KARACHI: The Federal Budget FY22 has proposed reduction in the capital gains tax (CGT) rate on the disposal of shares to 12.5 per cent from the existing 15 per cent.

Ahsan Mehanti at Arif Habib Corp said reduction in the capital gains tax was a positive development.
“It is a good development but too little, as compared to the market expectations, which was hoping reduction of tax on dividends and incentives for new listings.”

“Reduced CGT is positive for the market and would help attract foreign investment, as the foreign fund managers will have competitive tax rates. However, broad-based measures for the stock market would be better.”

According to the proposed amendment in the First Schedule of the Income Tax Ordinance 1969, the capital gains tax on securities held for less than a year will be 12.5 per cent and zero per cent for the securities held for over 12 months.

Moreover, the capital gains tax on the future commodity contracts entered into by members of the Pakistan Mercantile Exchange would remain unchanged at 5 per cent.

Topline Securities CEO Muhammad Sohail said that it was a spending-led confidence building budget exercise.
“Good for stock market; wherein, [the] capital gains tax (CGT) has been reduced and withholding tax on margin financing is abolished. However, the biggest challenge will be to deal with [the] IMF and rising commodity prices.”

To recall, in the budget proposals, the Pakistan Stock Exchange (PSX) noted the current tax rate of 15 per cent on the capital gains on the disposal of securities was very high and that too without any benefit of holding period and is higher than the rates on the sale of immovable property, which are ranging from 2.5 per cent to 10 per cent based on various slabs of the capital gains.

Currently, carry forward of losses is allowed up to a period of three years. Last year and its preceding year, the capital gains tax collection was merely Rs2.1 billion and Rs1.3 billion, respectively.

Moreover, brought forward losses, amounting to Rs232 billion, are available to be adjusted against the future capital gains; therefore, the CGT collection will continue to be negligible.

Commenting on the reduction in CGT rates, Alpha Beta Core CEO Khurram Schehzad said that it was a good development for the stock market alongside sector-wise developments, including reduction in the turnover tax, tax on small cars, tax on financing and a lot more.

“The reduction in CGT will be a big headline incentive to attract new local and foreign shareholders without any significant loss of tax revenue and in fact over some time is likely to be revenue positive.”

Prior to July 2010, the capital gains on disposal of securities were exempted from tax. Stakeholders agreed for the imposition of capital gains 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 2015 in respect of the tax rate and the holding period.

The Finance Act, 2016 inadvertently modified and imposed tax, irrespective of the holding period at the rate of 7.5 per cent instead of the stated intention of the then finance minister, who in his budget speech, had said that the maximum taxable holding period for the capital gains on securities may be extended from four to five years.

Later, 15 per cent CGT was fixed on the sale of securities held for less than 12 months and the securities held for over a year were exempted from the capital gains tax.

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