The government is actively examining taxation models of India and United Kingdom (UK) for introducing the concept of holding period (time period) for possible imposition of capital gain tax (CGT) on sales of listed securities from fiscal year 2008-09.
Sources told Business Recorder on Saturday that, to develop public confidence in capital market, both the Securities and Exchange Commission of Pakistan (SECP) and the Federal Board of Revenue (FBR) are examining the proposals to discourage speculative trading, based on short-term gain.
It is under consideration that CGT exemption may be linked to a minimum holding period of the securities traded. The idea is to levy two different rates of CGT on investment made in the stock market, depending on holding period of 3-6 months. In this connection, holding periods applicable in UK and India are under examination for this purpose.
One of the proposals is that CGT exemption may be allowed on investments held for more than six months. In case investment is held for 3 months, or less period, CGT should be levied at the rate of 10 percent, and investment made for over 3 months and less than 6 months should be subjected to CGT at the rate of 5 percent. However, the investment held for 6 months and above should not be liable to CGT, sources said.
According to SECP, exemption has encouraged short-term speculative day trading in stock markets, motivated to earn capital gain from the trade, and also enjoy tax exemption. Short-term trading remains beneficial for the investors, thus the long-term investment in the capital markets is not encouraged.
The economy is losing an important segment of revenue by not levying CGT on trading in the shares market. Internationally, few jurisdictions such as Singapore, Taiwan, Bangladesh. Sri-Lanka, UAE, Malaysia and Egypt, exempt capital gain tax on trading of securities in the capital market irrespective of the period for which shares have been held.
In some other stock exchanges, of India and UK, capital gain tax exemption is allowed only subject to the condition of a minimum holding period of the securities traded, the SECP added.
However, tax authorities have specified four international tax models available for levying CGT on stock exchanges. Some countries have given total CGT exemption to stock exchanges. There are countries where only one levy ie CGT or CVT, is applicable, but tax models also showed other countries where both capital value tax and CGT are applicable on the stock exchanges.