The Karachi Stock Exchange in its budget proposals, routinely compiled at this time of the year by all stakeholders, including those in the private sector as well as in autonomous organisations, has urged the government to maintain the exemption from capital gains tax and reduce the withholding tax/Capital Value Tax levied on stock market transactions.
The rationale behind this proposal, like other pre-budget proposals, is premised on self-interest of the institution/organisation compiling them. Thus it is no surprise that reducing capital gains tax and withholding tax on stock market transactions will reduce the costs of doing business on the stock market and thereby benefit the members of the stock exchange and their clients.
A government, however, must formulate a tax policy that is consistent with its macroeconomic objectives; and thereby ensure that tax concessions are only given to fledgling industries/sectors for a specified period of time and that all other sources of income, especially where profits are significant, pay the appropriate cost to the exchequer.
Favouring one industry/sector over another merely generates allegations of political patronage or victimisation depending on which side of the table one is sitting. Given the fact that the newly elected government is still mulling over the nature and extent of the challenges it faces today, inclusive of a rising budget deficit, it is doubly imperative that concessions must be granted/maintained after much thought.
What is pertinent in the case of the suggestion made by the Karachi Stock Exchange is that it was opposed by the Securities and Exchange Commission of Pakistan which cited a number of reasons for their opposition: The Karachi bourse registered an unprecedented growth, a 40% growth in its 100-index during 2007, market capitalisation rose by 56%, and collection of revenue under Capital Value Tax (CVT) and withholding tax on securities transactions doubled. These statistics reflect a booming industry which cannot be expected to be granted concessions especially at a time when the Finance Ministry has expressed concerns over its revenue generating ability.
Thus it is hoped that the government would disregard the suggestions of the Karachi Stock Exchange with respect to CVT and withholding tax. In addition there is one other sector that is booming in this country and that requires to have a capital gains tax imposed on it: the real estate sector which has been buoyed by considerable amounts of black money flows. In this regard the government will have to ensure that those who are not involved in the real estate business must not be penalised.
Therefore it is essential that a distinction be made between speculators and investors operating in these sectors. One of the ways to do this is by determining a holding period for assets acquired and then sold subsequently to qualify for exemption from capital gains tax. In addition, real estate tax is a provincial subject, however it maybe appropriate and fruitful for the federal government to collect it on behalf of the provincial government.