the budget proposals of the PSX for 2019-20 budget, at present National Clearing Company of Pakistan Limited calculates and collects withholding tax on capital gains made on disposal of shares listed on Pakistan Stock Exchange Limited.
However, it is witnessed that in many countries there is no capital gain tax collected by any institution but rather individuals/corporates are required to file their tax returns and pay taxes if any on the capital gains mad by trading of shares.
A broad range of countries including Canada, USA, Indonesia, India, and Vietnam do not mandate the collection of CGT by an intermediary at the time of disposal of securities, and the CGT is payable at the time of filing of returns. In Singapore, Hong Kong, Malaysia and Mauritius there is no capital gains tax. Therefore, considering international perspective, it would be appropriate if in Pakistan, payment of capital gains tax be made obligatory on individuals and corporates and the status of National Clearing Company of Pakistan Limited should be such that only the information is provided to the tax authorities by NCCPL.
The PSX has proposed that in line with the common practice in internationally, the government should review and revise the mechanism for payment of tax on capital gains for filers. An alternative to the current convention should be explored along with pros and cons. Withholding tax at NCCPL level/or filers should be debated thoroughly and replaced with the obligation on investors who are filer to pay CGT through annual tax returns.
However, the current mechanism of withholding on CGT for investors who are non-filers shall remain the same provided no WHT on such non-filers whose Capital Gains is up to Rs100,000 per annum. In any case, NCCPL should provide information on all investors' capital gains and losses to tax authorities for tracking purposes.
In line with international practice for collection of capital gains tax, an obligation to file returns and pay taxes on disposal of securities at year end would encourage a widespread tax culture among investors. Further, it would also lead to an increase in number of UINs.
The PSX has also recommended that currently the tax rates on capital gains from the disposal of securities are prescribed using various slabs that denote the holding period of the securities. The tax on these comparable slabs of holding periods of securities are higher than those for immovable property, and not aligned with the CGT on disposal of real estate, and result in making the real estate sector particularly appealing to investors when compared to capital markets. The current rates of CGT on disposal of securities and immovable property are outlined.
Such a convention is the norm in most developed and developing markets, where real estate and equities are given an equal footing in terms of their tax treatment.
The alignment of these tax rates will also lead to an easing of speculative pressure on real estate property prices in Pakistan, where much of the undocumented wealth has been currently flowing.
It has been recommend to align the rates of capital gains tax on disposal of securities with the rates of CGT on immovable property, using similar slabs of holding period as those on real estate. This will encourage documentation of real estate activity, and lead to an easing of speculative pressure on real estate property prices in Pakistan, where much of the undocumented wealth has been currently flowing, the PSX added.
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