KARACHI: The government has decided to provide a major relief to capital market investors by reducing the capital gains tax (CGT) rate from the existing 15 per cent to 12 per cent in the upcoming budget 2021/22, sources said on Saturday.
The sources in the Ministry of Finance said the proposal of major relief to investors to slash the CGT rate on the disposal of securities by 3 per cent has been finalised. The proposal, recommended by the Pakistan Stock Exchange (PSX) to attract new local and foreign investors, would be submitted to the Federal Cabinet for approval and its subsequent inclusion in the Finance Bill 2021, they said.
The PSX in its proposals for the budget 2021/22 said the current rate of 15 per cent CGT is very high and without any benefit of holding period; therefore, it should be reduced in line with other regional and OECD countries such as Bahrain, Hong Kong, India, Malaysia, Mauritius, Qatar, the UAE, New Zealand, Hungary, etc, where there is no or very low capital gains tax, compared with Pakistan.
The PSX recommended that the rate should be brought down to 10 per cent where the holding period is up to 12 months and for the holding period of securities above 12 months, it should be zero per cent. Giving rationale, the PSX said tax treatment of capital gains and dividends favours investment in fixed income and real estate, discouraging the flow of capital into productive areas.
The CGT in Pakistan is higher than most regional countries and does not encourage long-term savings and investment, it said. Reducing the CGT rates will enhance the volume of foreign investment inflows to the equity market and increase the tax base.
Besides, the government has also decided to exempt withholding income tax on commodity contracts in the regulated market. The PSX in its tax proposals for the budget 2021/22 said, at present, a buyer of a commodity withhold tax between 4 per cent and 9 per cent from the seller before making payment with the exception of growers.
“This tax adds cost and puts the investors at the disadvantageous position when dealing in actual commodity exchange at PMEX (Pakistan Mercantile Exchange) in futures contracts as grain markets are not documented and as such this tax is actually not being paid.”