The Federal Board of Revenue (FBR) has issued comprehensive procedure for computation of capital gain tax (CGT) on shares trading at the stock exchanges to clarify issues related to acquisition and disposal dates of shares. The FBR draft rules have clarified issues pertaining to date of securities acquisition, their disposal, holding period, derivative products and miscellaneous issues with respect to buying and selling of shares at the stock exchanges.
The FBR has proposed amendments in the Income Tax Rules, 2002 through SRO 808(I)/2010 of August 17. The FBR has issued the draft rules on 'computation of capital gain' for the information of all persons likely to be affected and notice is hereby given that the draft will be taken into consideration after 15 days of its publication in the official Gazette. Any objection/suggestion in respect of the said draft before the expiry of the aforesaid period shall be given due weight by the Federal Board of Revenue, the rules added.
According to the proposed rules, where requisition of securities (including letter of rights, units of mutual funds, securities in physical form) has taken place on trading platforms (including Platform for Off Market Transactions) provided by Stock Exchanges, the date of settlement of the relevant trade shall be taken as date of acquisition and broker's bill shall be the conclusive evidence of such acquisition. Where the title in the securities is not acquired physically through trading platforms provided by Stock Exchanges, the date on which the name of transferee is recorded in the share certificate shall be taken as date of acquisition.
In case of initial public offerings, including the shares of founders/sponsors where securities are on electronic form with the date of receipt of securities into CDC Account of the person, and where shares are in physical form, the date on which the company registers the person as its shareholder, shall be taken as dates of acquisition.
The rules further said that where the securities are bonus shares, the date of receipt of such shares in electronic from into CDC Account of the person and where shares are in physical form, the date on which the company registers the person as its share holder in respect of such bonus shares shall be taken as date of acquisition.
In case of securities being "right shares" the date of receipt of such shares in electronic form into CDC Account of the person and where shares are in physical form, the date on which the company registers the person as its shareholder in respect of such "right shares", shall he taken as date of acquisition. In cast of securities being units of an open end mutual fund, the date of acquisition shall be, the date of purchase/conversion in/transfer in/switching in of such units. Certified statement of account provided by Asset Management Company shall be the conclusive evidence of such acquisition.
In case of securities being "letter of rights" the date of receipt of such letter of rights in electronic form into CDC Account of the person and where letter of rights is in physical form, the date on which the company registers the person as entitled to such letter of rights, shall be taken as date of acquisition.
In case securities have been acquired on account of nomination under section 80 of the Companies Ordinance 1984 under bequest or inheritance, the date of acquisition shall be the date of death of the person making such nomination or such bequest as the case may be.
Where securities are acquired through a gift in an electronic form, date of transfer of such securities to CDC account is received in a physical form, the date on which such securities are entered against the name of such donee in time register of share holders of the company through such endorsement in the share certificates, shall be taken as the dates of acquisition.
In case securities have been acquired under Stock Option Scheme for Employees of a company approved by SECP, the date on which the option is exercised shall be taken as date of acquisition. In case of Derivative products, date of entry into purchase contract or sale contract of the financial instrument shall be taken as date of acquisition. The procedure regarding 'date of disposal' of shares revealed that in case disposal of securities (including letter of rights, securities in physical form and units of mutual funds) has taken place on trading platforms (including platform for Off Market Transactions) provided by Stock Exchanges, the date or settlement of the relevant trades shall be taken as date of disposal and broker's bill shall be conclusive evidence of such disposal.
In case, title in the securities in physical form has been transferred at the end of the register of shares, the date on which name of transferee is recorded in the share certificate shall be taken as date of disposal. In case of securities being units of an open end mutual fund, the date or redemption/conversion out/transfer out/ switching out of such units, shall be taken as date of disposal and certified statement of account issued by Asset Management Company shall be the conclusive evidence of such disposal.
In case of derivative products, date of exit from purchase conflict or sale contract of the financial instrument shall be taken as date of disposal. Highlighting the 'holding period', the rules said that where contract for the purchase and sale of securities is periodically or ultimately settled by the actual delivery the period between the date of acquisition and date of disposal shall be reckoned as the holding period.
In case of derivative products the period between the date of entry into contract of purchase or sale and date of exit from contract of purchase or sale shall be taken as the holding period. In case securities not traded on trading platforms (including Platform for Off Market Transactions) provided by Stock Exchanges, the period between date of acquisition and date of disposal, shall be taken as the holding period.
The securities held for a period 182 days and for a period of 365 days shall be taken as held for six months and one year respectively. The securities held for less than one day shall be treated as held for less than six months. About the derivative products, the rules said that for the purpose of section 37-A, "derivative product" mean financial contracts traded on Stock Exchanges of Pakistan that do not necessarily settle periodically or ultimately by the actual delivery of securities and include Future Contracts Options, Swaps and Contract of Right etc.
The rules further said that the method to determine date of acquisition of different/various securities, disposed of, for the purpose of determination of holding period to be employed consistently shall be "First in First Out". To determine the cost of acquisition of securities the method to be employed consistently, at the option of the person holding such securities, shall be either "Moving Weighed Average Cost method" or Specific Identification Cost method on FIFO basis".
The profit made on sale of borrowed shares shall be treated as capital gain when such shares are acquired for their return to Authorised Intermediary. Period intervening between acquisition and disposal of such borrowed shares shall determine the "holding period" in which the capital gain or loss fails. "Specific Identification Method" shall be used to determine the acquisition cost and consideration for disposal of such securities. The difference between cost of acquisition and consideration received against disposal (net off all borrowing costs) of such shares shall be treated as capital gain or loss. This rule shall he applicable to the securities borrowed in accordance with the "Securities Lending and Borrowing Scheme" approved by Securities and Exchange Commission of Pakistan.
The profit made on disposal of shares acquired under Margin Finance Scheme, Margin Trading Scheme or other Financing/Leverage schemes approved by Securities and Exchange Commission of Pakistan shall be treated as 'Capital gain'. The difference between cost of acquisition (inclusive of borrowing cost) and consideration received against disposal of such shares shall determine the quantum of capital gain or loss.
The FBR has further specified that only express and specific exemptions in respect of income from 'capital gains' as provided under the second schedule to the Income Tax Ordinance, 2001, shall apply for the purposes of taxation of income from 'capital gains' arising from disposal of securities. The loss suffered on disposal of securities during the period of a tax year shall be set off against capital gains from disposal of securities during such tax year, irrespective of the period of holding of such securities in such tax year, the draft income tax rules added.